DANA INCORPORATED 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 ofDana 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 theSecurities 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 inMaumee, Ohio , and was incorporated inDelaware 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. AtJune 30, 2020 , we employed approximately 33,300 people, operated in 34 countries and had 146 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 endedJune 30, 2020 and 2019 are as follows: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 % of % of % of % of Dollars Total Dollars Total Dollars Total Dollars Total Light Vehicle$ 337 31.3 %$ 927 40.2 %$ 1,145 38.1 %$ 1,833 41.0 % Commercial Vehicle 200 18.5 % 437 19.0 % 533 17.7 % 868 19.4 % Off-Highway 401 37.2 % 674 29.2 % 933 31.1 % 1,226 27.5 % Power Technologies 140 13.0 % 268 11.6 % 393 13.1 % 542 12.1 % Total$ 1,078 $ 2,306 $ 3,004 $ 4,469
See Note 18 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.
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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 onAsia 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 inAsia Pacific by forging new partnerships, expanding inorganically, and growing organically. We continue to operate in this region through wholly owned subsidiaries and joint ventures with local market partners. We have recently made acquisitions that have augmented our footprint in the region, specifically inIndia andChina . All the while, we have been making meaningful organic investments to grow with existing and new customers, primarily inThailand ,India , andChina . These added capabilities have enabled us to target the domesticAsia 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 four recent acquisitions of 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. InJanuary 2018 , we announced our intention 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 2021. ThroughJune 30, 2020 , 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 have 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. Financing actions - During 2019 we expanded our credit and guaranty agreement, entering into$675 of additional floating rate term loans to fund the ODS acquisition (see Acquisitions section below) and increasing our revolving credit facility to$1,000 and extending its maturity by two years. 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 ourU.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, duringJune 2020 , we completed a$400 2028 note offering and a$100 add on to our 2027 notes. See Note 11 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®, Victor Reinz®, Albarus™, Brevini™, PIV™, Fairfield®, Glaser®, Graziano™, GWB®, Spicer Select™, Thompson™, Tru-Cool®, and Transejes™, Dana delivers a broad range of aftermarket solutions - including genuine, all-makes, and value lines - servicing passenger car, commercial vehicle, off-highway equipment and industrial applications across the globe. Selective acquisitions - Although transformational opportunities like theGKN 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. 30
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Table of Contents AcquisitionsAshwoods Innovations Limited - OnFebruary 5, 2020 , we acquiredCurtis Instruments, Inc.'s (Curtis) 35.4% ownership interest inAshwoods 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. DuringMarch 2020 , we acquired the remaining noncontrolling interests in Ashwoods held by employee shareholders. See Hydro-Québec relationship discussion below for details of the subsequent change in our ownership interest in Ashwoods. The results of operations of Ashwoods are reported within our Off-Highway operating segment. Ashwoods had an insignificant impact on our consolidated results of operations during 2020. Nordresa - OnAugust 26, 2019 , we acquired a 100% ownership interest inNordresa Motors, Inc. (Nordresa) for consideration of$12 , using cash on hand. Nordresa is a prominent integration and application engineering expert for the development and commercialization of electric powertrains for commercial vehicles. The investment further enhances Dana's electrification capabilities by combining its complete portfolio of motors, inverters, chargers, gearboxes, and thermal-management products with Nordresa's proprietary battery-management system, electric powertrain controls and integration expertise to deliver complete electric powertrain systems. The results of operations of Nordresa are reported within our Commercial Vehicle operating segment. Nordresa had an insignificant impact on our consolidated results of operations during 2019.Prestolite E-Propulsion Systems (Beijing) Limited - OnJune 6, 2019 , we acquiredPrestolite Electric Beijing Limited's (PEBL) 50% ownership interest inPrestolite E-Propulsion Systems (Beijing) Limited (PEPS). PEPS manufactures and distributes electric mobility solutions, including electric motors, inverters, and generators for commercial vehicles and heavy machinery. PEPS has a state-of-the-art facility inChina , enabling us to expand motor and inverter manufacturing capabilities in the world's largest electric-mobility market. The acquisition of PEBL's interest in PEPS, along with our existing ownership interest in PEPS through our TM4 subsidiary, provides us with a 100% ownership interest and a controlling financial interest in PEPS. We recognized a$2 gain to other income (expense), net on the required remeasurement of our previously held equity method investment in PEPS to fair value. We paid$50 at closing using cash on hand. Reference is made to Note 2 of our consolidated financial statements in Item 1 of Part I for the allocation of purchase consideration to assets acquired and liabilities assumed. The results of operations of PEPS are reported within our Commercial Vehicle operating segment. The PEPS acquisition contributed$8 of sales and de minimis adjusted EBITDA in 2019. See Hydro-Québec relationship discussion below for details of the subsequent change in our ownership interest in PEPS. Oerlikon Drive Systems - OnFebruary 28, 2019 , we acquired a 100% ownership interest in the Oerlikon Drive Systems (ODS) segment of theOerlikon Group . ODS is a global manufacturer of high-precision gears, planetary hub drives for wheeled and tracked vehicles, and products, controls, and software that support vehicle electrification across the mobility industry. We paid$626 at closing, which was primarily funded through debt proceeds. Reference is made to Note 2 of our consolidated financial statements in Item 1 of Part I for the allocation of purchase consideration to assets acquired and liabilities assumed. The results of operations of ODS are reported primarily within our Off-Highway and Commercial Vehicle operating segments. The ODS acquisition added$630 of sales and$87 of adjusted EBITDA during 2019. SME - OnJanuary 11, 2019 , we acquired a 100% ownership interest in S.M.E. S.p.A. (SME). SME designs, engineers, and manufactures low-voltage AC induction and synchronous reluctance motors, inverters, and controls for a wide range of off-highway electric vehicle applications, including material handling, agriculture, construction, and automated-guided vehicles. The addition of SME's low-voltage motors and inverters, which are primarily designed to meet the evolution of electrification in off-highway equipment, significantly expands