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DAN Dana

Filed: 28 Apr 21, 10:44am
 

 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: March 31, 2021

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: 1-1063

 

Dana Incorporated

(Exact name of registrant as specified in its charter)

  

Delaware

 

26-1531856

(State of incorporation)

 

(IRS Employer Identification Number)

 

3939 Technology Drive, Maumee, OH

 

43537

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (419887-3000

 

Securities registered pursuant to Section 12(b) of the Act:

Common stock $0.01 par value

 

DAN

 

New York Stock Exchange

(Title of each class)

 

(Trading Symbol)

 

(Name of exchange on which registered)

 

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. Yes  ☑    No  ☐

 

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).  Yes  ☑    No  ☐

 

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.

 

Large accelerated filer

 

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

 

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  ☐    No  ☑

 

There were 145,143,361 shares of the registrant’s common stock outstanding at April 16, 2021.

 

 

 
 

DANA INCORPORATED – FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2021

 

TABLE OF CONTENTS

 

 

 

10-Q Pages

PART I – FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements

3

 

Consolidated Statement of Operations (Unaudited)

3

 

Consolidated Statement of Comprehensive Income (Unaudited)

4

 

Consolidated Balance Sheet (Unaudited)

5

 

Consolidated Statement of Cash Flows (Unaudited)

6

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

Item 4

Controls and Procedures

37

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

38

 

 

 

Item 1A

Risk Factors

38

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 6

Exhibits

38

 

 

 

Signatures

 

39

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Dana Incorporated

Consolidated Statement of Operations (Unaudited)

(In millions, except per share amounts)

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Net sales

 $2,263  $1,926 

Costs and expenses

        

Cost of sales

  2,012   1,720 

Selling, general and administrative expenses

  119   106 

Amortization of intangibles

  4   3 

Restructuring charges, net

  1   3 

Impairment of goodwill

  0   (51)

Other income (expense), net

  (19)  4 

Earnings before interest and income taxes

  108   47 

Interest income

  2   2 

Interest expense

  34   29 

Earnings before income taxes

  76   20 

Income tax expense (benefit)

  22   (16)

Equity in earnings of affiliates

  14   2 

Net income

  68   38 

Less: Noncontrolling interests net income

  1   2 

Less: Redeemable noncontrolling interests net loss

  (4)  (22)

Net income attributable to the parent company

 $71  $58 
         

Net income per share available to common stockholders

        
Basic $0.49  $0.40 
Diluted $0.48  $0.40 
         

Weighted-average common shares outstanding

        
Basic  144.9   144.2 
Diluted  146.4   144.8 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

Dana Incorporated

Consolidated Statement of Comprehensive Income (Unaudited)

(In millions)

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Net income

 $68  $38 

Other comprehensive income (loss), net of tax:

        

Currency translation adjustments

  (5)  (154)

Hedging gains and losses

  (17)  29 

Defined benefit plans

  3   3 

Other comprehensive loss

  (19)  (122)

Total comprehensive income (loss)

  49   (84)

Less: Comprehensive loss attributable to noncontrolling interests

  1   17 

Less: Comprehensive loss attributable to redeemable noncontrolling interests

  3   14 

Comprehensive income (loss) attributable to the parent company

 $53  $(53)

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

Dana Incorporated

Consolidated Balance Sheet (Unaudited)

(In millions, except share and per share amounts)

 

  

March 31,

  

December 31,

 
  

2021

  

2020

 

Assets

        

Current assets

        
Cash and cash equivalents $483  $559 
Marketable securities  26   21 

Accounts receivable

        
Trade, less allowance for doubtful accounts of $6 in 2021 and $7 in 2020  1,428   1,201 
Other  237   231 
Inventories  1,260   1,149 
Other current assets  139   127 

Total current assets

  3,573   3,288 
Goodwill  488   479 
Intangibles  250   236 
Deferred tax assets  613   611 
Other noncurrent assets  153   169 
Investments in affiliates  149   152 
Operating lease assets  192   190 
Property, plant and equipment, net  2,184   2,251 

Total assets

 $7,602  $7,376 
         

Liabilities and equity

        

Current liabilities

        
Short-term debt $26  $26 
Current portion of long-term debt  8   8 
Accounts payable  1,536   1,331 
Accrued payroll and employee benefits  203   190 
Taxes on income  44   35 
Current portion of operating lease liabilities  42   43 
Other accrued liabilities  311   308 

Total current liabilities

  2,170   1,941 
Long-term debt, less debt issuance costs of $26 in 2021 and $27 in 2020  2,420   2,420 
Noncurrent operating lease liabilities  157   154 
Pension and postretirement obligations  463   479 
Other noncurrent liabilities  340   368 

Total liabilities

  5,550   5,362 

Commitments and contingencies (Note 14)

        
Redeemable noncontrolling interests  182   180 

Parent company stockholders' equity

        
Preferred stock, 50,000,000 shares authorized, $0.01 par value, no shares outstanding  0   0 
Common stock, 450,000,000 shares authorized, $0.01 par value, 145,142,687 and 144,515,658 shares outstanding  2   2 
Additional paid-in capital  2,415   2,408 
Retained earnings  583   530 
Treasury stock, at cost (10,657,998 and 10,442,582 shares)  (161)  (156)
Accumulated other comprehensive loss  (1,044)  (1,026)

Total parent company stockholders' equity

  1,795   1,758 
Noncontrolling interests  75   76 

Total equity

  1,870   1,834 

Total liabilities and equity

 $7,602  $7,376 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

Dana Incorporated

Consolidated Statement of Cash Flows (Unaudited)

(In millions)

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Operating activities

        

Net income

 $68  $38 
Depreciation  88   85 
Amortization  7   4 
Amortization of deferred financing charges  2   2 
Earnings of affiliates, net of dividends received  (14)  (2)
Stock compensation expense  5   4 
Deferred income taxes  (6)  (35)
Pension expense, net  0   1 
Impairment of goodwill  0   51 
Change in working capital  (133)  (183)
Other, net  10   (16)

Net cash provided by (used in) operating activities

  27   (51)

Investing activities

        
Purchases of property, plant and equipment  (53)  (63)
Acquisition of businesses, net of cash acquired  (17)  (8)
Purchases of marketable securities  (11)  (12)
Proceeds from sales and maturities of marketable securities  6   6 
Settlements of undesignated derivatives  0   (3)
Other, net  2   (5)

Net cash used in investing activities

  (73)  (85)

Financing activities

        
Net change in short-term debt  (1)  298 
Proceeds from long-term debt  2   4 
Repayment of long-term debt  (1)  (1)
Deferred financing payments  (2)  0 
Dividends paid to common stockholders  (14)  (15)
Distributions to noncontrolling interests  0   (1)
Contributions from noncontrolling interests  1   2 
Other, net  (1)  (4)

Net cash provided by (used in) financing activities

  (16)  283 

Net increase (decrease) in cash, cash equivalents and restricted cash

  (62)  147 
Cash, cash equivalents and restricted cash – beginning of period  567   518 
Effect of exchange rate changes on cash balances  (12)  (29)

Cash, cash equivalents and restricted cash – end of period (Note 5)

 $493  $636 
         

Non-cash investing activity

        
Purchases of property, plant and equipment held in accounts payable $56  $73 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

Dana Incorporated

Index to Notes to Consolidated Financial Statements

 

 

1.

Organization and Summary of Significant Accounting Policies

 

 

2.

