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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form
| | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended:
OR
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From to
Commission File Number:
Dana Incorporated
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Emerging growth company | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
There were
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
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10-Q Pages |
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| Item 1 |
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| Item 2 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3 |
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| Item 4 |
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| Item 1 |
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| Item 1A |
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| Item 2 |
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| Item 6 |
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PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Dana Incorporated
Consolidated Statement of Operations (Unaudited)
(In millions, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Amortization of intangibles | ||||||||||||||||
| Restructuring charges, net | ||||||||||||||||
| Impairment of goodwill | ( | ) | ||||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Earnings before interest and income taxes | ||||||||||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Earnings (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense | ||||||||||||||||
| Equity in earnings of affiliates | ||||||||||||||||
| Net income (loss) | ( | ) | ||||||||||||||
| Less: Noncontrolling interests net income | ||||||||||||||||
| Less: Redeemable noncontrolling interests net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to the parent company | $ | $ | $ | $ | ( | ) | ||||||||||
| Net income (loss) per share available to common stockholders | ||||||||||||||||
| Basic | $ | $ | $ | $ | ( | ) | ||||||||||
| Diluted | $ | $ | $ | $ | ( | ) | ||||||||||
| Weighted-average common shares outstanding | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statement of Comprehensive Income (Unaudited)
(In millions)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||
| Currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||||||
| Hedging gains and losses | ( | ) | ( | ) | ||||||||||||
| Defined benefit plans | ||||||||||||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total comprehensive income (loss) | ( | ) | ||||||||||||||
| Less: Comprehensive (income) loss attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ||||||||||
| Less: Comprehensive loss attributable to redeemable noncontrolling interests | ||||||||||||||||
| Comprehensive income (loss) attributable to the parent company | $ | $ | $ | $ | ( | ) | ||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Balance Sheet (Unaudited)
(In millions, except share and per share amounts)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities | ||||||||
| Accounts receivable | ||||||||
| Trade, less allowance for doubtful accounts of in 2021 and in 2020 | ||||||||
| Other | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Goodwill | ||||||||
| Intangibles | ||||||||
| Deferred tax assets | ||||||||
| Other noncurrent assets | ||||||||
| Investments in affiliates | ||||||||
| Operating lease assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and equity | ||||||||
| Current liabilities | ||||||||
| Short-term debt | $ | $ | ||||||
| Current portion of long-term debt | ||||||||
| Accounts payable | ||||||||
| Accrued payroll and employee benefits | ||||||||
| Taxes on income | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Other accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, less debt issuance costs of in 2021 and in 2020 | ||||||||
| Noncurrent operating lease liabilities | ||||||||
| Pension and postretirement obligations | ||||||||
| Other noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Redeemable noncontrolling interests | ||||||||
| Parent company stockholders' equity | ||||||||
| Preferred stock, shares authorized, par value, no shares outstanding | ||||||||
| Common stock, shares authorized, par value, and shares outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Treasury stock, at cost (and shares) | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total parent company stockholders' equity | ||||||||
| Noncontrolling interests | ||||||||
| Total equity | ||||||||
| Total liabilities and equity | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statement of Cash Flows (Unaudited)
(In millions)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Amortization of deferred financing charges | ||||||||
| Redemption premium on debt | ||||||||
| Write-off of deferred financing costs | ||||||||
| Earnings of affiliates, net of dividends received | ( | ) | ||||||
| Stock compensation expense | ||||||||
| Deferred income taxes | ( | ) | ||||||
| Pension expense, net | ||||||||
| Impairment of goodwill | ||||||||
| Change in working capital | ( | ) | ( | ) | ||||
| Other, net | ||||||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Purchases of property, plant and equipment | ( | ) | ( | ) | ||||
| Acquisition of businesses, net of cash acquired | ( | ) | ( | ) | ||||
| Investments in affiliates | ( | ) | ( | ) | ||||
| Proceeds from sale of subsidiary, net of cash disposed | ( | ) | ||||||
| Purchases of marketable securities | ( | ) | ( | ) | ||||
| Proceeds from sales of marketable securities | ||||||||
| Proceeds from maturities of marketable securities | ||||||||
| Settlement of terminated fixed-to-fixed cross currency swap | ( | ) | ||||||
| Settlements of undesignated derivatives | ( | ) | ( | ) | ||||
| Other, net | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities | ||||||||
| Net change in short-term debt | ( | ) | ||||||
| Proceeds from long-term debt | ||||||||
| Repayment of long-term debt | ( | ) | ( | ) | ||||
| Redemption premium on debt | ( | ) | ||||||
| Deferred financing payments | ( | ) | ( | ) | ||||
| Dividends paid to common stockholders | ( | ) | ( | ) | ||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||
| Sale of interest to noncontrolling shareholder | ||||||||
| Contributions from noncontrolling interests | ||||||||
| Deconsolidation of non-wholly owned subsidiary | ( | ) | ||||||
| Payments to acquire noncontrolling interests | ( | ) | ||||||
| Repurchases of common stock | ( | ) | ||||||
| Other, net | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash – beginning of period | ||||||||
| Effect of exchange rate changes on cash balances | ( | ) | ( | ) | ||||
| Cash, cash equivalents and restricted cash – end of period (Note 5) | $ | $ | ||||||
| Non-cash investing activity | ||||||||
| Purchases of property, plant and equipment held in accounts payable | $ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
Index to Notes to Consolidated Financial Statements
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| 11. | Marketable Securities |
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Notes to Consolidated Financial Statements (Unaudited)
(In millions, except share and per share amounts)
Note 1. Organization and Summary of Significant Accounting Policies
General
Dana Incorporated (Dana) is headquartered in Maumee, Ohio and was incorporated in Delaware in 2007. As a global provider of high technology driveline (axles, driveshafts and transmissions); sealing and thermal-management products; and motors, power inverters, and control systems for electric vehicles our customer base includes virtually every major vehicle manufacturer in the global light vehicle, medium/heavy vehicle and off-highway markets.
The terms "Dana," "we," "our" and "us," when used in this report, are references to Dana. These references include the subsidiaries of Dana unless otherwise indicated or the context requires otherwise.
Summary of significant accounting policies
Basis of presentation — Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. These statements are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results reported in these consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020 (the 2020 Form 10-K). Certain prior year amounts have been reclassified to conform to the current presentation.
Recently adopted accounting pronouncements
On January 1, 2021, we adopted Accounting Standards Update (ASU) 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. This guidance is intended to simplify various aspects of income tax accounting including the elimination of certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Adoption of this guidance requires certain changes to primarily be made prospectively, with some changes to be made retrospectively. The adoption of this standard did not have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform. The guidance is intended to provide temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The amendments in these ASUs are elective and are effective upon issuance for all entities through December 31, 2022. We are currently assessing the impact of the guidance on our consolidated financial statements.
Pi Innovo Holding Limited — On March 1, 2021, we acquired the remaining
Ashwoods Innovations Limited — On February 5, 2020, we acquired Curtis Instruments, Inc.'s (Curtis)
Hydro-Québec Relationship — On April 14, 2020, Hydro-Québec acquired an indirect
Note 3. Goodwill and Other Intangible Assets
Goodwill — Our goodwill is tested for impairment annually as of October 31 for all of our reporting units, and more frequent if events or circumstances warrant such a review. No impairment charge was recorded in connection with our annual goodwill impairment test performed as of October 31, 2020 and we did not identify any events or circumstances that required an interim impairment test since our last annual test. We expect that the fair value of our reporting units will continue to exceed their carrying values in future periods.
As a result of the effect of the global COVID-19 pandemic on our expected future operating cash flows, a decrease in our share price which reduced our market capitalization below the book value of net assets and lower cushion in our expected reporting unit fair values as a result of the recent acquisitions, we determined certain impairment triggers had occurred in the first quarter of 2020. Accordingly, we performed interim impairment analyses at each of our reporting units as of March 31, 2020. Based on the results of our interim impairment tests, we concluded that carrying value exceeded fair value in our Commercial Vehicle and Light Vehicle reporting units and we recorded a goodwill impairment charge of $
The change in the carrying amount of goodwill in 2021 is primarily due to the acquisition of Pi Innovo, measurement period adjustments for the 2020 Ashwoods acquisition and currency fluctuation. See Note 2 for additional information on recent acquisitions.
Changes in the carrying amount of goodwill by segment —
| Light Vehicle | Commercial Vehicle | Off-Highway | Power Technologies | Total | ||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||
| Acquisitions | ( | ) | ||||||||||||||||||
| Currency impact | ( | ) | ( | ) | ||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
Components of other intangible assets —
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||
| Weighted Average Useful Life (years) | Gross Carrying Amount | Accumulated Impairment and Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Impairment and Amortization | Net Carrying Amount | |||||||||||||||||||||
| Amortizable intangible assets | |||||||||||||||||||||||||||
| Core technology | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Trademarks and trade names | ( | ) | ( | ) | |||||||||||||||||||||||
| Customer relationships | ( | ) | ( | ) | |||||||||||||||||||||||
| Non-amortizable intangible assets | |||||||||||||||||||||||||||
| Trademarks and trade names | |||||||||||||||||||||||||||
| $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
The net carrying amounts of intangible assets, other than goodwill, attributable to each of our operating segments at September 30, 2021 were as follows: Light Vehicle — $
Amortization expense related to amortizable intangible assets —
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Charged to cost of sales | $ | $ | $ | $ | ||||||||||||
| Charged to amortization of intangibles | ||||||||||||||||
| Total amortization | $ | $ | $ | $ | ||||||||||||
The following table provides the estimated aggregate pre-tax amortization expense related to intangible assets for each of the next five years based on September 30, 2021 exchange rates. Actual amounts may differ from these estimates due to such factors as currency translation, customer turnover, impairments, additional intangible asset acquisitions and other events.
| Remainder of 2021 | 2022 | 2023 | 2024 | 2025 | ||||||||||||||||
| Amortization expense | $ | $ | $ | $ | $ | |||||||||||||||
Note 4. Restructuring of Operations
Our restructuring activities have historically included rationalizing our operating footprint by consolidating facilities, positioning operations in lower cost locations and reducing overhead costs. In recent years our focus has been primarily headcount reduction initiatives to reduce operating costs, including actions taken at acquired businesses to rationalize cost structures and achieve operating synergies. Restructuring expense includes costs associated with current and previously announced actions and is comprised of contractual and noncontractual separation costs and exit costs, including certain operating costs of facilities that we are in the process of closing.
Net restructuring charges of $
Accrued restructuring costs and activity —
| Employee Termination Benefits |
Exit Costs |
Total |
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| Balance, June 30, 2021 |
$ | $ | — | $ | ||||||||
| Charges to restructuring |
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| Adjustments of accruals |
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| Cash payments |
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| Balance, September 30, 2021 |
$ | $ | — | $ | ||||||||
| Balance, December 31, 2020 |
$ | $ | — | $ | ||||||||
| Charges to restructuring |
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| Adjustments of accruals |
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| Cash payments |
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| Currency impact |
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| Balance, September 30, 2021 |
$ | $ | — | $ | ||||||||
At September 30, 2021, the accrued employee termination benefits include costs to reduce approximately
Cost to complete — The following table provides project-to-date and estimated future restructuring expenses for completion of our approved restructuring initiatives for our business segments at September 30, 2021.
| Expense Recognized |
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| Prior to 2021 |
2021 |
Total to Date |
Future Cost to Complete |
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| Commercial Vehicle |
$ | $ | $ | $ | ||||||||||||
The future cost to complete includes estimated separation costs, primarily those associated with one-time benefit programs, and exit costs through 2021, equipment transfers and other costs which are required to be recognized as closures are finalized or as incurred during the closure.
Note 5. Supplemental Balance Sheet and Cash Flow Information
Inventory components at —
| September 30, 2021 |
December 31, 2020 |
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| Raw materials |
$ | $ | ||||||
| Work in process and finished goods |
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| Inventory reserves |
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| Total |
$ | $ | ||||||
Cash, cash equivalents and restricted cash at —
| September 30, 2021 |
December 31, 2020 |
September 30, 2020 |
December 31, 2019 |
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| Cash and cash equivalents |
$ | $ | $ | $ | ||||||||||||
| Restricted cash included in other current assets |
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| Restricted cash included in other noncurrent assets |
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| Total cash, cash equivalents and restricted cash |
$ | $ | $ | $ | ||||||||||||
Common stock — Our Board of Directors declared a cash dividend of cents per share of common stock in the first, second and third quarters of 2021. Dividends accrue on restricted stock units (RSUs) granted under our stock compensation program and will be paid in cash or additional units when the underlying units vest.
Share repurchase program — On February 16, 2021 our Board of Directors approved an extension of our existing common stock share repurchase program through December 31, 2023. Under the program, we spent $
Changes in equity —
| Three Months Ended September 30, | ||||||||||||||||||||||||||||
| 2021 | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity | |||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Common stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||
| Redeemable noncontrolling interests adjustment to redemption value | ( | ) | ( | ) | ||||||||||||||||||||||||
| Deconsolidation of non-wholly owned subsidiary | ( | ) | ( | ) | ||||||||||||||||||||||||
| Common stock share repurchases | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||
| Purchase of noncontrolling interests | ||||||||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||||||
| 2021 | Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Non-controlling Interests | Total Equity | |||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Net income | ||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Common stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||
| Sale of noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||
| Redeemable noncontrolling interests adjustment to redemption value | ( | ) | ( | ) | ||||||||||||||||||||||||
| Deconsolidation of non-wholly owned subsidiary | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Common stock share repurchases | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||||||
| Stock withheld for employee taxes | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| 2020 | ||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
| Adoption of ASU 2016-13 credit losses, January 1, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Common stock dividends | ( | ) | ( | ) | ||||||||||||||||||||||||
| Distributions to noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||
| Purchase of noncontrolling interests | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||||||
| Stock withheld for employee taxes | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance, September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||
Changes in each component of accumulated other comprehensive income (loss) (AOCI) of the parent —
| Parent Company Stockholders | ||||||||||||||||
| Foreign Currency Translation | Hedging | Defined Benefit Plans | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance, June 30, 2021 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Holding gains and losses | ||||||||||||||||
| Reclassification of amount to net income (a) | ( | ) | ( | ) | ||||||||||||
| Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | ||||||||||||||||
| Tax expense | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance, September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Balance, June 30, 2020 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Currency translation adjustments | ||||||||||||||||
| Holding gains and losses | ( | ) | ( | ) | ||||||||||||
| Reclassification of amount to net income (a) | ||||||||||||||||
| Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | ||||||||||||||||
| Tax expense | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income | ||||||||||||||||
| Balance, September 30, 2020 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Parent Company Stockholders | ||||||||||||||||
| Foreign Currency Translation | Hedging | Defined Benefit Plans | Accumulated Other Comprehensive Loss | |||||||||||||
| Balance, December 31, 2020 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Other comprehensive income (loss): | ||||||||||||||||
| Currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Holding gains and losses | ||||||||||||||||
| Reclassification of amount to net income (a) | ( | ) | ( | ) | ||||||||||||
| Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | ||||||||||||||||
| Tax expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance, September 30, 2021 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Balance, December 31, 2019 | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income (loss): | ||||||||||||||||
| Currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Holding gains and losses | ( | ) | ( | ) | ||||||||||||
| Reclassification of amount to net income (a) | ||||||||||||||||
| Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | ||||||||||||||||
| Tax (expense) benefit | ( | ) | ( | ) | ||||||||||||
| Other comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||
| Balance, September 30, 2020 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
(a) Realized gains and losses from currency-related forward contracts associated with forecasted transactions or from other derivative instruments treated as cash flow hedges are reclassified from AOCI into the same line item in the consolidated statement of operations in which the underlying forecasted transaction or other hedged item is recorded. See Note 13 for additional details.