Dana's electrified product portfolio. We paid$88 at closing, consisting of$62 in cash on hand and a note payable of$26 which allows for net settlement of potential contingencies as defined in the purchase agreement. The note is payable in five years and bears annual interest of 5%. Reference is made to Note 2 of our consolidated financial statements in Item 1 of Part I for the allocation of purchase consideration to assets acquired and liabilities assumed. The SME acquisition added$21 of sales and de minimis adjusted EBITDA during 2019. See Hydro-Québec relationship discussion below for details of the subsequent change in our ownership interest in SME. Hydro-Québec Relationship OnJune 22, 2018 , we acquired a 55% ownership interest in TM4 from Hydro-Québec . OnJuly 29, 2019 , we broadened our relationship with Hydro-Québec , with Hydro-Québec acquiring an indirect 45% redeemable noncontrolling interest in SME and increasing its existing indirect 22.5% noncontrolling interest in PEPS to 45%. We received$65 at closing, consisting of$53 of cash and a note receivable of$12 . The note is payable in five years and bears annual interest of 5%. Dana will continue to consolidate SME and PEPS as the governing documents continue to provide Dana with a controlling financial interest in these subsidiaries. See Acquisitions section above for a discussion of Dana's acquisitions of PEPS and SME. OnApril 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. 31
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Table of Contents Trends in Our Markets The global novel coronavirus disease (COVID-19) pandemic has had and is expected to continue to have an adverse effect on our business, results of operations, cash flows and financial condition. The global COVID-19 pandemic has negatively impacted the global economy, disrupted our operations as well as those of our customers, suppliers and the global supply chains in which we participate, and created significant volatility and disruption of financial markets. The extent of the impact of the COVID-19 pandemic on our business and financial performance, including our ability to execute our near-term and long-term operational, strategic and capital structure initiatives, will depend on future developments, including the duration and severity of the pandemic, which are uncertain and cannot be predicted. The company's response to the global COVID-19 pandemic has been measured, swift and decisive with an emphasis on health and safety, cash conservation and enhancing liquidity. Our top priority is the health and safety of our employees, their families, our customers, and our communities. We have implemented protocols throughout our global footprint to ensure their health and safety including, but not limited to: temporarily closing a significant number of our facilities; restricting access to and enhancing cleaning and disinfecting protocols of those facilities that continue to operate; use of personal protection equipment; adhering to social distancing guidelines; instituting remote work; and restricting travel. In response to the rapid dissipation of customer demand, the company has taken actions to conserve cash by flexing its conversion costs across its global manufacturing, assembly and distribution facilities and aggressively reducing its cost base and eliminating discretionary spending at its technical centers and administrative offices. Cost flex activities at our operating facilities has included reduction of material orders, flexing labor costs, halting non-production spending and delaying capital spending where and when appropriate. Cost reduction activities at our technical centers and administrative offices has included a temporary 20% reduction in salaried employee wages, a temporary 20% reduction in board of director remuneration, a temporary 50% reduction in the Chief Executive Officer's compensation, elimination of cash incentive compensation, a moratorium on travel and entertainment expenditures and delaying capital spending and investment in research and development activities where and when appropriate. The company is also temporarily suspending the declaration and payment of dividends to common shareholders and temporarily suspending the repurchase of common stock under its existing common stock share repurchase program. In addition, the company is taking advantage of various government programs and subsidies in the countries in which it operates, including certain provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act. As ofJune 30, 2020 , we had total liquidity of$1,687 including cash and cash equivalents (less deposits), marketable securities and availability from our Revolving Facility. Also, the company has no meaningful debt maturities before 2024. As we continue to manage through the unprecedented disruption in our markets and associated economic uncertainty resulting from the global COVID-19 pandemic, we will continue to respond in a measured, swift and decisive manner with continued emphasis on health and safety, cash conservation and maintenance of our liquidity position. Foreign Currency With 55% of our first-half 2020 sales coming from outside theU.S. , international currency movements can have a significant effect on our sales and results of operations. The euro zone countries andBrazil accounted for 53% and 7% of our first-half 2020 non-U.S. sales, respectively, whileChina ,India andThailand accounted for 10%, 6% and 5%, respectively. Although sales inArgentina andSouth Africa were each less than 5% of our non-U.S. sales, exchange rate movements of those countries have been volatile and significantly impacted sales from time to time. International currencies strengthened against theU.S. dollar in 2018, with sales increasing by$16 principally due to a stronger euro, Thai baht and Chinese renminbi, partially offset by a weaker Brazilian real, Argentine peso and Indian rupee. Weaker international currencies during 2019 decreased sales by$177 , with the euro, Brazilian real and South African rand accounting for$103 ,$30 and$15 of the decrease, respectively. Weaker international currencies decreased sales by$61 during the first six months of 2020 compared to the same period last year, with the Brazilian real, euro, Chinese renminbi and South African rand accounting for$25 ,$17 ,$6 and$5 of the decrease, respectively. During the second quarter of 2018, we determined thatArgentina's economy met the GAAP definition of a highly inflationary economy. In assessingArgentina's economy as highly inflationary we considered its three-year cumulative inflation rate along with other factors. As a result, effectiveJuly 1, 2018 , theU.S. dollar is the functional currency for our Argentine operations, rather than the Argentine peso. BeginningJuly 1, 2018 , peso-denominated monetary assets and liabilities are remeasured intoU.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 intoU.S. dollar using historic Argentine peso exchange rates. 32