Acquisitions

 

 

3.

Goodwill and Other Intangible Assets

 

 

4.

Restructuring of Operations

 

 

5.

Supplemental Balance Sheet and Cash Flow Information

 

 

6.

Stockholders' Equity

 

 

7.

Redeemable Noncontrolling Interests

 

 

8.

Earnings per Share

 

 

9.

Stock Compensation

 

 

10.

Pension and Postretirement Benefit Plans

  
11.Marketable Securities

 

 

12.

Financing Agreements

 

 

13.

Fair Value Measurements and Derivatives

 

 

14.

Commitments and Contingencies

 

 

15.

Warranty Obligations

 

 

16.

Income Taxes

 

 

17.

Other Income (Expense), Net

 

 

18.

Revenue from Contracts with Customers

 

 

19.

Segments

 

 

20.

Equity Affiliates

 

 

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).

 

During the second quarter of 2020, we identified an error in the loss attributable to redeemable noncontrolling interests due to incorrectly excluding the share of the goodwill impairment charge related to the redeemable noncontrolling interests. Of the $48 impairment charge recorded for the Commercial Vehicle reporting unit during the quarter ended March 31, 2020, $20 should have been attributable to the redeemable noncontrolling interests.

 

We concluded that the error was not material to the financial statements for the quarter ended March 31, 2020 and therefore, amendment of the previously filed Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 was not required. In accordance with ASC Topic 250, "Accounting Changes and Error Corrections," we corrected the error of the prior period by revising the then year-to-date consolidated financial statements. The first quarter of 2020 presented herein has been revised in this filing. The following historical consolidated financial information includes both the consolidated financial information “as previously reported” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as well as the consolidated financial information “as revised” to reflect the correction of the error.

 

  

Period Ended March 31, 2020

 
  As Previously Reported  

Adjustment

  

As Revised

 
  (unaudited) 
Consolidated Statement of Operations            
Net income $38  $0  $38 

Less: Noncontrolling interests net income

  2   0   2 

Less: Redeemable noncontrolling interests net loss

  (2)  (20)  (22)

Net income attributable to the parent company

 $38  $20  $58 
             

Net income per share available to common stockholders

            

Basic

 $0.26  $0.14  $0.40 

Diluted

 $0.26  $0.14  $0.40 
             
Consolidated Statement of Comprehensive Income            
Total comprehensive loss $(84) $0  $(84)
Less: Comprehensive loss attributable to noncontrolling interests  17   0   17 
Less: Comprehensive (income) loss attributable to redeemable noncontrolling interests  (6)  20   14 
Comprehensive income (loss) attributable to the parent company $(73) $20  $(53)

 

  

Period Ended March 31, 2020

 
  As Previously Reported  

Adjustment

  

As Revised

 
  

(unaudited)

 

Consolidated Balance Sheet

            

Redeemable noncontrolling interests

 $175  $(20) $155 

Retained earnings

 $644  $20  $664 

 

 

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.

 

 

Note 2. 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. The pro forma effects of this acquisition would not materially impact our reported results for any period presented, and as a result no pro forma financial information is presented.

 

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. See Hydro-Québec relationship discussion below for details of subsequent changes in our ownership interest in Ashwoods. The results of operations of the business are reported within our Off-Highway operating segment. The pro forma effects of this acquisition would not materially impact our reported results for any period presented, and as a result no pro forma financial information is presented.

 

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.

 

 

 

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 during the first quarter 2021 that required an interim impairment 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 $51 in the first quarter of 2020. See Note 3 to our consolidated financial statements in Item 8 of our 2020 Form 10-K for additional information on these impairment losses.

 

 

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

 $0  $177  $302  $0  $479 
Acquisitions      24   (11)      13 
Currency impact      3   (7)      (4)

Balance, March 31, 2021

 $0  $204  $284  $0  $488 

 

Components of other intangible assets — 

 

     

March 31, 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

 8  $162  $(103) $59  $146  $(103) $43 

Trademarks and trade names

 13   31   (10)  21   31   (9)  22 

Customer relationships

 8   523   (428)  95   525   (431)  94 

Non-amortizable intangible assets

                           

Trademarks and trade names

     75       75   77       77 
     $791  $(541) $250  $779  $(543) $236 

 

 

The net carrying amounts of intangible assets, other than goodwill, attributable to each of our operating segments at March 31, 2021 were as follows: Light Vehicle — $21, Commercial Vehicle — $79, Off-Highway — $144 and Power Technologies — $6.

 

Amortization expense related to amortizable intangible assets — 

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Charged to cost of sales

 $3  $1 

Charged to amortization of intangibles

  4   3 

Total amortization

 $7  $4 

 

The following table provides the estimated aggregate pre-tax amortization expense related to intangible assets for each of the next five years based on March 31, 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

 $16  $22  $22  $21  $21 

 

 

 

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 $1 and $3 in the first quarters of 2021 and 2020 were comprised of severance and benefit costs related to integration of recent acquisitions, headcount reductions across our operations and exit costs related to previously announced actions.

 

Accrued restructuring costs and activity

 

  

Employee Termination Benefits

  

Exit Costs

  

Total

 

Balance, December 31, 2020

 $30  $0  $30 

Charges to restructuring

      1   1 
Cash payments  (4)  (1)  (5)
Currency impact  (1)      (1)

Balance, March 31, 2021

 $25  $0  $25 
             

 

At March 31, 2021, the accrued employee termination benefits include costs to reduce approximately 500 employees to be completed over the next year.

 

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 March 31, 2021.

 

  

Expense Recognized

     
  

Prior to 2021

  

2021

  

Total to Date

  

Future Cost to Complete

 

Commercial Vehicle

 $41  $0  $41  $2 

 

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

 

  

March 31, 2021

  

December 31, 2020

 
Raw materials $532  $473 
Work in process and finished goods  805   752 
Inventory reserves  (77)  (76)

Total

 $1,260  $1,149 

 

Cash, cash equivalents and restricted cash at —

 

  

March 31, 2021

  

December 31, 2020

  

March 31, 2020

  

December 31, 2019

 
Cash and cash equivalents $483  $559  $628  $508 
Restricted cash included in other current assets  7   5   5   6 
Restricted cash included in other noncurrent assets  3   3   3   4 

Total cash, cash equivalents and restricted cash

 $493  $567  $636  $518 

 

 

 

Note 6. Stockholders’ Equity

 

Common stock — Our Board of Directors declared a cash dividend of ten cents per share of common stock in the first quarter 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. Approximately $150 remained available for future share repurchases as of March 31, 2021.