(b) See Note 10 for additional details.
Note 7. Redeemable Noncontrolling Interests
Hydro-Québec holds direct
Redeemable noncontrolling interests reflected as of the balance sheet date are the greater of the redeemable noncontrolling interest balances adjusted for comprehensive income items and distributions or the redemption values. Redeemable noncontrolling interest adjustments of redemption value are recorded in retained earnings. We estimate the fair value of the redemption value using an income based approach based on discounted cash flow projections. In determining fair value using discounted cash flow projections, we make significant assumptions and estimates about the extent and timing of future cash flows, including revenue growth rates, projected EBITDA, discount rates, terminal growth rates and exit multiples.
Reconciliation of changes in redeemable noncontrolling interests —
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Capital contribution from redeemable noncontrolling interest | ||||||||||||||||
| Sale of redeemable noncontrolling interest | ||||||||||||||||
| Adjustment to redemption value | ||||||||||||||||
| Other | ( | ) | ||||||||||||||
| Comprehensive income (loss) adjustments: | ||||||||||||||||
| Net loss attributable to redeemable noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other comprehensive income (loss) attributable to redeemable noncontrolling interests | ( | ) | ( | ) | ||||||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
Reconciliation of the numerators and denominators of the earnings per share calculations —
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net income (loss) available to common stockholders - Numerator basic and diluted | $ | $ | $ | $ | ( | ) | ||||||||||
| Denominator: | ||||||||||||||||
| Weighted-average common shares outstanding - Basic | ||||||||||||||||
| Employee compensation-related shares, including stock options | ||||||||||||||||
| Weighted-average common shares outstanding - Diluted | ||||||||||||||||
The share count for diluted earnings per share is computed on the basis of the weighted-average number of common shares outstanding plus the effects of dilutive common stock equivalents (CSEs) outstanding during the period. We excluded
The Compensation Committee of our Board of Directors approved the grant of RSUs and performance share units (PSUs) shown in the table below during 2021.
| Granted |
Grant Date |
|||||||
| (In millions) |
Fair Value* |
|||||||
| RSUs |
$ | |||||||
| PSUs |
$ | |||||||
* Weighted-average per share
We calculated the fair value of the RSUs at grant date based on the closing market price of our common stock at the date of grant. The number of PSUs that ultimately vest is contingent on achieving specified financial targets and specified total shareholder return targets relative to peer companies. For the portion of the award based on financial metrics, we estimated the fair value of the PSUs at grant date based on the closing market price of our common stock at the date of grant adjusted for the value of assumed dividends over the period because the awards are not dividend protected. For the portion of the award based on shareholder returns, we estimated the fair value of the PSUs at grant date using various assumptions as part of a Monte Carlo simulation. The expected term represents the period from the grant date to the end of the -year performance period. The risk-free interest rate of
During 2021, we received $
On April 21, 2021, our stockholders approved the 2021 Omnibus Incentive Plan (the Plan), replacing the 2017 Omnibus Incentive Plan (the Prior Plan). The Plan authorizes the grant of stock options, stock appreciation rights (SARs), RSUs and PSUs through April 2031. The maximum aggregate number of shares of common stock that may be issued under the Plan is
Note 10. Pension and Postretirement Benefit Plans
We have a number of defined contribution and defined benefit, qualified and nonqualified, pension plans covering eligible employees. Other postretirement benefits (OPEB), including medical and life insurance, are provided for certain employees upon retirement.
Components of net periodic benefit cost (credit) —
| Pension |
OPEB |
|||||||||||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||
| Three Months Ended September 30, |
U.S. |
Non-U.S. |
U.S. |
Non-U.S. |
Non-U.S. |
Non-U.S. |
||||||||||||||||||
| Interest cost |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Expected return on plan assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Service cost |
||||||||||||||||||||||||
| Amortization of net actuarial loss |
||||||||||||||||||||||||
| Net periodic benefit cost (credit) |
$ | ( |
) | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||
| Nine Months Ended September 30, |
||||||||||||||||||||||||
| Interest cost |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Expected return on plan assets |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Service cost |
||||||||||||||||||||||||
| Amortization of net actuarial loss |
||||||||||||||||||||||||
| Net periodic benefit cost (credit) |
$ | ( |
) | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||
The service cost components of net periodic pension and OPEB costs are included in cost of sales and selling, general and administrative expenses as part of compensation cost and are eligible for capitalization in inventory and other assets. The non-service components are reported in other income (expense), net and are not eligible for capitalization.
Note 11. Marketable Securities
| September 30, 2021 |
December 31, 2020 |
|||||||||||||||||||||||
| Unrealized |
Fair |
Unrealized |
Fair |
|||||||||||||||||||||
| Cost |
Gains (Losses) |
Value |
Cost |
Gains (Losses) |
Value |
|||||||||||||||||||
| Certificates of deposit |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Corporate securities |
||||||||||||||||||||||||
| Total current marketable securities |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Noncurrent marketable securities - Corporate securities |
$ | $ | — | $ | $ | $ | $ | |||||||||||||||||
Certificates of deposit maturing in one year or less total $
We held $
Long-term debt at —
| Interest Rate | September 30, 2021 | December 31, 2020 | ||||||||
| Senior Notes due December 15, 2024 | | $ | $ | |||||||
| Senior Notes due April 15, 2025 | | * | ||||||||
| Senior Notes due June 1, 2026 | | * | ||||||||
| Senior Notes due November 15, 2027 | | |||||||||
| Senior Notes due June 15, 2028 | | |||||||||
| Senior Notes due July 15, 2029 | | |||||||||
| Senior Notes due September 1, 2030 | | |||||||||
| Term B Facility | ||||||||||
| Other indebtedness | ||||||||||
| Debt issuance costs | ( | ) | ( | ) | ||||||
| Less: Current portion of long-term debt | ||||||||||
| Long-term debt, less debt issuance costs | $ | $ | ||||||||
| * | In conjunction with the issuance of the April 2025 Notes we entered into -year fixed-to-fixed cross-currency swaps which have the effect of economically converting the April 2025 Notes to euro-denominated debt at a fixed rate of |
Interest on the senior notes is payable semi-annually and interest on the Term B Facility is payable quarterly. Other indebtedness includes the note payable to the former owners of S.M.E. S.p.A., borrowings from various financial institutions, and finance lease obligations.
Senior notes activity — On May 28, 2021, Dana Financing Luxembourg S.à r.l. (Dana Financing), a wholly-owned subsidiary of Dana, completed the sale of ( as of May 28, 2021) in senior unsecured notes ( July 2029 Notes) at
On May 13, 2021, we redeemed $
On May 13, 2021, we completed the sale of $
We may redeem some or all of the senior notes at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period commencing on the anniversary date of the senior notes in the year set forth below:
| Redemption Price | ||||||||||||||||||||
| April | November | June | July | September | ||||||||||||||||
| Year | 2025 Notes | 2027 Notes | 2028 Notes | 2029 Notes | 2030 Notes | |||||||||||||||
| 2021 | % | |||||||||||||||||||
| 2022 | % | % | ||||||||||||||||||
| 2023 | % | % | % | |||||||||||||||||
| 2024 | % | % | % | % | ||||||||||||||||
| 2025 | % | % | % | |||||||||||||||||
| 2026 | % | % | % | % | ||||||||||||||||
| 2027 | % | % | % | |||||||||||||||||
| 2028 | % | % | ||||||||||||||||||
| 2029 | % | |||||||||||||||||||
At any time prior to May 1, 2024, we may redeem up to 40% of the aggregate principal amount of the September 2030 Notes in an amount not to exceed the amount of proceeds of one or more equity offerings, at a price equal to
At any time prior to July 15, 2024, we may redeem up to 40% of the aggregate principal amount of the July 2029 Notes in an amount not to exceed the amount of proceeds of one or more equity offerings, at a price equal to
At any time prior to November 15, 2022, we may redeem up to 35% of the aggregate principal amount of the November 2027 Notes in an amount not to exceed the amount of proceeds of one or more equity offerings, at a price equal to
At any time prior to June 15, 2023, we may redeem up to 35% of the aggregate principal amount of the June 2028 Notes in an amount not to exceed the amount of proceeds of one or more equity offerings, at a price equal to
Credit agreement — On December 31, 2020, we fully paid down the Term A Facility. We wrote off $
The Term B Facility and the Revolving Facility are guaranteed by all of our wholly-owned domestic subsidiaries subject to certain exceptions (the guarantors) and are secured by a first-priority lien on substantially all of the assets of Dana and the guarantors, subject to certain exceptions.
Advances under the Revolving Facility bear interest at a floating rate based on, at our option, the base rate or Eurodollar rate (each as described in the credit agreement) plus a margin as set forth below:
| Margin | ||||||||
| Total Net Leverage Ratio | Base Rate | Eurodollar Rate | ||||||
| Less than or equal to 1.00:1.00 | % | % | ||||||
| Greater than 1.00:1.00 but less than or equal to 2.00:1.00 | % | % | ||||||
| Greater than 2.00:1.00 | % | % | ||||||
The Term B Facility bears interest based on, at our option, the Base Rate plus
Commitment fees are applied based on the average daily unused portion of the available amounts under the Revolving Facility as set forth below:
| Total Net Leverage Ratio | Commitment Fee | |||
| Less than or equal to 1.00:1.00 | % | |||
| Greater than 1.00:1.00 but less than or equal to 2.00:1.00 | % | |||
| Greater than 2.00:1.00 | % | |||
Up to $
At September 30, 2021, we had $
Bridge facility — On April 16, 2020, we entered into a $
Debt covenants — At September 30, 2021, we were in compliance with the covenants of our financing agreements. Under the Term B Facility, Revolving Facility and the senior notes, we are required to comply with certain incurrence-based covenants customary for facilities of these types and, in the case of the Revolving Facility, a maintenance covenant tested on the last day of each fiscal quarter requiring us to maintain a first lien net leverage ratio not to exceed
Note 13. Fair Value Measurements and Derivatives
In measuring the fair value of our assets and liabilities, we use market data or assumptions that we believe market participants would use in pricing an asset or liability including assumptions about risk when appropriate. Our valuation techniques include a combination of observable and unobservable inputs.
Fair value measurements on a recurring basis — Assets and liabilities that are carried in our balance sheet at fair value are as follows:
| Fair Value |
|||||||||||||
| Category |
Balance Sheet Location |
Fair Value Level |
September 30, 2021 | December 31, 2020 | |||||||||
| Certificates of deposit |
Marketable securities |
2 | $ | $ | |||||||||
| Available-for-sale securities |
Other noncurrent assets |
1 | |||||||||||
| Currency forward contracts |
|||||||||||||
| Cash flow hedges |
Accounts receivable - Other |
2 | |||||||||||
| Cash flow hedges |
Other accrued liabilities |
2 | |||||||||||
| Undesignated |
Accounts receivable - Other |
2 | |||||||||||
| Undesignated |
Other accrued liabilities |
2 | |||||||||||
| Interest rate collars |
Other accrued liabilities |
2 | |||||||||||
| Currency swaps |
|||||||||||||
| Cash flow hedges |
Other noncurrent liabilities |
2 | |||||||||||
| Undesignated |
Other noncurrent liabilities |
2 | |||||||||||
Fair Value Level 1 assets and liabilities reflect quoted prices in active markets. Fair Value Level 2 assets and liabilities reflect the use of significant other observable inputs.
Fair value of financial instruments — The financial instruments that are not carried in our balance sheet at fair value are as follows:
| September 30, 2021 |
December 31, 2020 |
|||||||||||||||||||
| Fair Value Level |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
||||||||||||||||
| Long-term debt |
2 | $ | $ | $ | $ | |||||||||||||||
Interest rate derivatives — Our portfolio of derivative financial instruments periodically includes interest rate swaps and interest rate collars designed to mitigate our interest rate risk. As of September 30, 2021, fixed-to-floating interest rate swaps are outstanding. We have outstanding interest rate collars with a notional value of $
Foreign currency derivatives — Our foreign currency derivatives include forward contracts associated with forecasted transactions, primarily involving the purchases and sales of inventory through the next months, as well as currency swaps associated with certain recorded external notes payable and intercompany loans receivable and payable. Periodically, our foreign currency derivatives also include net investment hedges of certain of our investments in foreign operations.
We have executed fixed-to-fixed cross-currency swaps in conjunction with the issuance of certain notes to eliminate the variability in the functional-currency-equivalent cash flows due to changes in exchange rates associated with the forecasted principal and interest payments. All of the underlying designated financial instruments have been designated as the hedged items in each respective cash flow hedge relationship, as shown in the table below. Designated as cash flow hedges of the forecasted principal and interest payments of the underlying designated financial instruments all of the swaps economically convert the underlying designated financial instruments into the functional currency of each respective holder. The impact of the interest rate differential between the inflow and outflow rates on all fixed-to-fixed cross-currency swaps is recognized during each period as a component of interest expense.
The following fixed-to-fixed cross-currency swaps were outstanding at September 30, 2021:
| Underlying Financial Instrument |
Derivative Financial Instrument |
|||||||||||||||||||||||||
| Description |
Type |
Face Amount |
Rate |
Notional Amount | Traded Amount |
Inflow Rate |
Outflow Rate |
|||||||||||||||||||
| April 2025 Notes |
Payable |
$ | % | $ | € | % | % | |||||||||||||||||||
| Luxembourg Intercompany Notes |
Receivable |
€ | % | € | $ | % | % | |||||||||||||||||||
| Undesignated 2026 Swap |
$ | € | % | % | ||||||||||||||||||||||
| Undesignated Offset 2026 Swap |
€ | $ | % | % | ||||||||||||||||||||||
The designated swaps are expected to be highly effective in offsetting the corresponding currency-based changes in cash outflows related to the underlying designated financial instruments. Based on our qualitative assessment that the critical terms of the underlying designated financial instruments and the associated swaps match and that all other required criteria have been met, we do not expect to incur any ineffectiveness. As effective cash flow hedges, changes in the fair value of the swaps will be recorded in OCI during each period. Additionally, to the extent the swaps remain effective, the appropriate portion of AOCI will be reclassified to earnings each period as an offset to the foreign exchange gain or loss resulting from the remeasurement of the underlying designated financial instruments. See Note 12 for additional information about the April 2025 Notes. To the extent the swaps are no longer effective, changes in their fair values will be recorded in earnings.