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Table of Contents International Markets Trade actions initiated by theU.S. imposing tariffs on imports have been met with retaliatory tariffs by other countries, adding a level of tension and uncertainty to the global economic environment. InNovember 2018 , theU.S. ,Mexico andCanada executed theU.S. -Mexico-Canada Agreement (USMCA), the successor agreement to the North American Free Trade Agreement (NAFTA). The agreement includes the imposition of tariffs on vehicles that do not meet regional raw material (steel and aluminum), part and labor content requirements. The agreement was ratified by theU.S. inJanuary 2020 . These and other actions are likely to impact trade policies with other countries and the overall global economy. TheUnited Kingdom's decision to exit theEuropean Union ("Brexit") continues to provide some uncertainty and potential volatility around European currencies, along with uncertain effects of future trade and other cross-border activities of theUnited Kingdom with theEuropean Union and other countries. TheBrazil market is an important market for our Commercial Vehicle segment, representing about 16% of this segment's first-half 2020 sales. Our medium/heavy truck sales inBrazil account for approximately 77% of our first-half 2020 sales in the country. Reduced market demand resulting from the weak economic environment inBrazil during 2015 and 2016 lead to significant production level declines in the light truck and medium/heavy markets. In response to the challenging economic conditions in this country, we implemented restructuring and other cost reduction actions and reduced costs to the extent practicable. The Brazilian economy rebounded in 2017 and 2018, leading to increased medium/heavy and light truck production of more than 40% in each of those segments over the two-year period. Sales by our operations inBrazil were$393 in 2019, up 1% from 2018, reflective of modestly higher medium/heavy and light truck production levels in 2019. Sales by our operations inBrazil were$114 in the first half of 2020, down 44% from the same period of 2019, reflective of lower medium/heavy truck production levels. As indicated above,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 inArgentina for the first half of 2020 of approximately$27 are approximately 1% of our consolidated sales and our net asset exposure related toArgentina was approximately$15 , including$6 of net fixed assets, atJune 30, 2020 . 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 and brass. 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 and component parts that include commodities. Beginning in 2018, commodity prices have been impacted by imposed tariffs. Suppliers directly impacted by the tariffs are attempting to pass through the cost of the tariffs while suppliers not subject to the tariffs are advantaging themselves by raising prices. 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. Prices for commodities such as steel and aluminum rose during 2019, due to strong global demand. Higher commodity prices reduced year-over-year earnings in 2019 by approximately$30 , as compared to year-over-year earnings reductions of$115 in 2018. Material recovery and other pricing actions decreased earnings in 2019 by$10 , whereas pricing and recovery actions increased year-over-year earnings in 2018 by$80 . Lower commodity prices increased year-over-year second-quarter and six-month earnings in 2020 by$4 and$22 , as compared to year-over-year earnings reductions of$19 and$44 in the same periods last year. Material cost recovery and other pricing actions decreased year-over-year earnings in the second quarter and first six months of 2020 by$24 and$51 , whereas pricing and recovery actions increased year-over-year earnings by$14 and$22 in the same periods last year.
Sales, Earnings and Cash Flow Outlook
Due to the unprecedented disruption in our markets and associated economic
uncertainty resulting from the global COVID-19 pandemic, the company has
withdrawn its most recent full-year financial guidance disclosed in Item 7 of
our 2019 Form 10-K which did not factor in the effects of the pandemic. In
addition, due to continuing disruption and economic uncertainty, the company
will not be providing financial guidance at this time.
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Summary Consolidated Results of Operations (Second Quarter, 2020 versus 2019)
Three Months Ended June 30,
2020 2019
Increase/
Dollars % of Net Sales Dollars % of Net Sales (Decrease)
Net sales $ 1,078 $ 2,306 $ (1,228 )
Cost of sales 1,088 100.9 % 1,980 85.9 % (892 )
Gross margin (10 ) -0.9 % 326 14.1 % (336 )
Selling, general and
administrative expenses 82 7.6 % 140 6.1 % (58 )
Amortization of intangibles 3 4 (1 )
Restructuring charges, net 16 9 7
Pension settlement charge (258 ) 258
Other expense, net (1 ) (10 ) 9
Loss before interest and income
taxes (112 ) (95 ) (17 )
Write-off deferred financing
costs (5 ) (5 )
Interest income 2 3 (1 )
Interest expense 32 34 (2 )
Loss before income taxes (147 ) (126 ) (21 )
Income tax expense (benefit) 34 (52 ) 86
Equity in earnings of
affiliates 8 8 -
Net loss (173 ) (66 ) (107 )
Less: Noncontrolling interests
net income 2 (2 )
Less: Redeemable noncontrolling
interests net income 1 1
Net loss attributable to the
parent company $ (174 ) $ (68 ) $ (106 )
Sales - The following table shows changes in our sales by geographic region.
Three Months Ended
June 30, Amount of Change Due To
Increase/ Acquisitions
2020 2019 (Decrease) Currency Effects (Divestitures) Organic Change
North
America $ 479 $ 1,174 $ (695 ) $ (1 ) $ - $ (694 )
Europe 397 713 (316 ) (7 ) (309 )
South
America 43 140 (97 ) (12 ) (85 )
Asia
Pacific 159 279 (120 ) (7 ) 3 (116 )
Total $ 1,078 $ 2,306 $ (1,228 ) $ (27 ) $ 3 $ (1,204 )
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Sales in 2020 were$1,228 lower than in 2019. Weaker international currencies decreased sales by$27 , principally due to a weaker Brazilian real, euro and Chinese renminbi. The acquisition of PEPS in last year's second quarter and Ashwoods in this year's first quarter, generated a year-over-year increase in sales of$3 . The organic sales decrease of$1,204 , or 52%, resulted from the rapid dissipation in production volumes across all of our end markets as a result of the global COVID-19 pandemic, partially offset by the conversion of sales backlog. The impact of the global COVID-19 pandemic on our operations as well as those of our customers, suppliers and the global supply chains in which we participate, was most notable duringApril 2020 , with a measured ramp up in production beginning in May and continuing intoJune 2020 . Pricing actions, including material commodity price and inflationary cost adjustments, reduced sales by$24 . TheNorth America organic sales decrease of 59% was driven principally by weaker light and medium/heavy duty truck production volumes resulting from the global COVID-19 pandemic, partially offset by the conversion of sales backlog. Second-quarter 2020 full frame light truck production was down 71% while production of Class 8 and Classes 5-7 trucks were down 81% and 67%, respectively. Excluding currency and acquisition effects, sales inEurope were down 43% compared with 2019. With our significant Off-Highway presence in the region, weakening construction/mining and agricultural markets due to the global COVID-19 pandemic were a major factor. Organic sales in this operating segment were down 39% compared with the second quarter of 2019. Excluding currency effects, second quarter sales inSouth America decreased 61% compared to 2019 due primarily to the global COVID-19 pandemic. Second-quarter 2020 medium/heavy truck production was down 62% and light truck production was down 77%.