 

Changes in equity

 

  

Three Months Ended March 31,

 

2021

 

Common Stock

  

Additional Paid-In Capital

  

Retained Earnings

  

Treasury Stock

  

Accumulated Other Comprehensive Loss

  

Non-controlling Interests

  

Total Equity

 

Balance, December 31, 2020

 $2  $2,408  $530  $(156) $(1,026) $76  $1,834 

Net income

          71           1   72 

Other comprehensive income

                  (18)  (2)  (20)
Common stock dividends          (14)              (14)
Redeemable noncontrolling interests adjustment to redemption value          (4)              (4)

Stock compensation

      7                   7 
Stock withheld for employee taxes              (5)          (5)

Balance, March 31, 2021

 $2  $2,415  $583  $(161) $(1,044) $75  $1,870 
                             

2020

                            

Balance, December 31, 2019

 $2  $2,386  $622  $(150) $(987) $95  $1,968 
Adoption of ASU 2016-13 credit losses, January 1, 2020          (1)              (1)

Net income

          58           2   60 

Other comprehensive loss

                  (111)  (19)  (130)

Common stock dividends

          (15)              (15)

Distributions to noncontrolling interests

                      (1)  (1)

Stock compensation

      5                   5 
Stock withheld for employee taxes              (6)          (6)

Balance, March 31, 2020

 $2  $2,391  $664  $(156) $(1,098) $77  $1,880 

 

 

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, December 31, 2020

 $(802) $9  $(233) $(1,026)

Other comprehensive income (loss):

                

Currency translation adjustments

  (4)          (4)

Holding gains and losses

      32       32 

Reclassification of amount to net income (a)

      (50)      (50)

Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b)

          4   4 
Tax (expense) benefit      1   (1)  0 

Other comprehensive income (loss)

  (4)  (17)  3   (18)

Balance, March 31, 2021

 $(806) $(8) $(230) $(1,044)
                 

Balance, December 31, 2019

 $(714) $(30) $(243) $(987)

Other comprehensive income (loss):

                

Currency translation adjustments

  (143)          (143)

Holding gains and losses

      39       39 

Reclassification of amount to net income (a)

      (11)      (11)

Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b)

          5   5 
Tax (expense) benefit      1   (2)  (1)

Other comprehensive income (loss)

  (143)  29   3   (111)

Balance, March 31, 2020

 $(857) $(1) $(240) $(1,098)

 

 

(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 45% redeemable noncontrolling interest in Dana TM4 Inc. and Dana TM4 USA, LLC and indirect 45% ownership interests in Dana (Beijing) Electric Motor Co., Ltd., Dana TM4 Italia S.r.l., Ashwoods Innovations Ltd. and Dana TM4 Private Limited (together Dana TM4). Hydro-Québec may put all, and not less than all, of its ownership interests in Dana TM4 to Dana at fair value any time after June 22, 2021. See Note 2 for additional information.

 

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. See Note 1 for additional information on the correction of the error in net loss attributable to redeemable noncontrolling interests. 

 

Reconciliation of changes in redeemable noncontrolling interests

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Balance, beginning of period

 $180  $167 
Capital contribution from redeemable noncontrolling interest  1   2 
Adjustment to redemption value  4     

Comprehensive income (loss) adjustments:

        

Net loss attributable to redeemable noncontrolling interests

  (4)  (22)
Other comprehensive income attributable to redeemable noncontrolling interests  1   8 

Balance, end of period

 $182  $155 

 

 

Note 8. Earnings per Share

 

Reconciliation of the numerators and denominators of the earnings per share calculations — 

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Net income available to common stockholders - Numerator basic and diluted

 $71  $58 
         

Denominator:

        

Weighted-average common shares outstanding - Basic

  144.9   144.2 

Employee compensation-related shares, including stock options

  1.5   0.6 

Weighted-average common shares outstanding - Diluted

  146.4   144.8 

 

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 0.9 million and 0.6 million CSEs from the calculation of diluted earnings per share for the first quarters of 2021 and 2020 as the effect of including them would have been anti-dilutive.

 

 

Note 9. Stock Compensation

 

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

  0.8  $23.43 

PSUs

  0.2  $26.81 

* 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 three-year performance period. The risk-free interest rate of 0.18% was based on U.S. Treasury constant maturity rates at the grant date. The  dividend yield of 2.27% was calculated using a blended approach of a historical average yield calculated by dividing the expected annual dividend by the average stock price over the prior year and the current yield calculated by dividing the expected annual dividend by the grant date stock price. The estimated volatility of 62.8% was based on observed historical volatility of daily stock returns for the 3-year period preceding the grant date. 

 

We received $4 of cash from the exercise of stock options related to 0.2 million shares. We paid $2 of cash to settle RSUs. We issued 0.5 million and 0.1 million shares of common stock based on the vesting of RSUs and PSUs during 2021. We recognized stock compensation expense of $5 and $4 during the first quarters of 2021 and 2020. At March 31, 2021, the total unrecognized compensation cost related to the nonvested awards granted and expected to vest was $36. This cost is expected to be recognized over a weighted-average period of 2.3 years.

 

 

 

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 March 31,

 

U.S.

  

Non-U.S.

  

U.S.

  

Non-U.S.

  

Non-U.S.

  

Non-U.S.

 

Interest cost

 $3  $1  $5  $1  $1  $1 

Expected return on plan assets

  (7)      (9)  (1)        

Service cost

      2       2         

Amortization of net actuarial loss

  2   2   3   2         

Net periodic benefit cost (credit)

 $(2) $5  $(1) $4  $1  $1 

 

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

 

  

March 31, 2021

  

December 31, 2020

 
      

Unrealized

  

Fair

      

Unrealized

  

Fair

 
  

Cost

  

Gains (Losses)

  

Value

  

Cost

  

Gains (Losses)

  

Value

 

Certificates of deposit - Current marketable securities

 $26  $0  $26  $21  $0  $21 

Corporate securities - Noncurrent marketable securities

 $16  $16  $32  $16  $33  $49 

 

Certificates of deposit maturing in one year or less total $26 at March 31, 2021.

 

We held $16 of convertible notes receivable from our investment in Hyliion Inc. On October 1, 2020, Hyliion completed its merger with Tortoise Acquisition Corp. The business combination resulted in the combined company being renamed Hyliion Holdings Corp., 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 is included in noncurrent marketable securities and carried at fair value with changes in fair value included in other income (expense), net. The strategic partnership with Hyliion establishes Dana as the preferred supplier for e-propulsion systems to Hyliion as long as Dana maintains a minimum equity investment in Hyliion.

 

 

 

Note 12. Financing Agreements

 

Long-term debt at

 

 

Interest Rate

  

March 31, 2021

  

December 31, 2020

 

Senior Notes due December 15, 2024

5.500%

  $425  $425 

Senior Notes due April 15, 2025

5.750%

*  400   400 

Senior Notes due June 1, 2026

6.500%

*  375   375 

Senior Notes due November 15, 2027

5.375%

   400   400 
Senior Notes due June 15, 20285.625%   400   400 

Term B Facility

    349   349 

Other indebtedness

    105   106 

Debt issuance costs

    (26)  (27)
     2,428   2,428 

Less: Current portion of long-term debt

    8   8 

Long-term debt, less debt issuance costs

   $2,420  $2,420 

 

*

In conjunction with the issuance of the April 2025 Notes we entered into 8-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 3.850%. In conjunction with the issuance of the June 2026 Notes we entered into 10-year fixed-to-fixed cross-currency swaps which have the effect of economically converting the June 2026 Notes to euro-denominated debt at a fixed rate of 5.140%. See Note 13 for additional information.

 

 

Interest on the senior notes is payable semi-annually and interest on the Term Facility B 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, finance lease obligations and the unamortized fair value adjustment related to a terminated interest rate swap. See Note 13 for additional information on the terminated interest rate swap.