We had previously entered into fixed-to-fixed cross currency swaps as a hedge against our June 2026 Notes. In June 2021, we elected to redeem all of the June 2026 Notes and de-designated the fixed-to-fixed cross currency swaps. See Note 12 for additional information about the extinguishment of the June 2026 Notes. As the forecasted payments subject to the hedge will no longer occur in the forecasted periods, we reclassified $
The total notional amount of outstanding foreign currency forward contracts, involving the exchange of various currencies, was $
The following currency derivatives were outstanding at September 30, 2021:
| Notional Amount (U.S. Dollar Equivalent) |
||||||||||||||||
| Functional Currency |
Traded Currency |
Designated |
Undesignated |
Total |
Maturity |
|||||||||||
| U.S. dollar |
Mexican peso, Canadian dollar |
$ | $ | $ | Sep-2022 |
|||||||||||
| Euro |
U.S. dollar, Hungarian forint, British pound, Swiss franc, Indian rupee, Mexican peso, Australian dollar, Chinese renminbi, Brazilian real, Japanese yen, New Zealand dollar, Canadian dollar, South African rand |
Jan-2024 |
||||||||||||||
| British pound |
U.S. dollar, euro |
Oct-2021 |
||||||||||||||
| Swedish krona |
euro |
Oct-2021 |
||||||||||||||
| South African rand |
U.S. dollar, euro, Thai baht |
Nov-2021 |
||||||||||||||
| Thai baht |
U.S. dollar |
Dec-2021 |
||||||||||||||
| Canadian dollar |
U.S. dollar |
Dec-2021 |
||||||||||||||
| Brazilian real |
U.S. dollar, euro |
Aug-2022 |
||||||||||||||
| Indian rupee |
U.S. dollar, euro, British pound |
Apr-2022 |
||||||||||||||
| Chinese renminbi |
U.S. dollar, euro, Canadian dollar |
Oct-2021 |
||||||||||||||
| Total forward contracts |
||||||||||||||||
| U.S. dollar |
euro |
Nov-2027 |
||||||||||||||
| Euro |
U.S. dollar |
Jun-2026 |
||||||||||||||
| Total currency swaps |
||||||||||||||||
| Total currency derivatives |
$ | $ | $ | |||||||||||||
Designated cash flow hedges — With respect to contracts designated as cash flow hedges, changes in fair value during the period in which the contracts remain outstanding are reported in OCI to the extent such contracts remain effective. Effectiveness is measured by using regression analysis to determine the degree of correlation between the change in the fair value of the derivative instrument and the change in the associated foreign currency exchange rates. Changes in fair value of contracts not designated as cash flow hedges or as net investment hedges are recognized in other income (expense), net in the period in which the changes occur. Realized gains and losses from currency-related forward contracts associated with forecasted transactions or from other derivative instruments, including those that have been designated as cash flow hedges and those that have not been designated, are recognized in the same line item in the consolidated statement of operations in which the underlying forecasted transaction or other hedged item is recorded. Accordingly, amounts are potentially recorded in sales, cost of sales or, in certain circumstances, other income (expense), net.
The following table provides a summary of deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less:
| Deferred Gain (Loss) in AOCI |
||||||||||||
| September 30, 2021 |
December 31, 2020 |
Gain (loss) expected to be reclassified into income in one year or less | ||||||||||
| Forward Contracts |
$ | $ | $ | |||||||||
| Collar |
( |
) | ( |
) | ( |
) | ||||||
| Cross-Currency Swaps |
||||||||||||
| Total |
$ | ( |
) | $ | $ | ( |
) | |||||
The following table provides a summary of the location and amount of gains or losses recognized in the consolidated statement of operations associated with cash flow hedging relationships:
| Three Months Ended September 30, 2021 | ||||||||||||
| Derivatives Designated as Cash Flow Hedges | Net sales | Cost of sales | Other income (expense), net | |||||||||
| Total amounts of income and expense line items presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded | $ | $ | $ | ( | ) | |||||||
| (Gain) or loss on cash flow hedging relationships | ||||||||||||
| Foreign currency forwards | ||||||||||||
| Amount of (gain) loss reclassified from AOCI into income | ( | ) | ( | ) | ||||||||
| Cross-currency swaps | ||||||||||||
| Amount of (gain) loss reclassified from AOCI into income | ( | ) | ||||||||||
| Nine Months Ended September 30, 2021 |
||||||||||||
| Derivatives Designated as Cash Flow Hedges |
Net sales |
Cost of sales |
Other income (expense), net |
|||||||||
| Total amounts of income and expense line items presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded |
$ | $ | $ | ( |
) | |||||||
| (Gain) or loss on cash flow hedging relationships |
||||||||||||
| Foreign currency forwards |
||||||||||||
| Amount of (gain) loss reclassified from AOCI into income |
( |
) | ( |
) | ||||||||
| Cross-currency swaps |
||||||||||||
| Amount of (gain) loss reclassified from AOCI into income |
( |
) | ||||||||||
| Three Months Ended September 30, 2020 |
||||||||||||
| Derivatives Designated as Cash Flow Hedges |
Net sales |
Cost of sales |
Other income (expense), net |
|||||||||
| Total amounts of income and expense line items presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded |
$ | $ | $ | ( |
) | |||||||
| (Gain) or loss on cash flow hedging relationships |
||||||||||||
| Foreign currency forwards |
||||||||||||
| Amount of (gain) loss reclassified from AOCI into income |
||||||||||||
| Cross-currency swaps |
||||||||||||
| Amount of (gain) loss reclassified from AOCI into income |
||||||||||||
| Nine Months Ended September 30, 2020 |
||||||||||||
| Derivatives Designated as Cash Flow Hedges |
Net sales |
Cost of sales |
Other income (expense), net |
|||||||||
| Total amounts of income and expense line items presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded |
$ | $ | $ | ( |
) | |||||||
| (Gain) or loss on cash flow hedging relationships |
||||||||||||
| Foreign currency forwards |
||||||||||||
| Amount of (gain) loss reclassified from AOCI into income |
||||||||||||
| Cross-currency swaps |
||||||||||||
| Amount of (gain) loss reclassified from AOCI into income |
||||||||||||
The amounts reclassified from AOCI into income for the cross-currency swaps represent an offset to a foreign exchange loss on our foreign currency-denominated intercompany and external debt instruments.
Certain of our hedges of forecasted transactions have not formally been designated as cash flow hedges. As undesignated forward contracts, the changes in the fair value of such contracts are included in earnings for the duration of the outstanding forward contract. Any realized gain or loss on the settlement of such contracts is recognized in the same period and in the same line item in the consolidated statement of operations as the underlying transaction. The following table provides a summary of the location and amount of gains or losses recognized in the consolidated statement of operations associated with undesignated hedging relationships.
| Amount of Gain (Loss) Recognized in Income | |||||||||
| Derivatives Not Designated as Hedging Instruments | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Location of Gain or (Loss) Recognized in Income | ||||||
| Foreign currency forward contracts | $ | $ | Cost of sales | ||||||
| Foreign currency forward contracts | $ | $ | ) | Other income (expense), net | |||||
| Amount of Gain (Loss) Recognized in Income | |||||||||
| Derivatives Not Designated as Hedging Instruments | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | Location of Gain or (Loss) Recognized in Income | ||||||
| Foreign currency forward contracts | $ | $ | Cost of sales | ||||||
| Foreign currency forward contracts | $ | ) | $ | ) | Other income (expense), net | ||||
Net investment hedges — We periodically designate derivative contracts or underlying non-derivative financial instruments as net investment hedges. With respect to contracts designated as net investment hedges, we apply the forward method, but for non-derivative financial instruments designated as net investment hedges, we apply the spot method. Under both methods, we report changes in fair value in the cumulative translation adjustment (CTA) component of OCI during the period in which the contracts remain outstanding to the extent such contracts and non-derivative financial instruments remain effective.
Note 14. Commitments and Contingencies
Product liabilities — Accrued product liability costs were $
Environmental liabilities — Accrued environmental liabilities were $
Guarantee of lease obligations — In connection with the divestiture of our Structural Products business in 2010, leases covering U.S. facilities were assigned to a U.S. affiliate of Metalsa. Under the terms of the sale agreement, we will guarantee the affiliate’s performance under the leases, which run through June 2025, including approximately $
Other legal matters — We are subject to various pending or threatened legal proceedings arising out of the normal course of business or operations. In view of the inherent difficulty of predicting the outcome of such matters, we cannot state what the eventual outcome of these matters will be. However, based on current knowledge and after consultation with legal counsel, we believe that any liabilities that may result from these proceedings will not have a material adverse effect on our liquidity, financial condition or results of operations.
We record a liability for estimated warranty obligations at the dates our products are sold. We record the liability based on our estimate of costs to settle future claims. Adjustments to our estimated costs at time of sale are made as claim experience and other new information becomes available. Obligations for service campaigns and other occurrences are recognized as adjustments to prior estimates when the obligation is probable and can be reasonably estimated.
Changes in warranty liabilities —
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
| Amounts accrued for current period sales |
||||||||||||||||
| Adjustments of prior estimates |
( |
) | ( |
) | ( |
) | ||||||||||
| Settlements of warranty claims |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Divestitures |
( |
) | ||||||||||||||
| Currency impact |
( |
) | ||||||||||||||
| Balance, end of period |
$ | $ | $ | $ | ||||||||||||
We estimate the effective tax rate expected to be applicable for the full fiscal year and use that rate to provide for income taxes in interim reporting periods. We also recognize the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.
We have generally not recognized tax benefits on losses generated in several entities where the recent history of operating losses does not allow us to satisfy the “more likely than not” criterion for the recognition of deferred tax assets. Consequently, there is no income tax expense or benefit recognized on the pre-tax income or losses in these jurisdictions as valuation allowances are adjusted to offset the associated tax expense or benefit. We believe it is reasonably possible that valuation allowances of up to approximately $
We record interest and penalties related to uncertain tax positions as a component of income tax expense. Net interest expense for the periods presented herein is not significant.
We reported an income tax expense of $
Dividends of earnings from non-U.S. operations are generally no longer subjected to U.S. income tax. We continue to analyze and adjust the estimated tax impact of the income and non-U.S. withholding tax liabilities based on the amounts and sources of these earnings.
Note 17. Other Income (Expense), Net
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Non-service cost components of pension and OPEB costs | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Government grants and incentives | ||||||||||||||||
| Foreign exchange gain (loss) | ( | ) | ||||||||||||||
| Strategic transaction expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on investment in Hyliion | ( | ) | ( | ) | ||||||||||||
| Loss on disposal group held for sale | ( | ) | ||||||||||||||
| Loss on de-designation of fixed-to-fixed cross currency swaps | ( | ) | ||||||||||||||
| Other, net | ( | ) | ||||||||||||||
| Other income (expense), net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Foreign exchange gains and losses on cross-currency intercompany loan balances that are not of a long-term investment nature are included above. Foreign exchange gains and losses on intercompany loans that are permanently invested are reported in OCI.
Strategic transaction expenses relate primarily to costs incurred in connection with acquisition and divestiture related activities, including costs to complete the transaction and post-closing integration costs. Strategic transaction expenses in 2021 were primarily attributable to our pursuit of the acquisition of a portion of the thermal-management business of Modine Manufacturing Company and certain other strategic initiatives. Strategic transaction expenses in 2020 were primarily attributable to the acquisitions of the Oerlikon Drive Systems segment of the Oerlikon Group (ODS) and Nordresa Motors, Inc. and certain other strategic initiatives.
We held convertible notes receivable from our investment in Hyliion Inc. On October 1, 2020, Hyliion Inc. completed its merger with Tortoise Acquisition Corp. The business combination resulted in the combined company being renamed Hyliion Holdings Corp. (Hyliion), with its common stock being listed on the New York Stock Exchange under the ticker symbol HYLN. Effective with the completed merger, our notes receivable were converted into
We had previously entered into fixed-to-fixed cross currency swaps as a hedge against our June 2026 Notes. In June 2021, we redeemed all of the June 2026 Notes and de-designated the fixed-to-fixed cross currency swaps. See Note 13 for additional information.
In conjunction with our acquisition of ODS, we acquired a controlling financial interest in a joint venture in China. We were required to divest our interest in this joint venture as it violates competitive restrictions of another of our China joint venture shareholder agreements. During the first quarter of 2021, we recorded an impairment charge of $
During October 2021, we signed a definitive sale-leaseback agreement on three of our U.S. manufacturing facilities. We will receive proceeds of $
Note 18. Revenue from Contracts with Customers
We generate revenue from selling production parts to original equipment manufacturers (OEMs) and service parts to OEMs and aftermarket customers. While we provide production and service parts to certain OEMs under awarded multi-year programs, these multi-year programs do not contain any commitment to volume by the customer. As such, individual customer releases or purchase orders represent the contract with the customer. Our customer contracts do not provide us with an enforceable right to payment for performance completed to date throughout the contract term. As such, we recognize part sales revenue at the point in time when the parts are shipped, and risk of loss has transferred to the customer. We have elected to continue to include shipping and handling fees billed to customers in revenue, while including costs of shipping and handling in costs of sales. Taxes collected from customers are excluded from revenues and credited directly to obligations to the appropriate government agencies. Payment terms with our customers are established based on industry and regional practices and generally do not exceed
We continually seek new business opportunities and at times provide incentives to our customers for new program awards. We evaluate the underlying economics of each payment made to our customers to determine the proper accounting by understanding the nature of the payment, the rights and obligations in the contract, and other relevant facts and circumstances. Upfront payments to our customers are capitalized if we determine that the payments are incremental and incurred only if the new business is obtained and we expect to recover these amounts from the customer over the term of the new business program. We recognize a reduction to revenue as products that the upfront payments are related to are transferred to the customer, based on the total amount of products expected to be sold over the term of the program. We evaluate the amounts capitalized each period for recoverability and expense any amounts that are no longer expected to be recovered. We had $
Certain of our customer contracts include rebate incentives. We estimate expected rebates and accrue the corresponding refund liability, as a reduction of revenue, at the time covered product is sold to the customer based on anticipated customer purchases during the rebate period and contractual rebate percentages. Refund liabilities are included in other accrued liabilities on our consolidated balance sheet. We provide standard fitness for use warranties on the products we sell, accruing for estimated costs related to product warranty obligations at time of sale. See Note 15 for additional information.