Excluding currency and acquisition effects, sales in
Cost of sales and gross margin - Cost of sales for the second quarter of 2020 decreased$892 , or 45% when compared to 2019. Cost of sales as a percent of sales in 2020 was 1,500 basis points higher than in the previous year. Cost of sales attributed to acquisitions was approximately$10 . Excluding the effects of acquisitions, cost of sales as a percent of sales was 100.3%, 1,440 basis points higher than in the previous year. The increase in cost of sales as a percent of sales was largely attributable to actions to flex down our cost structure lagging the rapid dissipation of customer demand across all of our end markets as a result of the global COVID-19 pandemic, our inability to effectively reduce labor costs in certain countries due to government requirements, as well as our inability to reduce fixed costs including depreciation and rent expense. Partially offsetting the impact of the rapid dissipation of customer demand were lower commodity prices which lowered material costs by$4 and continued material cost savings of approximately$11 . Gross margin of ($10 ) for 2020 decreased$336 from 2019. Gross margin as a percent of sales was (0.9%) in 2020, 1,500 basis points lower than in 2019. The decline in margin as a percent of sales was driven principally by the cost of sales factors referenced above. Selling, general and administrative expenses (SG&A) - SG&A expenses in 2020 were$82 (7.6% of sales) as compared to$140 (6.1% of sales) in 2019. SG&A attributed to acquisitions was$1 . Excluding the increase associated with acquisitions, SG&A expenses were 140 basis points higher than the same period of 2019. The year-over-year decrease of$59 exclusive of acquisitions was primarily due to lower year-over-year incentive compensation as well as lower salaried employee wages, benefits, travel expenses and professional fees resulting from the execution of cost reduction initiatives in response to the global COVID-19 pandemic.
Amortization of intangibles - Amortization expense was
Restructuring charges, net - Restructuring charges of$16 in 2020 were comprised of severance and benefit costs primarily related to headcount reductions across our operations in response to the global COVID-19 pandemic and exit costs related to previously announced actions. Restructuring charges of$9 in 2019 were comprised of severance and benefit costs primarily related to integration of recent acquisitions, headcount reductions across our operations and exit costs related to previously announced actions.
Pension settlement charge - See Note 10 of the consolidated financial statements
in Item 1 of Part I for a discussion of the termination of one of our
Other expense, net - The following table shows the major components of other
expense, net.
Three Months Ended
June 30,
2020 2019
Non-service cost components of pension and OPEB costs
(9 ) Government grants and incentives 2
5
Foreign exchange gain 2
1
Strategic transaction expenses (5 ) (11 ) Other, net 3 4 Other expense, net$ (1 ) $ (10 )
Strategic transaction expenses in 2020 were primarily attributable to the acquisitions of Nordresa and ODS and certain other strategic initiatives. Strategic transaction expenses in 2019 were primarily attributable to the acquisition of ODS. See Note 2 of our consolidated financial statements in Item 1 of Part I for additional information.
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Write-off deferred financing costs - OnJune 19, 2020 , in connection with the issuance of ourJune 2028 Notes, we terminated our$500 bridge facility and wrote off$5 of deferred fees associated with the bridge facility. See Note 11 of the consolidated financial statements in Item 1 of Part I for additional information. Interest income and interest expense - Interest income was$2 in 2020 and$3 in 2019. Interest expense decreased from$34 in 2019 to$32 in 2020, as the benefit of lower average effective interest rates was partially offset by higher average debt levels. The increase in average debt levels is primarily attributable to outstanding borrowings under the Revolving Facility during the second quarter of 2020. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.7% in 2020 and 5.4% in 2019. Income tax expense (benefit) - We reported an income tax expense of$34 and income tax benefit of$52 for the second quarter, 2020 and 2019, respectively. In the second quarter of 2020 we recorded an income tax expense of$56 for valuation allowances in foreign jurisdictions due to reduced income projections. During the second quarter of 2019, a pre-tax pension settlement charge of$258 with an associated income tax benefit of$9 was recorded. Also, during the second quarter of 2019, we recorded tax benefits of$48 related to tax actions that adjusted federal tax credits and$30 related to the development of a tax planning strategy which reduced valuation allowances on existing federal tax credits. Excluding these items, the effective tax rate would be 15% and 27% for the 2020 and 2019 three-month period. Our effective income tax rates vary from theU.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 theU.S. , different statutory tax rates outside theU.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$8 in both 2020 and 2019. Equity in earnings from DDAC was$9 in 2020 and$6 in 2019. After experiencing significant impacts resulting from the global COVID-19 pandemic during the first quarter of 2020, DDAC experienced higher demand levels during the second quarter of 2020 primarily driven by increased demand for certain medium/heavy vehicles by the Chinese government. Equity in earnings from BSFB was de minimis in 2020 and$2 in 2019. 36
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Summary Consolidated Results of Operations (Year-to-Date, 2020 versus 2019)
Six Months Ended June 30,
2020 2019
Increase/
Dollars % of Net Sales Dollars % of Net Sales (Decrease)
Net sales $ 3,004 $ 4,469 $ (1,465 )
Cost of sales 2,808 93.5 % 3,843 86.0 % (1,035 )
Gross margin 196 6.5 % 626 14.0 % (430 )
Selling, general and
administrative expenses 188 6.3 % 276 6.2 % (88 )
Amortization of intangibles 6 6 -
Restructuring charges, net 19 18 1
Impairment of goodwill (51 ) (51 )
Pension settlement charge (258 ) 258
Other income (expense), net 3 (23 ) 26
Earnings (loss) before interest
and income taxes (65 ) 45 (110 )
Write-off deferred financing
costs (5 ) (5 )
Interest income 4 5 (1 )
Interest expense 61 61 -
Loss before income taxes (127 ) (11 ) (116 )
Income tax expense (benefit) 18 (32 ) 50
Equity in earnings of
affiliates 10 14 (4 )
Net income (loss) (135 ) 35 (170 )
Less: Noncontrolling interests
net income 2 6 (4 )
Less: Redeemable noncontrolling
interests net loss (21 ) (1 ) (20 )
Net income (loss) attributable
to the parent company $ (116 ) $ 30 $ (146 )
Sales - The following table shows changes in our sales by geographic region.