 

Senior notes activity — In June 2020, we completed the sale of $400 in senior unsecured notes ( June 2028 Notes) at 5.625%. The June 2028 Notes rank equally with Dana's other unsecured senior notes. Interest on the notes is payable on December 15 and June 15 of each year, beginning on December 15, 2020. The June 2028 Notes will mature on June 15, 2028. Net proceeds of the offering totaled $395. Financing costs of $5 were recorded as deferred costs and are being amortized to interest expense over the life of the notes. The proceeds from the offering were used to pay down outstanding borrowings under our Revolving Facility and for general corporate purposes. Also, we completed the sale of an additional $100 of November 2027 Notes at 5.375%. The November 2027 Notes rank equally with Dana’s other unsecured senior notes. Interest on the notes is payable on May 15 and November 15 of each year, beginning on November 15, 2020. The November 2027 Notes will mature on November 15, 2027. Net proceeds of the offering totaled $99. Financing costs of $1 were recorded as deferred costs and are being amortized to interest expense over the life of the notes. The proceeds from the offering were used for general corporate purposes.

 

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

 
  

December

  

April

  

June

  

November

  

June

 

Year

 

2024 Notes

  

2025 Notes

  

2026 Notes

  

2027 Notes

  

2028 Notes

 

2020

  101.833%  104.313%            

2021

  100.917%  102.875%  103.250%        

2022

  100.000%  101.438%  102.167%  102.688%    

2023

  100.000%  100.000%  101.083%  101.344%  102.813%

2024

      100.000%  100.000%  100.000%  101.406%

2025

          100.000%  100.000%  100.000%

2026

              100.000%  100.000%

2027

                  100.000%

 

Prior to June 1, 2021, we may redeem some or all of the June 2026 Notes at a redemption price of 100.000% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a “make-whole” premium. We have not separated the make-whole premium from the underlying debt instrument to account for it as a derivative instrument as the economic characteristics and the risks of this embedded derivative are clearly and closely related to the economic characteristics and risks of the underlying debt.

 

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 105.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 50% of the original aggregate principal amount of the November 2027 Notes remains outstanding after the redemption. Prior to November 15, 2022, we may redeem some or all of the November 2027 Notes at a redemption price of 100.000% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a “make-whole” premium. We have not separated the make-whole premium from the underlying debt instrument to account for it as a derivative instrument as the economic characteristics and the risks of this embedded derivative are clearly and closely related to the economic characteristics and risks of the underlying debt.

 

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 105.625% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 50% of the original aggregate principal amount of the June 2028 Notes remains outstanding after the redemption. Prior to June 15, 2023, we may redeem some or all of the June 2028 Notes at a redemption price of 100.000% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a “make-whole” premium. We have not separated the make-whole premium from the underlying debt instrument to account for it as a derivative instrument as the economic characteristics and the risks of this embedded derivative are clearly and closely related to the economic characteristics and risks of the underlying debt.

 

Credit agreementOn December 31, 2020, we fully paid down the Term A Facility. We wrote off $3 of previously deferred financing costs associated with the Term A Facility. On March 25, 2021, we amended our credit and guaranty agreement, increasing the Revolving Facility to $1,150 and extending the maturity to March 25, 2026. We recorded deferred fees of $2 related to the amendment. The deferred fees are being amortized over the life of the applicable facilities. Deferred financing costs on our Revolving Facility are included in other noncurrent assets. The Term B Facility will mature on February 28, 2026. We may prepay some or all of the amounts under the Term B Facility without penalty.

 

The Term Facility B 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

  0.25%  1.25%

Greater than 1.00:1.00 but less than or equal to 2.00:1.00

  0.50%  1.50%

Greater than 2.00:1.00

  0.75%  1.75%

 

The Term B Facility bears interest based on, at our option, the Base Rate plus 1.25% or the Eurodollar rate plus 2.25%. We have elected to pay interest on our advances under Term Facility B at the Eurodollar Rate. The interest rate on the Term B Facility was 2.359%, inclusive of the applicable margins, as of March 31, 2021.

 

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

  0.250%

Greater than 1.00:1.00 but less than or equal to 2.00:1.00

  0.375%

Greater than 2.00:1.00

  0.500%

 

Up to $275 of the Revolving Facility may be applied to letters of credit, which reduces availability. We pay a fee for issued and undrawn letters of credit in an amount per annum equal to the applicable margin for Eurodollar rate advances based on a quarterly average availability under issued and undrawn letters of credit under the Revolving Facility and a per annum fronting fee of 0.125%, payable quarterly.

 

At March 31, 2021, we had 0 outstanding borrowings under the Revolving Facility and had utilized $21 for letters of credit. We had availability at March 31, 2021 under the Revolving Facility of $1,129 after deducting the letters of credit.

 

Bridge facility — On April 16, 2020, we entered into a $500 bridge facility (the Bridge Facility). We recorded deferred fees of $5 related to the Bridge Facility. The deferred fees were being amortized over the life of the Bridge Facility. The Bridge Facility was to mature on April 15, 2021. On June 19, 2020, in connection with the issuance of our June 2028 Notes, we terminated the Bridge Facility and wrote off the $5 of deferred fees associated with the Bridge Facility.

 

Debt covenants — At March 31, 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 2.00 to 1.00.

 

 

 

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

  March 31, 2021  December 31, 2020 
Certificates of deposit Marketable securities 2  $26  $21 
Available-for-sale securities Other noncurrent assets 1   32   49 

Currency forward contracts

             
Cash flow hedges Accounts receivable - Other 2   11   15 
Cash flow hedges Other accrued liabilities 2   2   1 
Undesignated Accounts receivable - Other 2   2   2 
Undesignated Other accrued liabilities 2   2   1 
Interest rate collars Other accrued liabilities 2   6   7 

Currency swaps

             
Cash flow hedges Other noncurrent liabilities 2   95   128 

 

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:

 

      

March 31, 2021

  

December 31, 2020

 
  

Fair Value Level

 

Carrying Value

  

Fair Value

  

Carrying Value

  

Fair Value

 

Long term debt

  2  $2,369  $2,450  $2,376  $2,475 

 

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 March 31, 2021, no fixed-to-floating interest rate swaps remain outstanding. However, a $3 fair value adjustment to the carrying amount of our December 2024 Notes, associated with a fixed-to-floating interest rate swap that had been executed but was subsequently terminated during 2015, remains deferred at March 31, 2021. This amount is being amortized as a reduction of interest expense through the period ending December 2024, the scheduled maturity date of the December 2024 Notes. The amount amortized as a reduction of interest expense was not material during the three months ended March 31, 2021. We have outstanding interest rate collars with a notional value of $425 that will mature in December 2021. For interest rate collars, no payments or receipts are exchanged unless interest rates rise or fall in excess of a predetermined ceiling or floor rate.

 

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 fifteen 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, and any subsequent replacement debt, 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, or subsequent replacement debt, 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 March 31, 2021:

 

Underlying Financial Instrument

  

Derivative Financial Instrument

 

Description

 

Type

 

Face Amount

  

Rate

  Designated Notional Amount  

Traded Amount

  

Inflow Rate

  

Outflow Rate

 

April 2025 Notes

 

Payable

 $400   5.75% $400  371   5.75%  3.85%

June 2026 Notes

 

Payable

 $375   6.50% $375  338   6.50%  5.14%

Luxembourg Intercompany Notes

 

Receivable

 278   3.70% 278  $300   5.38%  3.70%

 

All of the 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 all of the underlying designated financial instruments and all of 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 and the June 2026 Notes. To the extent the swaps are no longer effective, changes in their fair values will be recorded in earnings.