Contract liabilities are primarily comprised of cash deposits made by customers with cash in advance payment terms. Generally, our contract liabilities turn over frequently given our relatively short production cycles. Contract liabilities were $
Disaggregation of revenue —
The following table disaggregates revenue for each of our operating segments by geographical market:
| Three Months Ended September 30, 2021 | Light Vehicle | Commercial Vehicle | Off-Highway | Power Technologies | Total | |||||||||||||||
| North America | $ | $ | $ | $ | $ | |||||||||||||||
| Europe | ||||||||||||||||||||
| South America | ||||||||||||||||||||
| Asia Pacific | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | |||||||||||||||
| Europe | ||||||||||||||||||||
| South America | ||||||||||||||||||||
| Asia Pacific | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | |||||||||||||||
| Europe | ||||||||||||||||||||
| South America | ||||||||||||||||||||
| Asia Pacific | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| North America | $ | $ | $ | $ | $ | |||||||||||||||
| Europe | ||||||||||||||||||||
| South America | ||||||||||||||||||||
| Asia Pacific | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ |
We are a global provider of high-technology products to virtually every major vehicle manufacturer in the world. We also serve the stationary industrial market. Our technologies include drive systems (axles, driveshafts, transmissions, and wheel and track drives); motion systems (winches, slew drives, and hub drives); electrodynamic technologies (motors, inverters, software and control systems, battery-management systems, and fuel cell plates); sealing solutions (gaskets, seals, cam covers, and oil pan modules); thermal-management technologies (transmission and engine oil cooling, battery and electronics cooling, charge air cooling, and thermal-acoustical protective shielding); and digital solutions (active and passive system controls and descriptive and predictive analytics). We serve our global light vehicle, medium/heavy vehicle and off-highway markets through
Dana evaluates the performance of its operating segments based on external sales and segment EBITDA. Segment EBITDA is a primary driver of cash flows from operations and a measure of our ability to maintain and continue to invest in our operations and provide shareholder returns. Our segments are charged for corporate and other shared administrative costs. Segment EBITDA may not be comparable to similarly titled measures reported by other companies.
During the second quarter of 2021, we realigned certain of our Indian operations previously reported in our Commercial Vehicle operating segment to be reported within our Off-Highway operating segment and we realigned certain of our Brazilian operations previously reported in our Off-Highway operating segment to be reported within our Commercial Vehicle operating segment. Prior period amounts have been recast to conform with our current operating segment reporting structure.
Segment information —
| 2021 | 2020 | |||||||||||||||||||||||
| Three Months Ended September 30, | External Sales | Inter-Segment Sales | Segment EBITDA | External Sales | Inter-Segment Sales | Segment EBITDA | ||||||||||||||||||
| Light Vehicle | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial Vehicle | ||||||||||||||||||||||||
| Off-Highway | ||||||||||||||||||||||||
| Power Technologies | ||||||||||||||||||||||||
| Eliminations and other | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| Light Vehicle | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial Vehicle | ||||||||||||||||||||||||
| Off-Highway | ||||||||||||||||||||||||
| Power Technologies | ||||||||||||||||||||||||
| Eliminations and other | ( | ) | ( | ) | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Reconciliation of segment EBITDA to consolidated net income —
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Segment EBITDA | $ | $ | $ | $ | ||||||||||||
| Corporate expense and other items, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Non-service cost components of pension and OPEB costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Restructuring charges, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Stock compensation expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Strategic transaction expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amounts attributable to previously divested/closed operations | ( | ) | ( | ) | ||||||||||||
| Loss on investment in Hyliion | ( | ) | ( | ) | ||||||||||||
| Impairment of goodwill | ( | ) | ||||||||||||||
| Loss on disposal group held for sale | ( | ) | ||||||||||||||
| Loss on de-designation of fixed-to-fixed cross currency swaps | ( | ) | ||||||||||||||
| Other items | ( | ) | ( | ) | ||||||||||||
| Earnings before interest and income taxes | ||||||||||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Earnings (loss) before income taxes | ( | ) | ||||||||||||||
| Income tax expense | ||||||||||||||||
| Equity in earnings of affiliates | ||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ) | ||||||||||
We have a number of investments in entities that engage in the manufacture and supply of vehicular parts (primarily axles, axle housings and driveshafts).
Equity method investments exceeding $5 at September 30, 2021 —
| Ownership Percentage |
Investment |
|||||
| Dongfeng Dana Axle Co., Ltd. |
$ | |||||
| ROC-Spicer, Ltd. |
||||||
| Axles India Limited |
||||||
| Tai Ya Investment (HK) Co., Limited |
||||||
| All others as a group |
||||||
| Investments in equity affiliates |
||||||
| Investments in affiliates carried at cost |
||||||
| Investments in affiliates |
$ | |||||
On July 29, 2021, we acquired a
On July 7, 2021, we sold a portion of our ownership interest in Tai Ya Investment (HK) Co., Limited (Tai Ya) to China Motor Corporation (CMC), reducing our ownership interest in Tai Ya to
On March 1, 2021, we acquired the remaining
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)
Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes in this report.
Forward-Looking Information
Statements in this report (or otherwise made by us or on our behalf) that are not entirely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often be identified by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “predicts,” “seeks,” “estimates,” “projects,” “outlook,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing” and similar expressions, variations or negatives of these words. These statements represent the present expectations of Dana Incorporated and its consolidated subsidiaries (Dana) based on our current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our plans, actions and actual results could differ materially from our present expectations due to a number of factors, including those discussed below and elsewhere in this report and in our other filings with the Securities and Exchange Commission (SEC). All forward-looking statements speak only as of the date made and we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances that may arise after the date of this report.
Management Overview
Dana is headquartered in Maumee, Ohio, and was incorporated in Delaware in 2007. We are a global provider of high-technology products to virtually every major vehicle manufacturer in the world. We also serve the stationary industrial market. Our technologies include drive systems (axles, driveshafts, transmissions, and wheel and track drives); motion systems (winches, slew drives, and hub drives); electrodynamic technologies (motors, inverters, software and control systems, battery-management systems, and fuel cell plates); sealing solutions (gaskets, seals, cam covers, and oil pan modules); thermal-management technologies (transmission and engine oil cooling, battery and electronics cooling, charge air cooling, and thermal-acoustical protective shielding); and digital solutions (active and passive system controls and descriptive and predictive analytics). We serve our global light vehicle, medium/heavy vehicle and off-highway markets through four business units – Light Vehicle Drive Systems (Light Vehicle), Commercial Vehicle Drive and Motion Systems (Commercial Vehicle), Off-Highway Drive and Motion Systems (Off-Highway) and Power Technologies, which is the center of excellence for sealing and thermal-management technologies that span all customers in our on-highway and off-highway markets. We have a diverse customer base and geographic footprint, which minimizes our exposure to individual market and segment declines. At September 30, 2021, we employed approximately 39,500 people, operated in 33 countries and had 141 major facilities housing manufacturing and distribution operations, service and assembly operations, technical and engineering centers and administrative offices.
External sales by operating segment for the periods ended September 30, 2021 and 2020 are as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||||||||||||||||||
| % of |
% of |
% of |
% of |
|||||||||||||||||||||||||||||
| Dollars |
Total |
Dollars |
Total |
Dollars |
Total |
Dollars |
Total |
|||||||||||||||||||||||||
| Light Vehicle |
$ | 918 | 41.7 | % | $ | 913 | 45.8 | % | $ | 2,799 | 42.0 | % | $ | 2,058 | 41.2 | % | ||||||||||||||||
| Commercial Vehicle |
396 | 18.0 | % | 317 | 15.9 | % | 1,132 | 17.0 | % | 852 | 17.0 | % | ||||||||||||||||||||
| Off-Highway |
627 | 28.4 | % | 504 | 25.3 | % | 1,931 | 28.9 | % | 1,435 | 28.7 | % | ||||||||||||||||||||
| Power Technologies |
263 | 11.9 | % | 260 | 13.0 | % | 810 | 12.1 | % | 653 | 13.1 | % | ||||||||||||||||||||
| Total |
$ | 2,204 | $ | 1,994 | $ | 6,672 | $ | 4,998 | ||||||||||||||||||||||||
See Note 19 to our consolidated financial statements in Item 1 of Part I for further financial information about our operating segments.
Our internet address is www.dana.com. The inclusion of our website address in this report is an inactive textual reference only and is not intended to include or incorporate by reference the information on our website into this report.
Operational and Strategic Initiatives
Our enterprise strategy builds on our strong technology foundation and leverages our resources across the organization while driving a customer centric focus, expanding our global markets, and delivering innovative solutions as we evolve into the era of vehicle electrification.
Central to our strategy is leveraging our core operations. This foundational element enables us to infuse strong operational disciplines throughout the strategy, making it practical, actionable, and effective. It enables us to capitalize on being a major drive systems supplier across all three end-mobility markets. We are achieving improved profitability by actively seeking synergies across our engineering, purchasing, and manufacturing base. We have strengthened the portfolio by acquiring critical assets; and we are utilizing our physical and intellectual capital to amplify innovation across the enterprise. Leveraging these core elements can further expand the cost efficiencies of our common technologies and deliver a sustainable competitive advantage for Dana.
Driving customer centricity continues to be at the heart of who we are. Putting our customers at the center of our value system is firmly embedded in our culture and is driving growth by focusing on customer relationships and providing value to our customers. These relationships are strengthened as we are physically where we need to be in order to provide unparalleled service and we are prioritizing our customers’ needs as we engineer solutions that differentiate their products, while making it easier to do business with Dana by digitizing their experience. Our customer centric focus has uniquely positioned us to win more than our fair share of new business and capitalize on future customer outsourcing initiatives.
We continue to enhance and expand our global footprint, optimizing it to capture growth across all of our end markets. Expanding global markets means utilizing our global capabilities and presence to further penetrate growth markets, focusing on Asia due to its position as the largest mobility market in the world with the highest market growth rate and its lead in the adoption of new energy vehicles. We are investing across various avenues to increase our presence in Asia Pacific by forging new partnerships, expanding inorganically, and growing organically. We continue to operate in this region through wholly owned and joint ventures with local market partners. We have recently made acquisitions that have augmented our footprint in the region, specifically in India and China. All the while, we have been making meaningful organic investments to grow with existing and new customers, primarily in Thailand, India, and China. These added capabilities have enabled us to target the domestic Asia Pacific markets and utilize the capacity for export to other global markets.
Delivering innovative solutions enables us to capitalize on market growth trends as we evolve our core technology capabilities. We are also focused on enhancing our physical products with digital content to provide smart systems and we see an opportunity to become a digital systems provider by delivering software as a service to our traditional end customers. This focus on delivering solutions based on our core technology is leading to new business wins and increasing our content per vehicle. We have made significant investments - both organically and inorganically - allowing us to move to the next phase, which is to Lead electric propulsion.
We have accelerated hybridization and electrification through both core Dana technologies and targeted strategic acquisitions and are positioned today to lead the market. The ten recent investments in electrodynamic expertise and technologies combined with Dana’s longstanding mechatronics capabilities has allowed us to develop and deliver fully integrated e-Propulsion systems that are power-dense and achieve optimal efficiency through the integration of the components that we offer due to our mechatronics capabilities. With recent electric vehicle program awards, we are well on our way to achieving our growth objectives in this emerging market.
The development and implementation of our enterprise strategy is positioning Dana to grow profitably due to increased customer focus as we leverage our core capabilities, expand into new markets, develop and commercialize new technologies including for hybrid and electric vehicles.
See Trends in Our Markets discussion below for additional information on our operational and strategic initiatives.
Capital Structure Initiatives
In addition to investing in our business, we plan to continue prioritizing the allocation of capital to reduce debt and maintain a strong financial position. We continue to drive toward investment grade metrics as part of a balanced approach to our capital allocation priorities and our goal of further strengthening our balance sheet.
Shareholder return actions — When evaluating capital structure initiatives, we balance our growth opportunities and shareholder value initiatives with maintaining a strong balance sheet and access to capital. Our strong financial position has enabled us to simplify our capital structure while providing returns to our shareholders in the form of cash dividends and a reduction in the number of shares outstanding. Our Board of Directors authorized a $200 share repurchase program effective in 2018 which expires at the end of 2023. Through September 30, 2021, we have used cash of $73 to repurchase common shares under the program. Through the first quarter of 2020, we had declared and paid quarterly common stock dividends for thirty-three consecutive quarters. In response to the global COVID-19 pandemic, we temporarily suspended the declaration and payment of dividends to common shareholders and the repurchase of common stock under our existing common stock share repurchase program. With the impacts of the global COVID-19 pandemic largely behind us we resumed the declaration and payment of quarterly common stock dividends during the first quarter of 2021 and our share repurchase program in the third quarter of 2021.
Financing actions — Over the past few years we have taken advantage of the lower interest rate environment to complete refinancing transactions that resulted in lower effective interest rates while extending maturities. During 2019 we expanded our credit and guaranty agreement, entering into $675 of additional floating rate term loans to fund the ODS acquisition and increased our revolving credit facility to $1,000 and extended its maturity to August 2024. We completed a $300 2027 note offering and used the proceeds to repay $300 of higher cost 2023 notes. During 2019, we terminated one of our U.S. defined benefit pension plans, settling approximately $165 of previously unfunded pension obligations and eliminating future funding risk associated with interest rate and other market developments. In response to the global COVID-19 pandemic, during June 2020, we completed a $400 2028 note offering and a $100 add on to our 2027 notes. With the impact of the global COVID-19 pandemic on our operations dissipating, we paid down $474 of our floating rate term loans (the "Term A Facility") in the third and fourth quarters of 2020. During the first quarter of 2021, we increased our revolving credit facility to $1,150 and extended its maturity to March 2026. During the second quarter of 2021, we completed a €325 2029 note offering and used the proceeds to repay $375 of higher cost 2026 notes. In addition, we completed a $400 2030 note offering and redeemed $425 of higher cost 2024 notes. See Note 12 to our consolidated financial statements in Item 1 of Part I for additional information.
Other Initiatives
Aftermarket opportunities — We have a global group dedicated to identifying and developing aftermarket growth opportunities that leverage the capabilities within our existing businesses – targeting increased future aftermarket sales. Powered by recognized brands such as Dana®, Spicer®, Spicer Electrified™, Victor Reinz®, Glaser®, GWB®, Thompson®, Tru-Cool®, SVL®, and Transejes™, Dana delivers a broad range of aftermarket solutions – including genuine, all makes, and value lines – servicing passenger, commercial, and off-highway vehicles across the globe.
Selective acquisitions — Although transformational opportunities like the GKN plc driveline business transaction that we pursued in 2018 will be considered when strategically and economically attractive, our acquisition focus is principally directed at “bolt-on” or adjacent acquisition opportunities that have a strategic fit with our existing core businesses, particularly opportunities that support our enterprise strategy and enhance the value proposition of our product offerings. Any potential acquisition will be evaluated in the same manner we currently consider customer program opportunities and other uses of capital – with a disciplined financial approach designed to ensure profitable growth and increased shareholder value.
Acquisitions
Pi Innovo Holding Limited — On March 1, 2021, we acquired the remaining 51% ownership interest in Pi Innovo Holding Limited (Pi Innovo). Pi Innovo designs, develops and manufactures electronic control units spanning a range of applications and industries. The acquisition of the remaining ownership interest provides us with a 100% ownership interest in Pi Innovo. The total purchase consideration of $35 is comprised of $18 of cash paid at closing and the $17 fair value of our previously held equity method investment in Pi Innovo. The results of operations of the business are reported within our Commercial Vehicle operating segment. Pi Innovo had an insignificant impact on our consolidated results of operations during 2021.