Six Months Ended
June 30, Amount of Change Due To
Increase/ Acquisitions
2020 2019 (Decrease) Currency Effects (Divestitures) Organic Change
North America $ 1,461 $ 2,286 $ (825 ) $ (1 ) $ 30 $ (854 )
Europe 1,011 1,391 (380 ) (24 ) 60 (416 )
South America 148 262 (114 ) (25 ) (89 )
Asia Pacific 384 530 (146 ) (11 ) 29 (164 )
Total $ 3,004 $ 4,469 $ (1,465 ) $ (61 ) $ 119 $ (1,523 )
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Sales in 2020 were$1,465 lower than in 2019. Weaker international currencies decreased sales by$61 , principally due to a weaker Brazilian real, euro, Chinese renminbi and South African rand. The acquisitions of ODS in last year's first quarter, PEPS in last year's second quarter and Ashwoods in this year's first quarter, generated a year-over-year increase in sales of$119 . The organic sales decrease of$1,523 , or 34%, resulted from weaker light and medium/heavy truck markets and lower global off-highway demand in January andFebruary 2020 and the rapid dissipation in production volumes across all of our end markets beginning inMarch 2020 as a result of the global COVID-19 pandemic, partially offset by the conversion of sales backlog. The impact of the global COVID-19 pandemic on our operations as well as those of our customers, suppliers and the global supply chains in which we participate, was most notable duringApril 2020 , with a measured ramp up in production beginning in May and continuing intoJune 2020 . Pricing actions, including material commodity price and inflationary cost adjustments, reduced sales by$51 . TheNorth America organic sales decrease of 37% was driven principally by weaker light and medium/heavy duty truck production volumes resulting from the global COVID-19 pandemic, partially offset by the conversion of sales backlog. First-half 2020 full frame light truck production was down 40% while production of Class 8 and Classes 5-7 trucks were down 57% and 42%, respectively. Excluding currency and acquisition effects, sales inEurope were down 30% compared with 2019. With our significant Off-Highway presence in the region, weakening construction/mining and agricultural markets due to the global COVID-19 pandemic were a major factor. Organic sales in this operating segment were down 31% compared with the first half of 2019.
Excluding currency effects, first six months sales in
Excluding currency and acquisition effects, sales inAsia Pacific decreased about 31% asChina's economy was weakening even before the onset of the COVID-19 pandemic. Light truck, light vehicle engine and medium/heavy truck production were down 24%, 29% and 18%, respectively from the first half of 2019. Cost of sales and gross margin - Cost of sales for the first half of 2020 decreased$1,035 , or 27% when compared to 2019. Cost of sales as a percent of sales in 2020 was 750 basis points higher than in the previous year. Cost of sales attributed to acquisitions was approximately$125 . Excluding the effects of acquisitions, cost of sales as a percent of sales was 93.0%, 700 basis points higher than in the previous year. The increase in cost of sales as a percent of sales was largely attributable to actions to flex down our cost structure lagging the rapid dissipation of customer demand across all of our end markets as a result of the global COVID-19 pandemic, our inability to effectively reduce labor costs in certain countries due to government requirements, as well as our inability to reduce fixed costs including depreciation and rent expense. Partially offsetting the impact of the rapid dissipation of customer demand were lower commodity prices which lowered material costs by$22 and continued material cost savings of approximately$30 .
Gross margin of
Selling, general and administrative expenses (SG&A) - SG&A expenses in 2020 were$188 (6.3% of sales) as compared to$276 (6.2% of sales) in 2019. SG&A attributed to acquisitions was$8 . Excluding the increase associated with acquisitions, SG&A expenses as a percent of sales were comparable with the same period of 2019. The year-over-year decrease of$96 exclusive of acquisitions was primarily due to lower year-over-year incentive compensation as well as lower salaried employee wages, benefits, travel expenses and professional fees resulting from the execution of cost reduction initiatives in response to the global COVID-19 pandemic.
Amortization of intangibles - Amortization expense was
Restructuring charges - Restructuring charges of$19 in 2020 were comprised of severance and benefit costs primarily related to headcount reductions across our operations in response to the global COVID-19 pandemic and exit costs related to previously announced actions. Restructuring charges of$18 in 2019 were comprised of severance and benefit costs primarily 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 statements in Item 1 of Part I for additional information.