 

 

The total notional amount of outstanding foreign currency forward contracts, involving the exchange of various currencies, was $422 at March 31, 2021 and $386 at December 31, 2020. The total notional amount of outstanding foreign currency swaps, including the fixed-to-fixed cross-currency swaps, was $1,101 at March 31, 2021 and $1,118 at December 31, 2020.

 

The following currency derivatives were outstanding at March 31, 2021:

 

    

Notional Amount (U.S. Dollar Equivalent)

   

Functional Currency

 

Traded Currency

 

Designated

  

Undesignated

  

Total

  

Maturity

U.S. dollar

 

Mexican peso, Canadian dollar

 $75  $35  $110  

Dec-2021

Euro

 

U.S. dollar, Hungarian forint, British pound, Swiss franc, Indian rupee, Mexican peso, Australian dollar, Chinese renminbi, Brazilian real

  55   29   84  

Jan-2024

British pound

 

U.S. dollar, euro

  2   1   3  

Apr-2021

South African rand U.S. dollar, euro, Thai baht      12   12  Apr-2021
Thai baht U.S. dollar, euro  8   20   28  Dec-2021

Canadian dollar

 

U.S. dollar

  6       6  

Oct-2021

Brazilian real

 

U.S. dollar, euro

  43   8   51  

Mar-2022

Indian rupee

 

U.S. dollar, euro, British pound

      118   118  

Apr-2022

Chinese renminbi

 

Canadian dollar, euro

      6   6  

Apr-2021

Australian dollar U.S. dollar, euro      4   4  Apr-2021

Total forward contracts

    189   233   422   
                 

U.S. dollar

 

euro

  326       326  

Nov-2027

Euro

 

U.S. dollar

  775       775  

Jun-2026

Total currency swaps

    1,101      1,101   

Total currency derivatives

   $1,290  $233  $1,523   

 

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

 
  

March 31, 2021

  

December 31, 2020

  Gain (loss) expected to be reclassified into income in one year or less 

Forward Contracts

 $5  $9  $5 
Collar  (5)  (6)  (5)
Cross-Currency Swaps  (12)  3     

Total

 $(12) $6  $0 

 

 

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 March 31, 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

 $2,263  $2,012  $(19)

(Gain) or loss on cash flow hedging relationships

            

Foreign currency forwards

            
Amount of (gain) loss reclassified from AOCI into income      (1)  (1)

Cross-currency swaps

            
Amount of (gain) loss reclassified from AOCI into income          (48)

 

  

Three Months Ended March 31, 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

 $1,926  $1,720  $4 

(Gain) or loss on cash flow hedging relationships

            
Foreign currency forwards            
Amount of (gain) loss reclassified from AOCI into income      7     

Cross-currency swaps

            

Amount of (gain) loss reclassified from AOCI into income

          (18)

 

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 March 31, 2021

  

Three Months Ended March 31, 2020

  

Location of Gain or (Loss) Recognized in Income

Foreign currency forward contracts

 $0  $5  

Cost of sales

Foreign currency forward contracts $(2) $(9) 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 $1 at March 31, 2021 and $1 at December 31, 2020. We had also recognized amounts recoverable from third parties of $11 at March 31, 2021 and $11 at December 31, 2020. Payments made to claimants precede recovery of amounts from third parties, and may result in recoverable amounts in excess of the total liability. We estimate these liabilities based on current information and assumptions about the value and likelihood of the claims against us.

 

Environmental liabilities — Accrued environmental liabilities were $9 at March 31, 2021 and $10 at December 31, 2020. We consider the most probable method of remediation, current laws and regulations and existing technology in estimating our environmental liabilities.

 

Guarantee of lease obligations — In connection with the divestiture of our Structural Products business in 2010, leases covering three 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 $6 of annual payments. In the event of a required payment by Dana as guarantor, we are entitled to pursue full recovery from Metalsa of the amounts paid under the guarantee and to take possession of the leased property.

 

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.

 

 

Note 15. Warranty Obligations

 

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

 
  

March 31,

 
  

2021

  

2020

 

Balance, beginning of period

 $98  $101 
Amounts accrued for current period sales  10   8 
Adjustments of prior estimates  (1)  1 
Settlements of warranty claims  (7)  (11)
Currency impact  (1)  (2)

Balance, end of period

 $99  $97 

 

 

 

 

Note 16. Income Taxes

 

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 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 $22 and an income tax benefit of $16 for the first three months ended March 31, 2021 and 2020, respectively. Our effective tax rates were 29% and (80)% for the first three months of 2021 and 2020. During the first quarter of 2020, a pre-tax goodwill impairment charge of $51 with an associated income tax benefit of $1 was recorded. Also, during the first quarter of 2020, we recorded tax benefits of $37 related to tax actions that adjusted federal tax credits, tax expense of $2 to record additional valuation allowance in the U.S. based on reduced income projections, and tax expense of $4 to record valuation allowances in foreign jurisdictions due to reduced income projections. Excluding these items, the effective tax rate would be 23% for the 2020 three-month period. 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 non-deductible expenses.

 

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

 
  

March 31,

 
  

2021

  

2020

 
Non-service cost components of pension and OPEB costs $(2) $(2)
Government grants and incentives  3   4 
Foreign exchange gain  1   5 
Strategic transaction expenses  (3)  (6)
Loss on investment in Hyliion  (17)    
Loss on disposal group held for sale  (7)    
Other, net  6   3 

Other income (expense), net

 $(19) $4 

 

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 pending 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 is included in noncurrent marketable securities and carried at fair value with changes in fair value included in net income. The strategic partnership with Hyliion establishes Dana as the preferred supplier for e-propulsion systems to Hyliion as long as Dana maintains a minimum equity investment in Hyliion.

 

In conjunction with our acquisition of ODS, we acquired a controlling financial interest in a joint venture in China. We are 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. The disposal group has net assets of $2 as of March 31, 2021. Individual asset and liability balances are not material and therefore the amounts have not been segregated as held for sale on our consolidated balance sheet. We completed the disposal of this business in April 2021.

 

 

 

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 180 days. 

 

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 $9 and $8 recorded in other current assets and $45 and $45 recorded in other noncurrent assets at March 31, 2021 and December 31, 2020.

 

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 $29 and $27 at March 31, 2021 and December 31, 2020. Contract liabilities are included in other accrued liabilities on our consolidated balance sheet.

 

Disaggregation of revenue

 

The following table disaggregates revenue for each of our operating segments by geographical market:

 

Three Months Ended March 31, 2021

 

Light Vehicle

  

Commercial Vehicle

  

Off-Highway

  

Power Technologies

  

Total

 

North America

 $706  $185  $66  $138  $1,095 

Europe

  123   63   417   129   732 

South America

  36   70   9   5   120 

Asia Pacific

  126   34   140   16   316 

Total

 $991  $352  $632  $288  $2,263 

 

Three Months Ended March 31, 2020

                    

North America

 $586  $199  $74  $123  $982 

Europe

  102   49   349   114   614 

South America

  30   63   7   5   105 

Asia Pacific

  90   22   102   11   225 

Total

 $808  $333  $532  $253  $1,926 

 

 

 

Note 19. Segments

 

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 operating segments – 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. These operating segments have global responsibility and accountability for business commercial activities and financial performance.

 

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.