Ashwoods Innovations Limited — On February 5, 2020, we acquired Curtis Instruments, Inc.'s (Curtis) 35.4% ownership interest in Ashwoods Innovations Limited (Ashwoods). Ashwoods designs and manufactures permanent magnet electric motors for the automotive, material handling and off-highway vehicle markets. The acquisition of Curtis' interest in Ashwoods, along with our existing ownership interest in Ashwoods, provided us with a 97.8% ownership interest and a controlling financial interest in Ashwoods. We recognized a $3 gain to other income (expense), net on the required remeasurement of our previously held equity method investment in Ashwoods to fair value. The total purchase consideration of $22 is comprised of $8 of cash paid to Curtis at closing, the $10 fair value of our previously held equity method investment in Ashwoods and $4 related to the effective settlement of a pre-existing loan payable due from Ashwoods. During March 2020, we acquired the remaining noncontrolling interests in Ashwoods held by employee shareholders. The results of operations of Ashwoods are reported within our Off-Highway operating segment. The Ashwoods acquisition had an insignificant impact on our consolidated results of operations during 2020. See Hydro-Québec relationship discussion below for details of the subsequent change in our ownership interest in Ashwoods.
Hydro-Québec Relationship
On April 14, 2020, Hydro-Québec acquired an indirect 45% redeemable noncontrolling interest in Ashwoods. We received $9 in cash at closing, inclusive of $2 in proceeds on a loan from Hydro-Québec. Dana will continue to consolidate Ashwoods as the governing documents continue to provide Dana with a controlling financial interest in this subsidiary. See Acquisitions section above for a discussion of Dana's acquisition of Ashwoods.
Trends in Our Markets
We serve our customers in three core global end markets: light vehicle, primarily full frame trucks and SUVs; commercial vehicle, including medium- and heavy-duty trucks and busses; and off-highway, including construction, mining, and agriculture equipment.
In 2020, all of our end-markets were impacted to varying degrees by the global COVID-19 pandemic, which initially resulted in lower demand driven by production shutdowns related to virus mitigation efforts in the regions we serve. Each of our end-markets has unique cyclical dynamics and market drivers. These cycles are impacted by periods of investment where end-user vehicle fleets are refreshed or expanded in reaction to demand usage patterns, regulatory changes, or when the age of vehicles in service reach their useful life. Key market drivers include regional economic growth rates; industrial output; commodity production and pricing; and residential and nonresidential construction rates. Our multi-market coverage and broad customer base help provide stability across the cycles while mitigating secular variability.
Light vehicle markets — Our driveline business is weighted more heavily to the truck and SUV segments of the light-vehicle market versus the passenger-car segment. Our vehicle content is greater on rear-wheel drive, four-wheel drive, and all-wheel drive vehicles, as well as hybrid and electric vehicles. Global light-truck volumes have seen steady growth over the last three years, with the largest gains being in North America. The impact of COVID-19 saw the global market contract by 13% from 2019 levels. Our current outlook for the full year of 2021 reflects global full-frame light-truck production being up 6% with all regions improving over 2020, but falling short of 2019 levels due to the continued global semiconductor chip shortage.
Commercial vehicle markets — Our primary business is driveline systems for medium and heavy-duty trucks and busses, including the emerging market for hybrid and electric vehicles. Key regional markets are North America, South America (primarily Brazil) and Asia Pacific. The Class-8 truck market in North America experienced steady growth from 2017 through 2019, peaking at 345,000 trucks produced in 2019. Production of Class-8 trucks in 2020 was 38% below the record production in 2019 due to normal cycle dynamics and the impact of COVID-19. Our current outlook for 2021 is for stronger demand with production up 23% over the prior year driven by improving economic outlook and cyclical growth.
Medium-duty truck production in North America had grown steadily over the last several years before experiencing a 20% year-over-year decline from 2019 to 2020, primarily due to COVID-19. Our current outlook for 2021 is for a 3% increase in production over the prior year. Outside of North America, production of medium- and heavy-duty trucks in South America had been slowly improving prior to the COVID-19 pandemic as economic conditions had started to stabilize. Pandemic and economic conditions drove a 22% decline in production in 2020. Our current 2021 outlook for South America is for a 64% increase in production as the region recovers from the impact of the pandemic and the age of existing vehicles drives a replacement cycle for new trucks. In contrast to the rest of the world, Asia Pacific, driven by China, did not experience lower truck production in 2020, but is expected to slow output by 5% in 2021 as production matches lower demand, primarily driven by India where the recovery from the pandemic has been slower than in China.
Off-highway markets — Our off-highway business has a large presence outside of North America, with 64% of its 2020 sales coming from products manufactured in Europe; however, a large portion of these products are utilized in vehicle production outside the region. The construction equipment segment of the off-highway market is closely related to global economic growth and infrastructure investment. This segment has experienced a 5% market contraction, which began in late 2018 and further accelerated due to COVID-19, with 2020 production ending down an additional 10%. Our current 2021 outlook has production demand in the global construction market rebounding by 12% over the prior year. End-user investment in the mining equipment segment is driven by prices for commodity products produced by underground mining. The global mining equipment market has been mostly stable over the past several years as industry participants have maintained vehicle inventory levels to match commodity output, and this trend is expected to continue in 2021. The agriculture equipment market is the third of our key off-highway segments. Like the underground mining segment, investment in agriculture equipment is primarily driven by prices for farm commodities. From 2018 to 2019, global demand for agriculture equipment fell by 3% due to a slump in commodity prices. As prices have remained low, production in 2020 fell an additional 7%. Our current outlook for 2021 is for end-market demand to improve by 10% compared to the prior year, as farm subsidies in response to the global pandemic have bolstered the commodity market and are expected to drive the replacement of aging equipment.
Foreign currency — With 55% of our year-to-date 2021 sales coming from outside the U.S., international currency movements can have a significant effect on our sales and results of operations. The euro zone countries and China accounted for 51% and 10% of our year-to-date 2021 non-U.S. sales, respectively, while India and Brazil each accounted for 9%. Although sales in South Africa are less than 5% of our non-U.S. sales, the rand has been volatile and significantly impacted sales from time to time. International currencies strengthened against the U.S. dollar in the first nine months of 2021, increasing sales by $157. A stronger euro, Chinese renminbi, South African rand and British pound were partially offset by a weaker Brazilian real.
Argentina has experienced significant inflationary pressures the past few years, contributing to significant devaluation of its currency among other economic challenges. Our Argentine operation supports our Light Vehicle operating segment. Our sales in Argentina for the first nine months of 2021 of approximately $85 are 1% of our consolidated sales and our net asset exposure related to Argentina was approximately $29, including $11 of net fixed assets, at September 30, 2021. During the second quarter of 2018, we determined that Argentina's economy met the GAAP definition of a highly inflationary economy. In assessing Argentina's economy as highly inflationary we considered its three-year cumulative inflation rate along with other factors. As a result, effective July 1, 2018, the U.S. dollar is the functional currency for our Argentine operations, rather than the Argentine peso. Beginning July 1, 2018, peso-denominated monetary assets and liabilities are remeasured into U.S. dollars using current Argentine peso exchange rates with resulting translation gains or losses included in results of operations. Nonmonetary assets and liabilities are remeasured into U.S. dollar using historic Argentine peso exchange rates.
Commodity costs — The cost of our products may be significantly impacted by changes in raw material commodity prices, the most important to us being those of various grades of steel, aluminum, copper, brass and rare earth materials. The effects of changes in commodity prices are reflected directly in our purchases of commodities and indirectly through our purchases of products such as castings, forgings, bearings, batteries and component parts that include commodities. Most of our major customer agreements provide for the sharing of significant commodity price changes with those customers based on the movement in various published commodity indexes. Where such formal agreements are not present, we have historically been successful implementing price adjustments that largely compensate for the inflationary impact of material costs. Material cost changes will customarily have some impact on our financial results as customer pricing adjustments typically lag commodity price changes. Lower commodity prices increased year-over-year earnings in 2020 by approximately $37, as compared to year-over-year earnings reductions of $30 from higher commodity prices in 2019. Material recovery and other pricing actions decreased year-over-year earnings by $80 and $10 in 2020 and 2019, respectively. Higher commodity prices decreased year-over-year third-quarter and first-nine-months earnings in 2021 by $116 and $221, while lower commodity prices increased year-over-year earnings by $13 and $35 in the same periods last year. Material cost recovery and other pricing actions increased year-over-year third-quarter and first-nine-months earnings in 2021 by $66 and $100, where as material cost recovery and other pricing actions decreased year-over-year earnings by $18 and $69 in the same periods last year.
Sales, Earnings and Cash Flow Outlook
| 2021 Outlook |
2020 |
2019 |
||||||||||
| Sales |
$8,800 - $9,000 |
$ | 7,106 | $ | 8,620 | |||||||
| Adjusted EBITDA |
$815 - $875 |
$ | 593 | $ | 1,019 | |||||||
| Net cash provided by operating activities (% of sales) |
~9.5% | $ | 386 | $ | 637 | |||||||
| Discretionary pension contributions |
$ — | $ | — | $ | 61 | |||||||
| Purchases of property, plant and equipment (% of sales) |
~4.0% | $ | 326 | $ | 426 | |||||||
| Adjusted Free Cash Flow (% of sales) |
~1.0% | $ | 60 | $ | 272 | |||||||
Adjusted EBITDA and adjusted free cash flow are non-GAAP financial measures. See the Non-GAAP Financial Measures discussion below for definitions of our non-GAAP financial measures and reconciliations to the most directly comparable U.S. generally accepted accounting principles (GAAP) measures. We have not provided a reconciliation of our adjusted EBITDA outlook to the most comparable GAAP measure of net income. Providing net income guidance is potentially misleading and not practical given the difficulty of projecting event driven transactional and other non-core operating items that are included in net income, including restructuring actions, asset impairments and certain income tax adjustments. The accompanying reconciliations of these non-GAAP measures with the most comparable GAAP measures for the historical periods presented are indicative of the reconciliations that will be prepared upon completion of the periods covered by the non-GAAP guidance.
Our 2021 sales outlook range has been narrowed to $8,800 to $9,000. We currently expect sales will be near the mid point of the range reflecting strong end-market demand, an increased currency tail wind and additional material cost recovery. We have lowered our full year 2021 adjusted EBITDA outlook to $815 to $875. Adjusted EBITDA Margin is expected to be 9.5%, a 120 basis-point improvement over 2020, reflecting higher margin net new business and the benefit of year-over-year operational efficiencies being muted by continued global-supply-chain disruptions, labor shortages at certain of our facilities, constrained customer production due to the global semiconductor chip shortage and increased investment to support our electrification strategy. In addition, we anticipate higher commodity costs to be largely offset by material recovery and other pricing actions. We now expect to generate adjusted free cash flow of approximately $90, or approximately 1.0% of our sales for 2021. The benefit of higher year-over-year adjusted EBITDA will be partially offset by higher working capital requirements as we carry elevated levels of inventory, helping to mitigate continued global-supply-chain disruptions as well as labor shortages at certain of our facilities, ensuring continuous supply for our customers. We continue to forecast an elevated level of capital spending supporting new customer programs, as spending on certain projects was deferred during 2020 in response the global COVID-19 pandemic.
Among our operational and strategic initiatives are increased focus on and investment in product technology – delivering products and technology that are key to bringing solutions to issues of paramount importance to our customers. Our success on this front is measured, in part, by our sales backlog – net new business received that will be launching in the future and adding to our base annual sales. This backlog excludes replacement business and represents incremental sales associated with new programs for which we have received formal customer awards. At September 30, 2021, our sales backlog of net new business for the 2021 through 2022 period was $700. We expect to realize $500 of our sales backlog in 2021, with incremental sales backlog of $200 being realized in 2022. Our sales backlog is evenly balanced between electric-vehicle and traditional ICE-vehicle content.
Summary Consolidated Results of Operations (Third Quarter, 2021 versus 2020)
| Three Months Ended September 30, |
||||||||||||||||||||
| 2021 |
2020 |
|||||||||||||||||||
| Dollars |
% of Net Sales |
Dollars |
% of Net Sales |
Increase/ (Decrease) |
||||||||||||||||
| Net sales |
$ | 2,204 | $ | 1,994 | $ | 210 | ||||||||||||||
| Cost of sales |
1,998 | 90.7 | % | 1,780 | 89.3 | % | 218 | |||||||||||||
| Gross margin |
206 | 9.3 | % | 214 | 10.7 | % | (8 | ) | ||||||||||||
| Selling, general and administrative expenses |
103 | 4.7 | % | 111 | 5.6 | % | (8 | ) | ||||||||||||
| Amortization of intangibles |
4 | 4 | — | |||||||||||||||||
| Restructuring charges, net |
1 | 2 | (1 | ) | ||||||||||||||||
| Other income (expense), net |
(4 | ) | (8 | ) | 4 | |||||||||||||||
| Earnings before interest and income taxes |
94 | 89 | 5 | |||||||||||||||||
| Interest income |
2 | 3 | (1 | ) | ||||||||||||||||
| Interest expense |
31 | 38 | (7 | ) | ||||||||||||||||
| Earnings before income taxes |
65 | 54 | 11 | |||||||||||||||||
| Income tax expense |
20 | 16 | 4 | |||||||||||||||||
| Equity in earnings of affiliates |
5 | 7 | (2 | ) | ||||||||||||||||
| Net income |
50 | 45 | 5 | |||||||||||||||||
| Less: Noncontrolling interests net income |
4 | 4 | — | |||||||||||||||||
| Less: Redeemable noncontrolling interests net loss |
(2 | ) | (4 | ) | 2 | |||||||||||||||
| Net income attributable to the parent company |
$ | 48 | $ | 45 | $ | 3 | ||||||||||||||
Sales — The following table shows changes in our sales by geographic region.
| Three Months Ended |
||||||||||||||||||||||||
| September 30, |
Amount of Change Due To |
|||||||||||||||||||||||
| 2021 |
2020 |
Increase/ (Decrease) | Currency Effects |
Acquisitions (Divestitures) | Organic Change |
|||||||||||||||||||
| North America |
$ | 1,050 | $ | 1,069 | $ | (19 | ) | $ | 3 | $ | 4 | $ | (26 | ) | ||||||||||
| Europe |
651 | 577 | 74 | 8 | 66 | |||||||||||||||||||
| South America |
174 | 96 | 78 | 4 | 74 | |||||||||||||||||||
| Asia Pacific |
329 | 252 | 77 | 7 | (14 | ) | 84 | |||||||||||||||||
| Total |
$ | 2,204 | $ | 1,994 | $ | 210 | $ | 22 | $ | (10 | ) | $ | 198 | |||||||||||
Sales in 2021 were $210 higher than in 2020. Stronger international currencies increased sales by $22, principally due to a stronger Chinese renminbi, Brazilian real, South African rand and British pound. The organic sales increase of $198, or 10%, resulted from improved heavy-vehicle market demand and the conversion of sales backlog. Pricing actions, including material commodity price and inflationary costs adjustments, increased sales by $66.