Pension settlement charge - See Note 10 of the consolidated financial statements
in Item 1 of Part I for a discussion of the termination of one of our
Other income (expense), net - The following table shows the major components of other income (expense), net.
Six Months Ended
June 30,
2020 2019
Non-service cost components of pension and OPEB costs
6 8
Foreign exchange gain (loss) 7 (10 )
Strategic transaction expenses (11 ) (24 )
Non-income tax legal judgment 6
Other, net 6 12
Other income (expense), net $ 3 $ (23 )
Foreign exchange loss in 2019 included a loss on the undesignated Swiss franc
notional deal contingent forward related to the ODS acquisition. See Note 12 of
our consolidated financial statements in Item 1 of Part I for additional
information. Strategic transaction expenses in 2020 were primarily attributable
to the acquisitions of Nordresa and ODS and certain other strategic initiatives.
Strategic transaction expenses in 2019 were primarily attributable to the
acquisition of ODS. See Note 2 of our consolidated financial statements in Item
1 of Part I for additional information. During the first quarter of 2019, we won
a legal judgment regarding the methodology used to calculate PIS/COFINS tax in
Brazil .
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Write-off deferred financing costs - OnJune 19, 2020 , in connection with the issuance of ourJune 2028 Notes, we terminated our$500 bridge facility and wrote off$5 of deferred fees associated with the bridge facility. See Note 11 of the consolidated financial statements in Item 1 of Part I for additional information. Interest income and interest expense - Interest income was$4 in 2020 and$5 in 2019. Interest expense was$61 in both 2020 and 2019, as the benefit of lower average effective interest rates was offset by higher average debt levels. The increase in average debt levels is primarily attributable to outstanding borrowings under the Revolving Facility during the first half of 2020. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 4.7% in 2020 and 5.2% in 2019. Income tax expense (benefit) -We reported an income tax expense of$18 and income tax benefit of$32 for the six months endedJune 30, 2020 and 2019, respectively. Our effective tax rates were (14)% and 291% for the first six months of 2020 and 2019. In the second quarter of 2020 we recorded an income tax expense of$56 for valuation allowances in foreign jurisdictions due to reduced income projections. 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 benefit of$37 related to tax actions that adjusted federal tax credits, tax expense of$2 to record additional valuation allowance in theU.S. based on reduced income projections, and tax expense of$4 to record valuation allowances in foreign jurisdictions due to reduced income projections. During the second quarter of 2019, a pre-tax pension settlement charge of$258 with an associated income tax benefit of$9 was recorded. Also, during the second quarter of 2019, we recorded tax benefits of$48 related to tax actions that adjusted federal tax credits and$30 related to the development of a tax planning strategy which reduced valuation allowances on existing federal tax credits. During the first quarter of 2019, we recognized a benefit of$22 related to release of valuation allowances in theU.S. based on improved income projections. Partially offsetting this benefit was$6 of expense related to aU.S. state law change. Excluding these items, the effective tax rate would be 8% and 29% for the 2020 and 2019 six-month periods, respectively. Our effective income tax rates vary from theU.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 theU.S. , different statutory tax rates outside theU.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$10 in 2020 and$14 in 2019. Equity in earnings from DDAC was$8 in 2020 and$10 in 2019. After experiencing significant impacts resulting from the global COVID-19 pandemic during the first quarter of 2020, DDAC experienced higher demand levels during the second quarter of 2020 primarily driven by increased demand for certain medium/heavy vehicles by the Chinese government. Equity in earnings from BSFB was$3 in 2020 and$4 in 2019. 39
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Segment Results of Operations (2020 versus 2019)
Light Vehicle
Three Months Six Months
Segment Segment
Sales Segment EBITDA EBITDA Margin Sales Segment EBITDA EBITDA Margin
2019 $ 927 $ 118 12.7 % $ 1,833 $ 220 12.0 %
Volume and mix (565 ) (146 ) (642 ) (165 )
Performance (19 ) (5 ) (35 ) (4 )
Currency effects (6 ) 1 (11 )
2020 $ 337 $ (32 ) -9.5 % $ 1,145 $ 51 4.5 %
Light Vehicle sales in the second quarter and first half of 2020, exclusive of
currency effects, were 63% and 37% lower than the same period of 2019. The rapid
dissipation in customer demand resulting from the global COVID-19 pandemic was
partially offset by conversion of sales backlog. Year-over-year North America
full frame light truck production decreased 71% in this year's second quarter
while light truck production in Europe , South America and Asia Pacific declined
by 64%, 77% and 22%, respectively. Year-over-year North America full frame light
truck production decreased 40% in this year's first six months while light truck
production in Europe , South America and Asia Pacific declined by 39%, 44% and
24%, respectively. Net customer pricing and cost recovery actions further
decreased year-over-year sales by $16 and $32 in this year's second quarter and
first six months, respectively.
Light Vehicle second-quarter segment EBITDA decreased by $150 from last year,
with first-half earnings lower by $169 . Lower sales volumes provided
a year-over-year headwind of $146 (25.8% decremental margin) and $165 (25.7%
decremental margin) in the second quarter and first six months, respectively, as
actions to flex down our cost structure lagged the rapid dissipation of customer
demand resulting from the global COVID-19 pandemic. The year-over-year
performance-related earnings decrease in the second quarter was driven by lower
net pricing and material cost recovery of $16 , operational inefficiencies of $6
and incremental safety costs of $2 directly related to the global COVID-19
pandemic, including facility sanitization and personal protective equipment.