 

Segment information

 

  

2021

  

2020

 

Three Months Ended March 31,

 

External Sales

  

Inter-Segment Sales

  

Segment EBITDA

  

External Sales

  

Inter-Segment Sales

  

Segment EBITDA

 

Light Vehicle

 $991  $40  $100  $808  $30  $83 

Commercial Vehicle

  352   25   14   333   20   21 

Off-Highway

  632   13   80   532   9   72 

Power Technologies

  288   6   41   253   6   30 

Eliminations and other

      (84)          (65)    

Total

 $2,263  $  $235  $1,926  $  $206 

 

Reconciliation of segment EBITDA to consolidated net income 

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Segment EBITDA

 $235  $206 
Corporate expense and other items, net  (1)  (1)
Depreciation  (88)  (85)
Amortization  (7)  (4)
Non-service cost components of pension and OPEB costs  (2)  (2)
Restructuring charges, net  (1)  (3)
Stock compensation expense  (5)  (4)
Strategic transaction expenses  (3)  (6)
Loss on investment in Hyliion  (17)    
Impairment of goodwill      (51)
Loss on disposal group held for sale  (7)    
Other items  4   (3)

Earnings before interest and income taxes

  108   47 

Interest income

  2   2 

Interest expense

  34   29 

Earnings before income taxes

  76   20 

Income tax expense (benefit)

  22   (16)

Equity in earnings of affiliates

  14   2 

Net income

 $68  $38 

 

 

 

 

Note 20. Equity Affiliates

 

We have a number of investments in entities that engage in the manufacture and supply of vehicular parts (primarily axles, axle housings and driveshafts) and electronic control units.

 

Equity method investments exceeding $5 at March 31, 2021 — 

 

  

Ownership Percentage

 

Investment

 

Dongfeng Dana Axle Co., Ltd. (DDAC)

 50% $111 

ROC-Spicer, Ltd.

 50%  22 

Axles India Limited

 48%  9 

All others as a group

    5 

Investments in equity affiliates

    147 

Investments in affiliates carried at cost

    2 

Investments in affiliates

   $149 

 

 

On March 1, 2021, we acquired the remaining 51% ownership interest in Pi Innovo Holdings Limited (Pi Innovo). The additional interest, along with our existing ownership interest, provided us with a 100% ownership interest in Pi Innovo. As such, we ceased accounting for our investment in Pi Innovo under the equity method. See Note 2 for additional information.

 

 

 

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 March 31, 2021, we employed approximately 39,100 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 March 31, 2021 and 2020 are as follows:

 

  

Three Months Ended March 31,

 
  

2021

  

2020

 
      

% of

      

% of

 
  

Dollars

  

Total

  

Dollars

  

Total

 

Light Vehicle

 $991   43.8% $808   42.0%

Commercial Vehicle

  352   15.6%  333   17.3%

Off-Highway

  632   27.9%  532   27.6%

Power Technologies

  288   12.7%  253   13.1%

Total

 $2,263      $1,926     

 

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.

 

Over the past year we have achieved our goal to accelerate hybridization and electrification through both core Dana technologies and targeted strategic acquisitions and are positioned today to lead the market. The nine 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 March 31, 2021, we have used cash of $50 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.

 

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. 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 the first quarter of 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 full-frame light-truck production to be up by a similar percentage, with all regions exhibiting a strong rebound and returning to 2019 levels as production constraints have eased, inventory returns to more normal levels, and constrained customer demand is fulfilled.


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 42% 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 11% 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 37% 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 9% 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 11% 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 7% compared to the prior year, as farm subsidies in response to the global pandemic have bolstered the  commodity market and is expected to drive the replacement of aging equipment.

 

Foreign currency — With 54% of our first quarter 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 India accounted for 51% and 10% of our first quarter 2021 non-U.S. sales, respectively, while China and Brazil accounted for 9% and 7%, respectively. 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 quarter of 2021, increasing sales by $48. A stronger euro and Chinese renminbi 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 quarter of 2021 of approximately $25 are 1% of our consolidated  sales and our net asset exposure related to Argentina was approximately $23, including $5 of net fixed assets, at March 31, 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 earnings in the first quarter of 2021 by $35, as compared to an earnings increase of $18 from lower commodity prices in the first quarter of 2020. Material cost recovery and other pricing actions increased earnings in the first quarter of 2021 by $4, whereas pricing and recovery actions decreased earnings by $27 in the first quarter of 2020.

 

 

Sales, Earnings and Cash Flow Outlook

 

  

2021 Outlook

  

2020

  

2019

 

Sales

 

$8,500 - $9,000

  $7,106  $8,620 

Adjusted EBITDA

 

$920 - $1,000

  $593  $1,019 
Net cash provided by operating activities (of sales) ~11%  $386  $637 

Discretionary pension contributions

 $ —  $  $61 
Purchases of property, plant and equipment (of sales) ~4.5%  $326  $426 
Adjusted Free Cash Flow (of sales) 3.0% - 3.5%  $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.

 

We have increased our 2021 sales outlook to $8,500 to $9,000, approximately $450 higher than our February 2021 outlook. The increase is primarily attributable to stronger end-market demand, an increased currency tail wind and additional material cost recovery. At our current sales outlook for 2021, we now anticipate our full year 2021 adjusted EBITDA to be $920 to $1,000, approximately $50 higher than our February 2021 outlook. Adjusted EBITDA Margin is still expected to be 11.0%, a 270 basis-point improvement over 2020, reflecting higher margin net new business and the benefit of operational inefficiencies associated with the global COVID-19 pandemic not repeating in 2021, being partially offset by  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 $280, or approximately 3.2% of our sales for 2021. The benefit of higher year-over-year adjusted EBITDA will be partially offset by 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 March 31, 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 (First Quarter, 2021 versus 2020)

 

  

Three Months Ended March 31,

     
  

2021

  

2020

     
  

Dollars

  

% of Net Sales

  

Dollars

  

% of Net Sales

  

Increase/ (Decrease)

 

Net sales

 $2,263      $1,926      $337 

Cost of sales

  2,012   88.9%  1,720   89.3%  292 

Gross margin

  251   11.1%  206   10.7%  45 

Selling, general and administrative expenses

  119   5.3%  106   5.5%  13 

Amortization of intangibles

  4       3       1 

Restructuring charges, net

  1       3       (2)
Impairment of goodwill          (51)      51 

Other income (expense), net

  (19)      4       (23)

Earnings before interest and income taxes

  108       47       61 

Interest income

  2       2        

Interest expense

  34       29       5 

Earnings before income taxes

  76       20       56 

Income tax expense (benefit)

  22       (16)      38 

Equity in earnings of affiliates

  14       2       12 

Net income

  68       38       30 
Less: Noncontrolling interests net income  1       2       (1)
Less: Redeemable noncontrolling interests net loss  (4)      (22)      18 

Net income attributable to the parent company

 $71      $58      $13 

 

Sales — The following table shows changes in our sales by geographic region.

 

  

Three Months Ended

                 
  

March 31,

      

Amount of Change Due To

 
  

2021

  

2020

  Increase/ (Decrease)  

Currency Effects

  Acquisitions (Divestitures)  

Organic Change

 
North America $1,095  $982  $113  $1  $1  $111 
Europe  732   614   118   54   2   62 
South America  120   105   15   (18)      33 
Asia Pacific  316   225   91   11       80 

Total

 $2,263  $1,926  $337  $48  $3  $286 

 

 

Sales in 2021 were $337 higher than in 2020. Stronger international currencies increased sales by $48, principally due to a stronger euro and Chinese renminbi, partially offset by a weaker Brazilian real. The organic sales increase of $286, or 15%, resulted from improved overall market demand and the conversion of sales backlog. Pricing actions, including material commodity price and inflationary costs adjustments, increased sales by $4. 