The North America organic sales decrease of 2% was driven principally by weaker light- and medium-duty truck production volumes and lower light-vehicle engine production levels, partially offset by higher heavy-duty truck production and the conversion of sales backlog. Third quarter full-frame light-truck production was down 16%, Classes 5-7 were down 15% and Class 8 was up 6% compared with the third quarter of 2020. Light-vehicle engine production was down 20% compared with the third quarter of 2020. Excluding currency effects, sales in Europe were up 11% compared with 2020. With our significant Off-Highway presence in the region, stronger construction/mining and agricultural markets were a major factor. Organic sales in this operating segment were up 23% compared with the third quarter of 2020. A 15% decrease in year-over-year light-duty truck production levels and a 21% decrease in year-over-year light-vehicle engine production levels tempered our organic European sales increase. Excluding currency effects, third quarter sales in South America increased 77% compared to 2020 due primarily to improved light- and medium/heavy-duty truck production. Third-quarter light-truck production was up 7% and medium/heavy-truck production was up 78%. Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 33% compared to 2020 due to a stronger construction/mining market. The global semiconductor chip shortage impacted our third-quarter 2021 sales as customers of some of our more significant programs were forced to take down time during the quarter.
Cost of sales and gross margin — Cost of sales for the third quarter of 2021 increased $218, or 12% when compared to 2020. Cost of sales as a percent of sales was 140 basis points higher than in the previous year. Incremental margins provided by increased sales volumes were offset by higher year-over-year commodity costs of $116, higher standard freight costs of $18 and incremental investment in electrification initiatives. Commodity cost increases are being driven by higher prices for certain grades of steel and aluminum. Year-over-year freight cost increases are primarily due to higher freight rates, driven by container shortages and port congestions due to pandemic-related operational disruptions. Continued material cost savings and supplier recoveries provided a partial offset, reducing costs of sales by approximately $28.
Gross margin of $206 for 2021 decreased $8 from 2020. Gross margin as a percent of sales was 9.3% in 2021, 140 basis points lower than in 2020. The degradation of gross margin as a percent of sales was driven principally by the cost of sales factors referenced above. Gross margin during the third quarter of 2021 was negatively impacted by costs associated with continued global supply chain disruptions and operational inefficiencies driven by labor shortages at certain of our facilities and customer down time resulting from the global semiconductor chip shortage. In addition, gross margin during the third quarter of 2021 was negatively impacted by material cost recovery mechanisms with our customers lagging material cost increases charged by our suppliers by approximately 90 days.
Selling, general and administrative expenses (SG&A) — SG&A expenses in 2021 were $103 (4.7% of sales) as compared to $111 (5.6% of sales) in 2020. SG&A expenses were $8 lower in 2021 primarily due to lower incentive compensation, partially offset by higher salaried employee wages and benefits, travel expenses and professional fees.
Amortization of intangibles — Amortization expense was $4 in both 2021 and in 2020.
Restructuring charges, net — Net restructuring charges of $1 and $2 in the third quarter of 2021 and 2020, respectively, were primarily comprised of exit costs related to previously announced actions.
Other income (expense), net — The following table shows the major components of other income (expense), net.
| Three Months Ended |
||||||||
| September 30, |
||||||||
| 2021 |
2020 |
|||||||
| Non-service cost components of pension and OPEB costs |
$ | (2 | ) | $ | (3 | ) | ||
| Government grants and incentives |
5 | 3 | ||||||
| Foreign exchange gain (loss) |
1 | (2 | ) | |||||
| Strategic transaction expenses |
(3 | ) | (4 | ) | ||||
| Loss on investment in Hyliion |
(6 | ) | ||||||
| Other, net |
1 | (2 | ) | |||||
| Other income (expense), net |
$ | (4 | ) | $ | (8 | ) | ||
Strategic transaction expenses relate primarily to costs incurred in connection with acquisition and divestiture related activities, including costs to complete the transaction and post-closing integration costs. Strategic transaction expenses in 2021 were primarily attributable to our pursuit of the acquisition of a portion of the thermal-management business of Modine Manufacturing Company and certain other strategic initiatives. Strategic transaction expenses in 2020 were primarily attributable to the acquisitions of the Oerlikon Drive Systems segment of the Oerlikon Group (ODS) and Nordresa Motors, Inc. and certain other strategic initiatives.
We held convertible notes receivable from our investment in Hyliion Inc. On October 1, 2020, Hyliion Inc. completed its merger with Tortoise Acquisition Corp. The business combination resulted in the combined company being renamed Hyliion Holdings Corp. (Hyliion), with its common stock being listed on the New York Stock Exchange under the ticker symbol HYLN. Effective with the completed merger, our notes receivable were converted into 2,988,229 common shares of HYLN. Our investment in Hyliion was included in marketable securities and carried at fair value with changes in fair value included in net income. During the third quarter of 2021, we sold all of our Hyliion shares.
Interest income and interest expense — Interest income was $2 in 2021 and $3 in 2020. Interest expense decreased from $38 in 2020 to $31 in 2021, primarily due to lower debt levels and to a lesser extent lower interest rates on outstanding borrowings. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.9% in 2021 and 5.1% in 2020.
Income tax expense — We reported income tax expense of $20 and $16 for 2021 and 2020, respectively. Our effective tax rates were 31% and 30% for the third quarter of 2021 and 2020. Our effective income tax rates vary from the U.S. federal statutory rate of 21% due to establishment, release and adjustment of valuation allowances in several countries, nondeductible expenses and deemed income, local tax incentives in several countries outside the U.S., different statutory tax rates outside the U.S. and withholding taxes related to repatriations of international earnings. The effective income tax rate may vary significantly due to fluctuations in the amounts and sources, both foreign and domestic, of pretax income and changes in the amounts of nondeductible expenses.
In countries where our history of operating losses does not allow us to satisfy the “more likely than not” criterion for recognition of deferred tax assets, we have generally recognized no income tax on the pre-tax income or losses as valuation allowance adjustments offset the associated tax effects. Consequently, there is no income tax expense or benefit recognized on the pre-tax income or losses in these jurisdictions as valuation allowances are adjusted to offset the associated tax expense or benefit. We believe it is reasonably possible that valuation allowances of up to approximately $50 related to subsidiaries in Germany will be released in the next twelve months.
Equity in earnings of affiliates — Net earnings from equity investments was $5 in 2021 and $7 in 2020. Equity in earnings from DDAC was $3 in 2021 and $6 in 2020. Equity earnings from Bendix Spicer Foundation Brake, LLC (BSFB) was $1 in 2020. On October 1, 2020 we sold our 20% ownership interest in BSFB to Bendix Commercial Vehicle Systems LLC.
Summary Consolidated Results of Operations (Year-to-Date, 2021 versus 2020)
| Nine Months Ended September 30, |
||||||||||||||||||||
| 2021 |
2020 |
|||||||||||||||||||
| Dollars |
% of Net Sales |
Dollars |
% of Net Sales |
Increase/ (Decrease) |
||||||||||||||||
| Net sales |
$ | 6,672 | $ | 4,998 | $ | 1,674 | ||||||||||||||
| Cost of sales |
5,963 | 89.4 | % | 4,588 | 91.8 | % | 1,375 | |||||||||||||
| Gross margin |
709 | 10.6 | % | 410 | 8.2 | % | 299 | |||||||||||||
| Selling, general and administrative expenses |
348 | 5.2 | % | 299 | 6.0 | % | 49 | |||||||||||||
| Amortization of intangibles |
11 | 10 | 1 | |||||||||||||||||
| Restructuring charges, net |
2 | 21 | (19 | ) | ||||||||||||||||
| Impairment of goodwill |
(51 | ) | 51 | |||||||||||||||||
| Other income (expense), net |
(33 | ) | (5 | ) | (28 | ) | ||||||||||||||
| Earnings before interest and income taxes |
315 | 24 | 291 | |||||||||||||||||
| Loss on extinguishment of debt |
(24 | ) | (5 | ) | (19 | ) | ||||||||||||||
| Interest income |
6 | 7 | (1 | ) | ||||||||||||||||
| Interest expense |
99 | 99 | — | |||||||||||||||||
| Earnings (loss) before income taxes |
198 | (73 | ) | 271 | ||||||||||||||||
| Income tax expense |
56 | 34 | 22 | |||||||||||||||||
| Equity in earnings of affiliates |
29 | 17 | 12 | |||||||||||||||||
| Net income (loss) |
171 | (90 | ) | 261 | ||||||||||||||||
| Less: Noncontrolling interests net income |
9 | 6 | 3 | |||||||||||||||||
| Less: Redeemable noncontrolling interests net loss |
(10 | ) | (25 | ) | 15 | |||||||||||||||
| Net income (loss) attributable to the parent company |
$ | 172 | $ | (71 | ) | $ | 243 | |||||||||||||
Sales — The following table shows changes in our sales by geographic region.
| Nine Months Ended |
||||||||||||||||||||||||
| September 30, |
Amount of Change Due To |
|||||||||||||||||||||||
| 2021 |
2020 |
Increase/ (Decrease) |
Currency Effects |
Acquisitions (Divestitures) |
Organic Change |
|||||||||||||||||||
| North America |
$ | 3,157 | $ | 2,530 | $ | 627 | $ | 9 | $ | 7 | $ | 611 | ||||||||||||
| Europe |
2,136 | 1,588 | 548 | 125 | 2 | 421 | ||||||||||||||||||
| South America |
434 | 244 | 190 | (12 | ) | 202 | ||||||||||||||||||
| Asia Pacific |
945 | 636 | 309 | 35 | (26 | ) | 300 | |||||||||||||||||
| Total |
$ | 6,672 | $ | 4,998 | $ | 1,674 | $ | 157 | $ | (17 | ) | $ | 1,534 | |||||||||||
Sales in 2021 were $1,674 higher than in 2020. Stronger international currencies increased sales by $157, principally due to a stronger euro, Chinese renminbi, South African rand and British pound, partially offset by a weaker Brazilian real. The organic sales increase of $1,534, or 31%, resulted from improved overall market demand and the conversion of sales backlog. Pricing actions, including material commodity price and inflationary costs adjustments, increase sales by $100.
The North America organic sales increase of 24% was driven principally by stronger light-, medium- and heavy-duty truck production volumes, higher-light vehicle engine production levels and the conversion of sale backlog. First-nine-months full-frame light-truck production was up 20%, Classes 5-7 were up 8% and Class 8 was up 33% compared with the first nine months of 2020. Light-vehicle engine production was up 10% compared with the first nine months of 2020. Excluding currency effects and the impact of acquisitions, sales in Europe were up 27% compared with 2020. With our significant Off-Highway presence in the region, stronger construction/mining and agricultural markets were a major factor. Organic sales of this operating segment were up 29% compared with the first nine months of 2020. A 10% increase in year-over-year light-vehicle engine production levels also contributed to our organic European sales increase. Excluding currency effects, first-nine-months sales in South America increased 83% compared to 2020 due primarily to improved light- and medium/heavy-duty truck production. First-nine-months 2021 light-truck production was up 58% and medium/heavy-truck production was up 95%. Excluding currency effects and the impact of divestitures, sales in Asia Pacific increased 47% compared to 2020 due to improved light-truck production and stronger construction/mining and agricultural markets. First-nine-months 2021 light-truck production was up 12%. The global semiconductor chip shortage impacted our first-nine-months 2021 sales as customers of some of our more significant programs were forced to take down time during the second and third quarters.
Cost of sales and gross margin — Cost of sales for the first nine months of 2021 increased $1,375, or 30% when compared to 2020. Cost of sales as a percent of sales was 240 basis points lower than in the previous year. Incremental margins provided by increased sales volumes were partially offset by higher year-over-year commodity costs of $221, higher standard and premium freight costs of $61 and incremental investment in electrification initiatives. Commodity cost increases are being driven by higher prices for certain grades of steel and aluminum. Year-over-year freight cost increases are primarily due to higher freight rates, driven by container shortages and port congestions due to pandemic-related operational disruptions, and the incurrence of premium freight to support customer demand levels. Continued material cost savings and supplier recoveries provided a partial offset, reducing costs of sales by approximately $104.
Gross margin of $709 for 2021 increased $299 from 2020. Gross margin as a percent of sales was 10.6% in 2021, 240 basis points higher than in 2020. The improvement in gross margin as a percent of sales was driven principally by the cost of sales factors referenced above. Gross margin during the nine months of 2021 was negatively impacted by costs associated with continued global supply chains disruptions and operational inefficiencies driven by labor shortages at certain of our facilities and customer down time resulting from the global semiconductor chip shortage. In addition, gross margin during the first nine months of 2021 was negatively impacted by material cost recovery mechanisms with our customers lagging material cost increases charged by our suppliers by approximately 90 days.
| Nine Months Ended |
||||||||
| September 30, |
||||||||
| 2021 |
2020 |
|||||||
| Non-service cost components of pension and OPEB costs |
$ | (7 | ) | $ | (8 | ) | ||
| Government grants and incentives |
13 | 9 | ||||||
| Foreign exchange gain |
2 | 5 | ||||||
| Strategic transaction expenses |
(11 | ) | (15 | ) | ||||
| Loss on investment in Hyliion |
(20 | ) | ||||||
| Loss on disposal group held for sale |
(7 | ) | ||||||
| Loss on de-designation of fixed-to-fixed cross currency swaps |
(9 | ) | ||||||
| Other, net |
6 | 4 | ||||||
| Other income (expense), net |
$ | (33 | ) | $ | (5 | ) | ||
Strategic transaction expenses relate primarily to costs incurred in connection with acquisition and divestiture related activities, including costs to complete the transaction and post-closing integration costs. Strategic transaction expenses in 2021 were primarily attributable to our pursuit of the acquisition of a portion of the thermal-management business of Modine Manufacturing Company and certain other strategic initiatives. Strategic transaction expenses in 2020 were primarily attributable to the acquisitions of the Oerlikon Drive Systems segment of the Oerlikon Group (ODS) and Nordresa Motors, Inc. and certain other strategic initiatives.
We held convertible notes receivable from our investment in Hyliion Inc. On October 1, 2020, Hyliion Inc. completed its merger with Tortoise Acquisition Corp. The business combination resulted in the combined company being renamed Hyliion Holdings Corp. (Hyliion), with its common stock being listed on the New York Stock Exchange under the ticker symbol HYLN. Effective with the completed merger, our notes receivable were converted into 2,988,229 common shares of HYLN. Our investment in Hyliion was included in marketable securities and carried at fair value with changes in fair value included in net income. During the third quarter of 2021, we sold all of our Hyliion shares.
We had previously entered into fixed-to-fixed cross currency swaps as a hedge against our June 2026 Notes. In June 2021, we redeemed all of the June 2026 Notes and de-designated the fixed-to-fixed cross currency swaps. See Note 13 of the consolidated financial statements in Item I of Part I for additional information.