Partially offsetting these performance-related earnings decreases were the
benefit of the temporary reduction in salaried employee wages of $6 , certain
benefits of the CARES Act of $5 , material cost savings of $3 , lower incentive
compensation of $2 , commodity cost decreases of $2 and lower warranty expense of
$1 . The year-over-year performance related-earnings decrease in the first six
months was driven by lower net pricing and material cost recovery of $32 ,
operational inefficiencies of $14 and incremental safety costs of $2 directly
related to the global COVID-19 pandemic. Partially offsetting these
performance-related earnings decreases were commodity cost decreases of $14 ,
material cost savings of $10 , the benefit of the temporary reduction in salaried
employee wages of $6 , certain benefits of the CARES Act of $5 , lower incentive
compensation of $5 and lower warranty expense of $4 .
Commercial Vehicle
Three Months Six Months
Segment Segment EBITDA
Sales Segment EBITDA EBITDA Margin Sales Segment EBITDA Margin
2019 $ 437 $ 41 9.4 % $ 868 $ 82 9.4 %
Volume and mix (227 ) (58 ) (310 ) (79 )
Acquisitions 3 (3 ) 6 (7 )
Performance (4 ) 12 (9 ) 18
Currency effects (9 ) (22 ) (1 )
2020 $ 200 $ (8 ) -4.0 % $ 533 $ 13 2.4 %
Commercial Vehicle sales in the second quarter and first half of 2020, exclusive
of currency effects and the impact of acquisitions, were 53% and 37% lower than
the same period of 2019. Declining market conditions coming out of 2019
deteriorated further with the rapid dissipation in customer demand resulting
from the global COVID-19 pandemic. Year-over-year North America Class 8
production was down 81% and Classes 5-7 production was down 67% in this year's
second quarter. Year-over-year medium/heavy truck production in Europe , South
America and Asia Pacific were down 63%, 62% and 10%, respectively, in this
year's second quarter. Year-over-year North America Class 8 production was down
57% and Classes 5-7 production was down 42% in this year's first six months.
Year-over-year medium/heavy truck production in Europe , South America and Asia
Pacific were down 46%, 34% and 18%, respectively, in this year's first six
months. Net customer pricing and cost recovery actions further decreased
year-over-year sales by $4 and $9 in this year's second quarter and first six
months, respectively.
Commercial Vehicle second-quarter segment EBITDA decreased by $49 from last
year, with first-half earnings lower by $69 . Lower sales volumes provided a
year-over-year headwind of $58 (25.6% decremental margin) and $79 (25.5%
decremental margin) in the second quarter and first six months, respectively,
as actions to flex down our cost structure lagged the rapid dissipation of
customer demand resulting from the global COVID-19 pandemic. The year-over-year
performance-related earnings increase in the second quarter was driven by the
benefit of the temporary reduction in salaried employee wages of $5 , improved
operational efficiencies of $3 , certain benefits of the CARES Act of $2 ,
material cost savings of $2 , lower incentive compensation of $2 , commodity cost
decreases of $1 , lower warranty expense of $1 and lower premium freight of $1 .
Partially offsetting these performance-related earnings increases were lower net
pricing and material recovery of $4 and incremental safety costs of $1 directly
related to the global COVID-19 pandemic, including facility sanitization and
personal protective equipment. The year-over-year performance-related earnings
increase in the first six month was driven by material cost savings of $7 , the
benefit of the temporary reduction in salaried employee wages of $5 , lower
incentive compensation of $5 , commodity cost decreases of $4 , lower premium
freight of $4 , certain benefits of the CARES Act of $2 and lower warranty
expense of $1 . Partially offsetting these performance-related earnings increases
were lower net pricing and material recovery actions of $9 and incremental
safety costs of $1 directly related to the global COVID-19 pandemic, including
facility sanitization and personal protective equipment.
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Off-Highway
Three Months Six Months
Segment Segment
Sales Segment EBITDA EBITDA Margin Sales Segment EBITDA EBITDA Margin
2019 $ 674 $ 103 15.3 % $ 1,226 $ 185 15.1 %
Volume and mix (259 ) (66 ) (375 ) (92 )
Acquisitions 113 14
Performance (4 ) 2 (9 ) 6
Currency effects (10 ) (1 ) (22 ) (3 )
2020 $ 401 $ 38 9.5 % $ 933 $ 110 11.8 %
Excluding currency effects and the impact of the ODS and Ashwoods acquisitions,
second-quarter and first-half 2020 sales in our Off-Highway segment decreased
39% and 31% compared to last year. Already declining global construction/mining
and agricultural equipment markets coming out of 2019 deteriorated further with
the rapid dissipation of customer demand resulting from the global COVID-19
pandemic. Net customer pricing and cost reduction actions further decreased
year-over-year sales by $4 and $9 in this year's second quarter and first six
months, respectively.
Off-Highway second-quarter segment EBITDA decreased by $65 from last year, with
first-half earnings lower by $75 . Lower sales volumes provided a year-over-year
headwind of $66 (25.5% decremental margin) and $92 (24.5% decremental margin) in
the second quarter and first six months, respectively, as actions to flex down
our cost structure lagged the rapid dissipation of customer demand resulting
from the global COVID-19 pandemic. The year-over-year performance-related
earnings increase in the second quarter was driven by the benefit of the
temporary reduction in salaried employee wages of $9 , material cost savings of
$5 , commodity cost decreases of $1 , lower incentive compensation of $1 and
certain benefits of the CARES Act of $1 . Partially offsetting these
performance-related earnings increases were lower net pricing and material
recovery of $4 , higher warranty expense of $3 , operational inefficiencies of
$6 and incremental safety costs of $2 directly related to the global COVID-19
pandemic, including facility sanitization and personal protective equipment. The
year-over-year performance-related earnings increase in the first six months was
driven by material cost savings of $10 , the benefit of the temporary reduction
in salaried employee wages of $9 , commodity cost decreases of $4 , lower
incentive compensation of $2 and certain benefits of the CARES Act of $1 .