 

The North America organic sales increase of 11% was driven principally by stronger light and heavy duty truck production volumes and the conversion of sales backlog. First quarter 2021 full frame light truck production was up 8% and Class 8 truck production was up 10%, while Classes 5-7 were down 2% compared with the first quarter of 2020. Excluding currency and acquisition effects, sales in Europe were up 10% 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 12% compared with the first quarter of 2020. Excluding currency effects, first quarter sales in South America increased 31% compared to 2020 due primarily to improved light and medium/heavy duty truck production. First-quarter 2021 light truck production was up 25% and medium/heavy truck production was up 35%. Excluding currency effects, sales in Asia Pacific increased 36% compared to 2020 due to improved light and medium/heavy duty truck production and a stronger construction/mining market. First-quarter 2021 light truck production was up 27% and medium/heavy truck production was up 46%. The global semiconductor chip shortage had a negligible impact on our first quarter 2021 sales.

 

Cost of sales and gross margin — Cost of sales for the first quarter of 2021 increased $292, or 17% when compared to 2020. Cost of sales as a percent of sales was 40 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 $35, higher standard and premium freight costs of $23 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 provided a partial offset, reducing costs of sales by approximately $27.

 

Gross margin of $251 for 2021 increased $45 from 2020. Gross margin as a percent of sales was 11.1% in 2021, 40 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 first 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 $119 (5.3% of sales) as compared to $106 (5.5% of sales) in 2020. The year-over-year increase of $13 was primarily due to higher year-over-year incentive compensation, benefits and salaried employee wages, partially offset by lower travel costs and marketing expenses.

 

Amortization of intangibles — Amortization expense was $4 in 2021 and $3 in 2020. The increase in amortization expense is primarily due to higher levels of intangible assets as the result of acquisition activity.

 

Restructuring charges, net — Net restructuring charges of $1 and $3 in the first quarters of 2021 and 2020 were comprised of severance and benefit costs related to integration of recent acquisitions, headcount reductions across our operations and exit costs related to previously announced actions.

 

Impairment of goodwill — During the first quarter of 2020, we recorded a $51 goodwill impairment charge. See Note 3 of our consolidated financial statement in Item 1 of Part I for additional information.

 

 

Other income (expense), net — The following table shows the major components of other income (expense), net.

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Non-service cost components of pension and OPEB costs

 $(2) $(2)

Government grants and incentives

  3   4 

Foreign exchange gain

  1   5 

Strategic transaction expenses

  (3)  (6)
Loss on investment in Hyliion  (17)    
Loss on disposal group held for sale  (7)    

Other, net

  6   3 

Other income (expense), net

 $(19) $4 

 

Strategic transaction expenses in 2021 were primarily attributable to our pending 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 is included in noncurrent marketable securities and carried at fair value with changes in fair value included in net income. The strategic partnership with Hyliion establishes Dana as the preferred supplier for e-propulsion systems to Hyliion as long as Dana maintains a minimum equity investment in Hyliion.

 

In conjunction with our acquisition of ODS, we acquired a controlling financial interest in a joint venture in China. We are 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. The disposal group has net assets of $2 as of March 31, 2021. Individual asset and liability balances are not material and therefore the amounts have not been segregated as held for sale on our consolidated balance sheet. We completed the disposal of this business in April 2021.

 

Interest income and interest expense — Interest income was $2 in both 2021 and 2020. Interest expense increased from $29 in 2020 to $34 in 2021, primarily due to higher interest rates on outstanding borrowings. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 5.5% in 2021 and 4.8% 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 3.19% during the first quarter of 2020, in the fourth quarter of 2020.

 

Income tax expense (benefit) — We reported income tax expense of $22 and an income tax benefit of $16 for the three months ended March 31, 2021 and 2020, respectively. Our effective tax rates were 29% and (80)% for the first three months of 2021 and 2020. During the first quarter of 2020, a pre-tax goodwill impairment charge of $51 with an associated income tax benefit of $1 was recorded. Also, during the first quarter of 2020, we recorded tax benefits of $37 related to tax actions that adjusted federal tax credits, tax expense of $2 to record additional valuation allowance in the U.S. based on reduced income projections, and tax expense of $4 to record valuation allowances in foreign jurisdictions due to reduced income projections. 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. 

 

Equity in earnings of affiliates — Net earnings from equity investments was $14 in 2021 and $2 in 2020. Equity in earnings from DDAC was $13 in 2021 and a loss of $1 in 2020. DDAC's operations located in China's Hubei province, the center of the initial COVID-19 outbreak, were shut down the entire month of February 2020. Production was permitted to resume in March 2020. Equity earnings from Bendix Spicer Foundation Brake, LLC (BSFB) was $3 in 2020. On October 1, 2020 we sold our 20% ownership interest in BSFB to Bendix Commercial Vehicle Systems LLC. 

 

 

 

Segment Results of Operations (2021 versus 2020)

 

Light Vehicle

 

  

Three Months

 
  

Sales

  

Segment EBITDA

  

Segment EBITDA Margin

 

2020

 $808  $83   10.3%

Volume and mix

  178   40     

Performance

  (5)  (24)    
Currency effects  10   1     

2021

 $991  $100   10.1%

 

Light Vehicle sales in the first quarter of 2021, exclusive of currency effects, were 21% higher than the same period of 2020 reflecting improved global markets and the conversion of sales backlog. First quarter 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 increased 8% while light truck production in Europe, South America and Asia Pacific increased 3%, 25% and 27%, respectively. Net customer pricing and cost recovery actions decreased year-over-year first quarter sales by $5.

 

Light Vehicle first-quarter 2021 segment EBITDA increased by $17 when compared to the same period of 2020. Higher sales volumes provided a year-over-year increase of $40 (22.5% incremental margin). The year-over-year performance-related earnings decrease was driven by commodity cost increases of $16, higher standard and premium freight costs of $9, lower net pricing and material cost recovery actions of $4, higher incentive compensation of $3, operational inefficiencies of $3 and higher net foreign currency transaction losses of $2. Partially offsetting these performance-related earnings decreases were material cost savings of $13.

 

Commercial Vehicle

 

  

Three Months

 
  

Sales

  

Segment EBITDA

  

Segment EBITDA Margin

 

2020

 $333  $21   6.3%

Volume and mix

  21   5     

Acquisitions

  2         

Performance

  3   (12)    

Currency effects

  (7)        

2021

 $352  $14   4.0%

 

Commercial Vehicle sales in the first quarter of 2021, exclusive of currency effects and the impact of acquisitions, were 7% higher than the same period of 2020 reflecting mixed markets and the conversion of sales backlog. First quarter 2020 sales were significantly impacted by the rapid dissipation in customer demand resulting from the global COVID-19 pandemic. Market recoveries by region have been mixed. Year-over-year North America Class 8 production was up 10% while Classes 5-7 production was down 2%. Medium/heavy truck production in Europe was down 11% while production in South America and Asia Pacific were up 35% and 46%, respectively. Net customer pricing and cost recovery actions increased sales year-over-year first quarter sales by $3.