In conjunction with our acquisition of ODS, we acquired a controlling financial interest in a joint venture in China. We were required to divest of our interest in this joint venture as it violates competitive restrictions of another of our China joint venture shareholder agreements. During the first quarter of 2021, we recorded an impairment charge of $7, as we determined the carrying value of the disposal group exceeded its fair value less costs to sell. We completed the divestiture of this business in April 2021. See Note 17 of the consolidated financial statement in Item I of Part I for additional information.
Loss on extinguishment of debt — On May 13, 2021 and May 17, 2021, we redeemed $254 and $171 of our December 2024 Notes, respectively. The $11 loss on extinguishment of debt includes the redemption premiums and the write-off of $3 of previously deferred financings costs associated with our December 2024 Notes. In addition, we recognized a previously deferred $3 gain on a terminated fixed-to-floating interest rate swap associated with the December 2024 Notes. On June 10, 2021, we redeemed all of our June 2026 Notes. The $16 loss on extinguishment of debt includes the $12 redemption premium and the write-off of $4 of previously deferred financing costs associated with our June 2026 Notes. On June 19, 2020, in connection with the issuance of our June 2028 Notes, we terminated our $500 bridge facility and wrote off $5 of deferred fees associated with the bridge facility. See Note 12 of the consolidated financial statements in Item 1 of Part I for additional information.
Interest income and interest expense — Interest income was $6 in 2021 and $7 in 2020. Interest expense was $99 in both 2021 and 2020, with lower debt levels in 2021 offset by higher interest rates. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 5.3% in 2021 and 4.9% in 2020. The year-over-year increase in our average effective interest rate is primarily attributable to the issuance of $400 of our 5.625% June 2028 Notes and an additional $100 of our 5.375% November 2027 Notes during the second quarter of 2020 and the pay down our Term A Facility, which bore interest at an average of 2.65% during the first nine months of 2020, in the fourth quarter of 2020.
Segment Results of Operations (2021 versus 2020)
Light Vehicle
| Three Months |
Nine Months |
|||||||||||||||||||||||
| Sales |
Segment EBITDA |
Segment EBITDA Margin |
Sales |
Segment EBITDA |
Segment EBITDA Margin |
|||||||||||||||||||
| 2020 |
$ | 913 | $ | 89 | 9.7 | % | $ | 2,058 | $ | 140 | 6.8 | % | ||||||||||||
| Volume and mix |
(12 | ) | (6 | ) | 691 | 151 | ||||||||||||||||||
| Divestitures |
(9 | ) | (1 | ) | (16 | ) | (1 | ) | ||||||||||||||||
| Performance |
22 | (28 | ) | 32 | (52 | ) | ||||||||||||||||||
| Currency effects |
4 | 34 | 3 | |||||||||||||||||||||
| 2021 |
$ | 918 | $ | 54 | 5.9 | % | $ | 2,799 | $ | 241 | 8.6 | % | ||||||||||||
Light Vehicle sales in the third quarter and first nine months of 2021, exclusive of currency effects and the impact of divestitures, were 1% and 35% higher than the same period of 2020 reflecting weaker global markets in the third quarter of 2021, improved global markets in the first nine months of 2021, and the conversion of sales backlog in both periods. First-half 2020 sales were significantly impacted by the rapid dissipation in customer demand resulting from the global COVID-19 pandemic. Year-over-year North America full-frame light-truck production decreased 16% in this year’s third quarter while light-truck production in Europe and Asia Pacific decreased 15% and 14%, respectively, while light-truck production in South America increased 7%. Year-over-year North America full-frame light-truck production increased 20% in this year’s first nine months while light-truck production in Europe, South America and Asia Pacific increased 19%, 58% and 12%, respectively. Net customer pricing and cost recovery actions further increased year-over-year sales by $14 and $16 in this year’s third quarter and first nine months, respectively. The global semiconductor chip shortage impacted our third-quarter and first-nine months 2021 sales as customers of some of our more significant programs were forced to take down time during the second and third quarters.
Light Vehicle third-quarter 2021 segment EBITDA decreased by $35 from last year, with first-nine-months earnings higher by $101. Lower sales volumes decreased year-over-year earnings by $6 (50.0% decremental margin) in the third quarter of 2021. Higher sales volumes provided a year-over-year benefit of $151 (21.9% incremental margin) in the first nine months of 2021. Year-over-year performance-related earnings decreases in the third quarter were driven by commodity cost increases of $53, higher standard freight costs of $5, operational inefficiencies of $4, higher program launch costs of $3 and benefits of austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $2. Offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $14, material cost savings and supplier recoveries of $13, lower incentive compensation of $6, lower premium freight costs of $4 and lower warranty costs of $2. The year-over-year performance-related earnings decrease in the first nine months was driven by commodity cost increases of $101, higher standard freight costs of $21, higher program launch costs of $6, benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $5 and $8, respectively and higher warranty costs of $3. Partially offsetting these performance-related decreases were material cost savings and supplier recoveries of $61, net customer pricing and material cost recovery actions of $16, operational efficiencies of $14 and lower premium freight costs of $1.
Commercial Vehicle
| Three Months |
Nine Months |
|||||||||||||||||||||||
| Sales |
Segment EBITDA |
Segment EBITDA Margin |
Sales |
Segment EBITDA |
Segment EBITDA Margin |
|||||||||||||||||||
| 2020 |
$ | 317 | $ | 17 | 5.4 | % | $ | 852 | $ | 32 | 3.8 | % | ||||||||||||
| Volume and mix |
51 | 13 | 229 | 62 | ||||||||||||||||||||
| Acquisitions/Divestitures |
(1 | ) | 1 | (2 | ) | 1 | ||||||||||||||||||
| Performance |
23 | (11 | ) | 44 | (43 | ) | ||||||||||||||||||
| Currency effects |
6 | 9 | 1 | |||||||||||||||||||||
| 2021 |
$ | 396 | $ | 20 | 5.1 | % | $ | 1,132 | $ | 53 | 4.7 | % | ||||||||||||
Commercial Vehicle sales in the third quarter and first nine months of 2021, exclusive of currency effects and the impact of acquisitions and divestitures, were 23% and 32% higher than the same period of 2020 reflecting mixed global markets in the third quarter of 2021, improved global markets in the first nine months of 2021, and the conversion of sales backlog in both periods. First-half 2020 sales were significantly impacted by the rapid dissipation in customer demand resulting from the global COVID-19 pandemic. Year-over-year North America Class 8 production was up 6% and Classes 5-7 were down 15% in this year’s third quarter. Year-over-year North America Class 8 production was up 33% and Classes 5-7 were up 8% in the first nine months of this year. Year-over-year medium/heavy-truck production in Europe and South America were up 3% and 78%, respectively, while production in Asia Pacific was down 39% in this year’s third quarter. Year-over-year medium/heavy-truck production in Europe, South America and Asia Pacific were up 16%, 95% and 5%, respectively, in the first nine months of this year. Net customer pricing and cost recovery actions further increased year-over-year sales by $28 and $52 in this year’s third quarter and first nine months, respectively. The global semiconductor chip shortage impacted our third-quarter and first-nine months 2021 sales as customers of some of our more significant programs were forced to take down time during the second and third quarters.
Commercial Vehicle third-quarter 2021 segment EBITDA increased by $3 from last year, with first-nine-months earnings higher by $21. Higher sales volumes provided a year-over-year benefit of $13 (25.5% incremental margin) and $62 (27.1% incremental margin) in the third quarter and first nine months of 2021. The year-over-year performance-related earnings decrease in the third quarter was driven by commodity cost increases of $31, operational inefficiencies of $9, higher standard and premium freight costs of $8 and benefits of austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1. Partially offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $28, material cost savings of $5, lower incentive compensation of $4 and lower warranty costs of $1. The year-over-year performance-related earnings decrease in the first nine months was driven by commodity cost increases of $60, higher standard and premium freight costs of $24, operational inefficiencies of $14 and benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $2 and $9, respectively. Partially offsetting these performance-related decreases were net customer pricing and material cost recovery actions of $52, material cost savings of $13 and lower warranty costs of $1.
Off-Highway
| Three Months |
Nine Months |
|||||||||||||||||||||||
| Sales |
Segment EBITDA |
Segment EBITDA Margin |
Sales |
Segment EBITDA |
Segment EBITDA Margin |
|||||||||||||||||||
| 2020 |
$ | 504 | $ | 64 | 12.7 | % | $ | 1,435 | $ | 172 | 12.0 | % | ||||||||||||
| Volume and mix |
91 | 20 | 380 | 94 | ||||||||||||||||||||
| Acquisitions |
1 | (1 | ) | |||||||||||||||||||||
| Performance |
24 | 15 | 29 | 2 | ||||||||||||||||||||
| Currency effects |
8 | 1 | 86 | 9 | ||||||||||||||||||||
| 2021 |
$ | 627 | $ | 100 | 15.9 | % | $ | 1,931 | $ | 276 | 14.3 | % | ||||||||||||
Off-Highway sales in the third quarter and first nine months of 2021, exclusive of currency effects and the impact of acquisitions, were 23% and 29% higher than the same period of 2020 reflecting improved global markets and the conversion of sales backlog. Year-over-year global construction/mining and agricultural equipment markets reflected marked improvement. Net customer pricing and cost recovery actions further increased year-over-year sales by $21 and $28 in this year’s third quarter and first nine months, respectively.
Off-Highway third-quarter 2021 segment EBITDA increased by $36 from last year, with first-nine-months earnings higher by $104. Higher sales volumes provided a year-over-year benefit of $20 (22.0% incremental margin) and $94 (24.7% incremental margin) in the third quarter and first nine months of 2021. The year-over-year performance-related earnings increase in the third quarter was driven by net customer and material cost recovery actions of $21, operational efficiencies of $17, material cost savings of $8 and lower incentive compensation of $4. Partially offsetting these performance-related increases were commodity cost increases of $23, higher standard and premium freight costs of $6, higher warranty costs of $5 and benefits of austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1. The year-over-year performance-related earnings increase in the first nine months was driven by net customer and material cost recovery actions of $28, material cost savings of $23 and operational efficiencies of $22. Partially offsetting these performance-related increases were commodity cost increases of $44, higher standard and premium freight costs of $9, benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1 and $12, respectively, and higher warranty costs of $5.
Power Technologies
| Three Months |
Nine Months |
|||||||||||||||||||||||
| Sales |
Segment EBITDA |
Segment EBITDA Margin |
Sales |
Segment EBITDA |
Segment EBITDA Margin |
|||||||||||||||||||
| 2020 |
$ | 260 | $ | 34 | 13.1 | % | $ | 653 | $ | 63 | 9.6 | % | ||||||||||||
| Volume and mix |
(10 | ) | (3 | ) | 119 | 43 | ||||||||||||||||||
| Performance |
9 | 6 | 10 | 2 | ||||||||||||||||||||
| Currency effects |
4 | 1 | 28 | 3 | ||||||||||||||||||||
| 2021 |
$ | 263 | $ | 38 | 14.4 | % | $ | 810 | $ | 111 | 13.7 | % | ||||||||||||
Power Technologies primarily serves the light-vehicle market but also sells product to the medium/heavy-truck and off-highway markets. Power Technologies sales in the third quarter of 2021, exclusive of currency effects, were flat compared to the same period last year. Sales in the first nine months of 2021, exclusive of currency effects, were 20% higher than the same period of 2020 reflecting improved global markets and the conversion of sales backlog. First-half 2020 sales were significantly impacted by the rapid dissipation in customer demand resulting from the global COVID-19 pandemic. Year-over-year North America, Europe, South America and Asia Pacific light-vehicle engine production was down 20%, 21%, 20% and 15%, respectively, in this year’s third quarter. Year-over-year North America, Europe, South America and Asia Pacific light-vehicle engine production was up 10%, 10%, 23% and 10%, respectively, in the first nine months of this year. Net customer pricing and cost recovery actions further increased year-over-year sales by $3 and $4 in this year’s third quarter and first nine months, respectively. The global semiconductor chip shortage impacted our third-quarter and first-nine months 2021 sales as customers were forced to take down time during the second and third quarters.
Power Technologies third-quarter 2021 segment EBITDA increased by $4 from last year, with first-nine-months earnings higher by $48. Lower sales volumes decreased year-over-year earnings by $3 (30.0% decremental margin) in the third quarter of 2021. Higher sales volumes provided a year-over-year benefit of $43 (36.1% incremental margin) in the first nine months of 2021. The year-over-year performance-related earnings increase in the third quarter was driven by operational efficiencies of $8, net customer pricing and material recovery actions of $3, lower incentive compensation of $3, material cost savings of $2 and lower warranty costs of $2. Partially offsetting these performance-related increases were commodity cost increases of $9 and higher standard and premium freight costs of $3. The year-over-year performance-related earnings increase in the first nine months was driven by operational efficiencies of $21, material cost savings of $7, net customer pricing and material cost recovery actions of $4 and lower warranty costs of $4. Partially offsetting these performance-related increases were commodity cost increases of $16, higher standard and premium freight costs of $8, benefits of the CARES Act and austerity measures taken in response to the global COVID-19 pandemic during 2020 not repeating in 2021 of $1 and $7, respectively, and higher incentive compensation of $2.
Non-GAAP Financial Measures
Adjusted EBITDA
We have defined adjusted EBITDA as net income before interest, income taxes, depreciation, amortization, equity grant expense, restructuring expense, non-service cost components of pension and other postretirement benefits (OPEB) costs and other adjustments not related to our core operations (gain/loss on debt extinguishment, pension settlements, divestitures, impairment, etc.). Adjusted EBITDA is a measure of our ability to maintain and continue to invest in our operations and provide shareholder returns. We use adjusted EBITDA in assessing the effectiveness of our business strategies, evaluating and pricing potential acquisitions and as a factor in making incentive compensation decisions. In addition to its use by management, we also believe adjusted EBITDA is a measure widely used by securities analysts, investors and others to evaluate financial performance of our company relative to other Tier 1 automotive suppliers. Adjusted EBITDA should not be considered a substitute for earnings before income taxes, net income or other results reported in accordance with GAAP. Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.
The following table provides a reconciliation of net income to adjusted EBITDA.