 

Commercial Vehicle first-quarter 2021 segment EBITDA decreased by $7 when compared to the same period of 2020. Higher sales volumes provided a year-over-year increase of $5 (23.8% incremental margin). The year-over-year performance-related earnings decrease was driven by higher standard and premium freight costs of $10, commodity cost increases of $9, operational inefficiencies of $3, higher incentive compensation of $2 and higher net foreign currency transaction losses of $1. Partially offsetting these performance-related earnings decreases were higher net pricing and material cost recovery actions of $8, material cost savings of $4 and lower warranty costs of $1.

 

 

Off-Highway

 

  

Three Months

 
  

Sales

  

Segment EBITDA

  

Segment EBITDA Margin

 

2020

 $532  $72   13.5%

Volume and mix

  65   15     

Acquisitions

  1   (1)    

Performance

      (9)    

Currency effects

  34   3     

2021

 $632  $80   12.7%

 

Off-Highway sales in the first quarter of 2021, exclusive of currency effects and the impact of acquisitions, were 12% higher than the same period of 2020 reflecting improved markets and the conversion of sales backlog. Year-over-year construction/mining and agricultural equipment markets in Europe and Asia Pacific reflected marked improvement while North American markets continued to be weak.

 

Off-Highway first-quarter 2021 segment EBITDA increased by $8 when compared to the same period of 2020. Higher sales volumes provided a year-over-year increase of $15 (23.1% incremental margin). The year-over-year performance-related earnings decrease was driven by higher commodity costs of $7, operational inefficiencies of $4, higher incentive compensation of $2, higher net foreign currency transaction losses of $2, higher premium freight of $1 and higher warranty costs of $1. Partially offsetting these performance-related earnings decreases were material cost savings of $7 and higher net pricing and material cost recovery actions of $1.

 

Power Technologies

 

  

Three Months

 
  

Sales

  

Segment EBITDA

  

Segment EBITDA Margin

 

2020

 $253  $30   11.9%

Volume and mix

  25   8     

Performance

  (1)  2     
Currency effects  11   1     

2021

 $288  $41   14.2%

 

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 first quarter of 2021, exclusive of currency effects, were 9% higher than the same period of 2020 reflecting the conversion of sales backlog and mixed markets. Year-over-year light vehicle engine production was up 24% in Asia Pacific and down 1%, 2% and 10% in North America, Europe and South America, respectively. Net customer pricing and cost recovery actions decreased sales year-over-year first quarter sales by $1.

 

Power Technologies first-quarter 2021 segment EBITDA increased by $11 when compared to the same period of 2020. Higher sales volumes provided a year-over-year increase of $8 (32.0% incremental margin). The year-over-year performance-related earning increase was driven by operational efficiencies of $8, material cost savings of $3 and lower warranty costs of $1. Partially offsetting these performance-related earning increases were commodity cost increases of $3, higher standard and premium freight costs of $3, higher incentive compensation of $2, higher net foreign currency transaction losses of $1 and lower net pricing and material recovery actions of $1.

 

 

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

 
  

March 31,

 
  

2021

  

2020

 

Net income

 $68  $38 

Equity in earnings of affiliates

  14   2 

Income tax expense (benefit)

  22   (16)

Earnings before income taxes

  76   20 
Depreciation and amortization  95   89 
Restructuring charges, net  1   3 
Interest expense, net  32   27 
Impairment of goodwill      51 
Loss on investment in Hyliion  17     
Loss on disposal group held for sale  7     
Other*  6   15 

Adjusted EBITDA

 $234  $205 
*

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

 
  

March 31,

 
  

2021

  

2020

 

Net cash provided by (used in) operating activities

 $27  $(51)

Purchases of property, plant and equipment

  (53)  (63)

Free cash flow

  (26)  (114)

Discretionary pension contribution

      

Adjusted free cash flow

 $(26) $(114)

 

 

Liquidity

 

The following table provides a reconciliation of cash and cash equivalents to liquidity, a non-GAAP measure, at March 31, 2021:

 

Cash and cash equivalents

 $483 
Less: Deposits supporting obligations  (2)

Available cash

  481 
Additional cash availability from Revolving Facility  1,129 

Marketable securities

  26 

Total liquidity

 $1,636 

 

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 $1,129 at March 31, 2021 under the Revolving Facility after deducting $21 of outstanding letters of credit.

 

The components of our March 31, 2021 consolidated cash balance were as follows:

 

  

U.S.

  

Non-U.S.

  

Total

 
Cash and cash equivalents $10  $379  $389 
Cash and cash equivalents held as deposits      2   2 
Cash and cash equivalents held at less than wholly-owned subsidiaries  4   88   92 

Consolidated cash balance

 $14  $469  $483 

 

 

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 March 31, 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. 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:

 

  

Three Months Ended

 
  

March 31,

 
  

2021

  

2020

 

Cash used for changes in working capital

 $(133) $(183)

Other cash provided by operations

  160   132 

Net cash provided by (used in) operating activities

  27   (51)

Net cash used in investing activities

  (73)  (85)

Net cash provided by (used in) financing activities

  (16)  283 

Net increase (decrease) in cash, cash equivalents and restricted cash

 $(62) $147 

 

Operating activities — Exclusive of working capital, other cash provided by operations was $160 in 2021 and $132 in 2020. The year-over-year increase is primarily attributable to higher operating earnings.

 

Working capital used cash of $133 and $183 in 2021 and 2020. Cash of $257 and $43 was used to finance receivables in 2021 and 2020. The lower level of cash required for receivables in 2020 was due primarily to the rapid dissipation of customer demand during March 2020 as a result of the global COVID-19 pandemic. Cash of $137 and $56 was used to fund higher inventory levels during 2021 and 2020. The lower level of cash required for inventory 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 $261 in 2021, while decreases in accounts payable and other net liabilities used cash of $84 in 2020. The reduction in accounts payable in 2020 was principally driven by lower raw material purchases in March 2020 due to the rapid dissipation of customer demand resulting from the global COVID-19 pandemic.

 

Investing activities — Expenditures for property, plant and equipment were $53 and $63 during the first quarter of 2021 and 2020. During the first quarter of 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 and 2020, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities.

 

Financing activities — During the first quarter of 2020, we drew $300 on our revolving credit facility as part of our contingency planning activities related to the global COVID-19 pandemic. During the first quarter of 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. We used $14 and $15 for dividend payments to common stockholders during the first quarter of 2021 and 2020.

 

 

 

Off-Balance Sheet Arrangements

 

There have been no material changes at March 31, 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

 

There have been no material changes in our contractual obligations from those disclosed in Item 7 of our 2020 Form 10-K.

 

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 three months ended March 31, 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 three 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 March 31, 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.

 

 

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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.

 

Item 1A. Risk Factors

 

There have been no material changes in our risk factors disclosed in Item 1A of our 2020 Form 10-K.

 

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 $150 remained available under the program for future share repurchases as of March 31, 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. No shares of our common stock were repurchased under the program during the first quarter of 2021.

 

 

Item 6. Exhibits

 

 
  

Exhibit No.

Description

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. Filed with this Report.

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. Filed with this Report.

 

 

32

Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002). Filed with this Report.

 

 

101

The following materials from Dana Incorporated’s Quarterly Report on Form 10-Q for the quarter ended March 31, 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.

 

 

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

 

 

SIGNATURES

 

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.

 

  
     

 

 

DANA INCORPORATED

 

 

Date:

April 28, 2021

By:  

/s/ Jonathan M. Collins        

 

 

 

 

Jonathan M. Collins

 

 

 

 

Executive Vice President and

 

 

 

 

Chief Financial Officer 

 

 

39