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Net income (loss) |
$ | 50 | $ | 45 | $ | 171 | $ | (90 | ) | |||||||
| Equity in earnings of affiliates |
5 | 7 | 29 | 17 | ||||||||||||
| Income tax expense |
20 | 16 | 56 | 34 | ||||||||||||
| Earnings (loss) before income taxes |
65 | 54 | 198 | (73 | ) | |||||||||||
| Depreciation and amortization |
98 | 94 | 290 | 272 | ||||||||||||
| Restructuring charges, net |
1 | 2 | 2 | 21 | ||||||||||||
| Interest expense, net |
29 | 35 | 93 | 92 | ||||||||||||
| Loss on extinguishment of debt |
24 | 5 | ||||||||||||||
| Impairment of goodwill |
51 | |||||||||||||||
| Loss on investment in Hyliion |
6 | 20 | ||||||||||||||
| Loss on disposal group held for sale |
7 | |||||||||||||||
| Loss on de-designation of fixed-to-fixed cross currency swaps |
9 | |||||||||||||||
| Other* |
11 | 16 | 34 | 33 | ||||||||||||
| Adjusted EBITDA |
$ | 210 | $ | 201 | $ | 677 | $ | 401 | ||||||||
| * | Other includes stock compensation expense, non-service cost components of pension and OPEB costs, strategic transaction expenses and other items. See Note 19 to our consolidated financial statements in Item 1 of Part I for additional details. |
Free Cash Flow and Adjusted Free Cash Flow
We have defined free cash flow as cash provided by (used in) operating activities less purchases of property, plant and equipment. We have defined adjusted free cash flow as cash provided by (used in) operating activities excluding discretionary pension contributions less purchases of property, plant and equipment. We believe these measures are useful to investors in evaluating the operational cash flow of the company inclusive of the spending required to maintain the operations. Free cash flow and adjusted free cash flow are not intended to represent nor be an alternative to the measure of net cash provided by (used in) operating activities reported in accordance with GAAP. Free cash flow and adjusted free cash flow may not be comparable to similarly titled measures reported by other companies.
The following table reconciles net cash flows provided by (used in) operating activities to adjusted free cash flow.
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Net cash provided by (used in) operating activities |
$ | (75 | ) | $ | 321 | $ | 19 | $ | 195 | |||||||
| Purchases of property, plant and equipment |
(95 | ) | (60 | ) | (228 | ) | (181 | ) | ||||||||
| Free cash flow |
(170 | ) | 261 | (209 | ) | 14 | ||||||||||
| Discretionary pension contribution |
— | — | — | — | ||||||||||||
| Adjusted free cash flow |
$ | (170 | ) | $ | 261 | $ | (209 | ) | $ | 14 | ||||||
Liquidity
The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at September 30, 2021:
| Cash and cash equivalents |
$ | 220 | ||
| Less: Deposits supporting obligations |
— | |||
| Available cash |
220 | |||
| Additional cash availability from Revolving Facility |
1,077 | |||
| Marketable securities |
18 | |||
| Total liquidity |
$ | 1,315 |
Cash deposits are maintained to provide credit enhancement for certain agreements and are reported as part of cash and cash equivalents. For most of these deposits, the cash may be withdrawn if a comparable security is provided in the form of letters of credit. Accordingly, these deposits are not considered to be restricted. Marketable securities are included as a component of liquidity as these investments can be readily liquidated at our discretion. We had availability of $1,077 at September 30, 2021 under the Revolving Facility after deducting $52 of outstanding borrowings and $21 of outstanding letters of credit.
The components of our September 30, 2021 consolidated cash balance were as follows:
| U.S. |
Non-U.S. |
Total |
||||||||||
| Cash and cash equivalents |
$ | 39 | $ | 111 | $ | 150 | ||||||
| Cash and cash equivalents held at less than wholly-owned subsidiaries |
3 | 67 | 70 | |||||||||
| Consolidated cash balance |
$ | 42 | $ | 178 | $ | 220 | ||||||
A portion of the non-U.S. cash and cash equivalents is utilized for working capital and other operating purposes. Several countries have local regulatory requirements that restrict the ability of our operations to repatriate this cash. Beyond these restrictions, there are practical limitations on repatriation of cash from certain subsidiaries because of the resulting tax withholdings and subsidiary by-law restrictions which could limit our ability to access cash and other assets.
On March 25, 2021, we amended our credit and guaranty agreement, increasing the Revolving Facility to $1,150 and extending its maturity to March 25, 2026.
At September 30, 2021, we were in compliance with the covenants of our financing agreements. Under the Term B Facility, the Revolving Facility and our senior notes, we are required to comply with certain incurrence-based covenants customary for facilities of these types. The incurrence-based covenants in the Term B Facility and the Revolving Facility permit us to, among other things, (i) issue foreign subsidiary indebtedness, (ii) incur general secured indebtedness subject to a pro forma first lien net leverage ratio not to exceed 1.50:1.00 in the case of first lien debt and a pro forma secured net leverage ratio of 2.50:1.00 in the case of other secured debt and (iii) incur additional unsecured debt subject to a pro forma total net leverage ratio not to exceed 3.50:1.00, tested at the time of incurrence. We may also make dividend payments in respect of our common stock as well as certain investments and acquisitions subject to a pro forma total net leverage ratio of 2.75:1.00. In addition, the Revolving Facility is subject to a financial covenant requiring us to maintain a first lien net leverage ratio not to exceed 2.00:1.00. The indentures governing the senior notes include other incurrence-based covenants that may subject us to additional specified limitations.
From time to time, depending upon market, pricing and other conditions, as well as our cash balances and liquidity, we may seek to acquire our senior notes or other indebtedness or our common stock through open market purchases, privately negotiated transactions, tender offers, exchange offers or otherwise, upon such terms and at such prices as we may determine (or as may be provided for in the indentures governing the notes), for cash, securities or other consideration. In addition, we may enter into sale-leaseback transactions related to certain of our real estate holdings. There can be no assurance that we will pursue any such transactions in the future, as the pursuit of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our financing and governance documents.
The principal sources of liquidity available for our future cash requirements are expected to be (i) cash flows from operations, (ii) cash and cash equivalents on hand and (iii) borrowings from our Revolving Facility. We believe that our overall liquidity and operating cash flow will be sufficient to meet our anticipated cash requirements for capital expenditures, working capital, debt obligations and other commitments during the next twelve months. While uncertainty surrounding the current economic environment could adversely impact our business, based on our current financial position, we believe it is unlikely that any such effects would preclude us from maintaining sufficient liquidity.
Cash Flow
The following table summarizes our consolidated statement of cash flows:
| Nine Months Ended |
||||||||
| September 30, |
||||||||
| 2021 |
2020 |
|||||||
| Cash used for changes in working capital |
$ | (501 | ) | $ | (50 | ) | ||
| Other cash provided by operations |
520 | 245 | ||||||
| Net cash provided by operating activities |
19 | 195 | ||||||
| Net cash used in investing activities |
(260 | ) | (193 | ) | ||||
| Net cash provided by (used in) financing activities |
(71 | ) | 466 | |||||
| Net increase (decrease) in cash, cash equivalents and restricted cash |
$ | (312 | ) | $ | 468 | |||
Operating activities — Exclusive of working capital, other cash provided by operations was $520 in 2021 and $245 in 2020. The year-over-year increase is primarily attributable to higher operating earnings.
Working capital used cash of $501 and $50 in 2021 and 2020. Cash of $253 and $120 was used to finance receivables in 2021 and 2020, respectively. The higher level of cash used to finance receivables in 2021 is due to higher year-over-year third quarter sales driven by strong heavy-vehicles markets. Cash of $441 was used to fund higher inventory levels during 2021, while cash of $105 was provided by lower inventory levels in 2020. We are carrying higher levels of inventory in 2021 to mitigate continued global-supply-chain disruptions as well as labor shortages at certain of our facilities, ensuring continuous supply for our customers. The cash generated by lower inventory levels in 2020 was due primarily to actions taken to reduce inventory levels, preserving working capital, in response to the global COVID-19 pandemic. Increases in accounts payable and other net liabilities provided cash of $193 in 2021, while decreases in accounts payable and other net liabilities used cash of $35 in 2020. The increase in accounts payable and other net liabilities in 2021 was principally driven by higher raw material purchases in the second and third quarters.
Investing activities — Expenditures for property, plant and equipment were $228 and $181 during 2021 and 2020. During 2020, capital spending was delayed where and when appropriate in response to the global COVID-19 pandemic. During 2021, we paid $17, net of cash acquired, to acquire an additional 51% interest in Pi Innovo. The acquisition of the additional ownership interest provides us with a 100% ownership interest in Pi Innovo. During the first quarter of 2020, we paid $8 to acquire Curtis' 35.4% ownership interest in Ashwoods. The acquisition of Curtis's interest in Ashwoods, along with our existing ownership interest in Ashwoods, provided us with a controlling financing interest in Ashwoods. During 2021, we acquired a 1% ownership interest in Switch Mobility Limited for $18. During 2021, we sold all of our Hyliion shares for $29. During 2020, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities. In 2021 we de-designated the fixed-to-fixed cross currency swaps associated with our June 2026 Notes and settled certain of the fixed-to-fixed cross currency swaps resulting in a net cash outflow of $22.
Financing activities — During 2021, we had net borrowings of $52 on our Revolving Facility. During 2021, we completed the issuance of €325 of our July 2029 Notes and $400 of our September 2030 Notes, paying financing costs of $11. Also during 2021, we redeemed all $375 of our June 2026 Notes and all $425 of our December 2024 Notes, paying redemption premiums of $21. During 2021, we paid financing costs of $2 to amend our credit and guaranty agreement, increasing the Revolving Facility to $1,150 and extending its maturity to March 25, 2026. During 2020, we completed the issuance of $400 of our June 2028 Notes and the issuance of an additional $100 of our November 2027 Notes, paying financing costs of $8. During 2020, we entered a $500 bridge facility, paying financing costs of $5. We subsequently terminated the bridge facility. We used $44 and $15 for dividend payments to common stockholders during 2021 and 2020. We used cash of $23 to repurchase common shares under our share repurchase program in 2021. During the second quarter of 2020, we temporarily suspended the declaration and payment of dividends to common stockholders and temporarily suspended the repurchase of common stock under our existing common stock repurchase program in response to the global COVID-19 pandemic. Distributions to noncontrolling interests totaled $10 in both 2021 and 2020. During 2020, Hydro-Québec paid us $7 to acquire an indirect 45% ownership interest in Ashwoods. During 2021, we sold a portion of our ownership interest in Tai Ya Investment (HK) Co., Limited (Tai Ya) to China Motor Corporation, reducing our ownership interest in Tai Ya to 50%. In conjunction with the decrease in our ownership interest, the Tai Ya shareholders agreement was amended, eliminating our controlling financial interest in Tai Ya. Upon our loss of control, we deconsolidated Tai Ya, including $6 of cash and cash equivalents.
Off-Balance Sheet Arrangements
There have been no material changes at September 30, 2021 in our off-balance sheet arrangements from those reported or estimated in the disclosures in Item 7 of our 2020 Form 10-K.
Contractual Obligations
During the second quarter of 2021, we completed the sale of $400 of our September 2030 Notes and €325 of our July 2029 Notes and redeemed all $425 of our December 2024 Notes and all $375 of our June 2026 Notes. See Note 12 to our consolidated financial statements in Item 1 of Part I for additional information.
Contingencies
For a summary of litigation and other contingencies, see Note 14 to our consolidated financial statements in Item 1 of Part I. Based on information available to us at the present time, we do not believe that any liabilities beyond the amounts already accrued that may result from these contingencies will have a material adverse effect on our liquidity, financial condition or results of operations.
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires us to use estimates and make judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue and expenses and the related disclosures. See Item 7 in our 2020 Form 10-K for a description of our critical accounting estimates and Note 1 to our consolidated financial statements in Item 8 of our 2020 Form 10-K for our significant accounting policies. There were no changes to our critical accounting estimates in the nine months ended September 30, 2021. See Note 1 to our consolidated financial statements in this Form 10-Q for a discussion of new accounting guidance adopted during the first nine months of 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to market risk exposures related to changes in currency exchange rates, interest rates or commodity costs from those discussed in Item 7A of our 2020 Form 10-K.
Item 4. Controls and Procedures
Disclosure controls and procedures — We maintain disclosure controls and procedures that are designed to ensure that the information disclosed in the reports we file with the SEC under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Our CEO and CFO have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.
Changes in internal control over financial reporting — There was no change in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
CEO and CFO certifications — The certifications of our CEO and CFO that are attached to this report as Exhibits 31.1 and 31.2 include information about our disclosure controls and procedures and internal control over financial reporting. These certifications should be read in conjunction with the information contained in this Item 4 and in Item 9A of Part II of our 2020 Form 10-K for a more complete understanding of the matters covered by the certifications.
We are a party to various pending judicial and administrative proceedings that arose in the ordinary course of business. After reviewing the currently pending lawsuits and proceedings (including the probable outcomes, reasonably anticipated costs and expenses and our established reserves for uninsured liabilities), we do not believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on our liquidity, financial condition or results of operations. Legal proceedings are also discussed in Note 14 to our consolidated financial statements in Item 1 of Part I of this Form 10-Q.
The risk factor "Labor stoppages or work slowdowns at Dana, key suppliers or our customers could result in a disruption in our operations and have a material adverse effect on our business." disclosed in Item 1A of our 2020 Form 10-K has been updated to read as follows:
Labor stoppages or work slowdowns at Dana, key suppliers or our customers could result in a disruption in our operations and have a material adverse effect on our business.
We and our customers rely on our respective suppliers to provide parts needed to maintain production levels. We all rely on workforces represented by labor unions. Workforce disputes that result in work stoppages or slowdowns could disrupt operations of all of these businesses, which in turn could have a material adverse effect on the supply of, or demand for, the products we supply to our customers.
Labor agreements with United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) and United Steelworkers (USW) represented employees at certain of our U.S. facilities expired in August 2021. Represented employees have continued to work while Dana and representatives from the UAW and USW continued good faith negotiations. A tentative agreement for new multi-year labor agreements has been reached by the parties. The agreements are subject to the ratification process by both unions, the result of which is uncertain.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer's purchases of equity securities — On February 16, 2021 our Board of Directors approved an extension of our existing common stock share repurchase program through December 31, 2023. Approximately $127 remained available under the program for future share repurchases as of September 30, 2021. We repurchase shares utilizing available excess cash either in the open market or through privately negotiated transactions. Stock repurchases are subject to prevailing market conditions and other considerations. Under the program, we used cash of $23 to repurchase 1,000,000 shares of our common stock during the third quarter of 2021.
| Calendar Month |
Class or Series of Securities |
Number of Shares Purchased |
Average Price Paid per Share |
Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
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| July |
Common |
$ | 150 | |||||||||||||||
| August |
Common |
1,000,000 | $ | 23.37 | 1,000,000 | $ | 127 | |||||||||||
| September |
Common |
$ | 127 | |||||||||||||||
| Exhibit No. |
Description |
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| 31.1 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. Filed with this Report. |
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| 31.2 |
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. Filed with this Report. |
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| 32 |
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| 101 |
The following materials from Dana Incorporated’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statement of Operations, (ii) the Consolidated Statement of Comprehensive Income, (iii) the Consolidated Balance Sheet, (iv) the Consolidated Statement of Cash Flows and (v) Notes to the Consolidated Financial Statements. Filed with this Report. |
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| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
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DANA INCORPORATED
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| Date: |
October 26, 2021 |
By: |
/s/ Jonathan M. Collins |
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Jonathan M. Collins |
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Executive Vice President and |
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Chief Financial Officer |
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