Partially offsetting these performance-related earnings increases were lower net
pricing and material recovery of $9 , higher warranty expense of $2 , operational
inefficiencies of $7 and incremental safety costs of $2 directly related to the
global COVID-19 pandemic.
Power Technologies
Three Months Six Months
Segment Segment
Sales Segment EBITDA EBITDA Margin Sales Segment EBITDA EBITDA Margin
2019 $ 268 $ 28 10.4 % $ 542 $ 62 11.4 %
Volume and mix (126 ) (40 ) (142 ) (45 )
Performance 11 (1 ) 12
Currency effects (2 ) (6 )
2020 $ 140 $ (1 ) -0.7 % $ 393 $ 29 7.4 %
Power Technologies primarily serves the light vehicle market but also sells
product to the medium/heavy truck and off-highway markets. Net of currency
effects, sales for the second quarter and first half of 2020 were 47% and 26%
lower than the same periods of 2019, primarily due to lower market demand
resulting from the global COVID-19 pandemic. Light vehicle engine production
declined in North America , Europe and Asia Pacific compared to last year's
second quarter and first six months.
Power Technologies second-quarter segment EBITDA decreased $29 from last year,
with first-half earnings lower by $33 . Lower sales volumes provided a
year-over-year headwind of $40 (31.7% decremental margin) and $45 (31.7%
decremental margin) in the second quarter and first six months, respectively, as
actions to flex down our cost structure lagged the dissipation of customer
demand resulting from the global COVID-19 pandemic. The year-over-year
performance-related earnings increase in the second quarter was driven by the
benefit of the temporary reduction in salaried employee wages of $5 , operational
efficiencies of $3 , lower incentive compensation of $2 , material cost savings of
$1 and certain benefits of the CARES Act of $1 . Partially offsetting these
performance-related earnings increases was incremental safety costs of $1
directly related to the global COVID-19 pandemic, including facility
sanitization and personal protective equipment. The year-over-year
performance-related earnings increase in the first six months was driven by the
benefit of the temporary reduction in salaried employee wages of $5 , material
savings of $3 , lower incentive compensation of $3 , operational efficiencies of
$2 and certain benefits of the CARES Act of $1 . Partially offsetting these
performance-related earnings increases were lower net pricing and material
recovery of $1 and incremental safety costs of $1 directly related to the global
COVID-19 pandemic.
Non-GAAP Financial Measures
Adjusted EBITDA
We have defined adjusted EBITDA as net income (loss) before interest, 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.
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The following table provides a reconciliation of net income (loss) to adjusted
EBITDA.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income (loss) $ (173 ) $ (66 ) $ (135 ) $ 35
Equity in earnings of affiliates 8 8 10 14
Income tax expense (benefit) 34 (52 ) 18 (32 )
Loss before income taxes (147 ) (126 ) (127 ) (11 )
Depreciation and amortization 89 84 178 161
Restructuring charges, net 16 9 19 18
Interest expense, net 30 31 57 56
Write-off deferred financing costs 5 5
Impairment of goodwill 51
Pension settlement charges 258 258
Other* 2 30 17 61
Adjusted EBITDA $ (5 ) $ 286 $ 200 $ 543 * Other includes non-service cost components of pension and OPEB costs, stock
compensation expense, strategic transaction expenses and other items. See Note
18 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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Net cash provided by (used in) operating
activities $ (75 ) $ 73 $ (126 ) $ 57
Purchases of property, plant and
equipment (58 ) (92 ) (121 ) (190 )
Free cash flow (133 ) (19 ) (247 ) (133 )
Discretionary pension contribution - 62 - 62
Adjusted free cash flow $ (133 ) $ 43 $ (247 ) $ (71 )
Liquidity
The following table provides a reconciliation of cash and cash equivalents to
liquidity, a non-GAAP measure, at
Cash and cash equivalents$ 694 Less: Deposits supporting obligations (5 ) Available cash 689 Additional cash availability from Revolving Facility 979 Marketable securities 19 Total liquidity$ 1,687 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$979 atJune 30, 2020 under the Revolving Facility after deducting$21 of outstanding letters of credit. The components of ourJune 30, 2020 consolidated cash balance were as follows: U.S. Non-U.S. Total Cash and cash equivalents$ 411 $ 175 $ 586 Cash and cash equivalents held as deposits 5 5 Cash and cash equivalents held at less than wholly-owned subsidiaries 3 100 103 Consolidated cash balance$ 414 $ 280 $ 694 42
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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. AtJune 30, 2020 , we were in compliance with the covenants of our financing agreements. Under the Term Facilities, 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 Facilities 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 Term A Facility and the Revolving Facility are 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. In response to the COVID-19 pandemic we have taken controlled and measured actions to preserve liquidity including but not limited to flexing our cost structure, reducing capital spending and investments in research and development activities where and when appropriate, taking advantage of various government programs and subsidies including certain provisions of the CARES Act, temporarily suspending the declaration and payment of dividends to common shareholders and temporarily suspending the repurchase of common stock under our existing common stock share repurchase program. DuringJune 2020 , we completed the sale of$400 in senior unsecured notes dueJune 15, 2028 (June 2028 Notes) as well as a$100 add on to our senior unsecured notes dueNovember 15, 2027 (November 2027 Notes). OnApril 16, 2020 , we amended certain provisions of our credit and guaranty agreement including gradually increasing the first lien net leverage ratio from a maximum of 2.00 to 1.00 to a maximum of 4.00 to 1.00 for the quarter endingDecember 31, 2020 and then, starting with the quarter endingDecember 31, 2021 , decrease the ratio quarterly until it returns to its prior level of 2.00 to 1.00 for and after the quarter endingSeptember 30, 2022 , unless Dana, in its sole discretion, elects to return the first lien net leverage ratio to its prior level of 2.00 to 1.00 earlier than such date. We also amended certain restrictive covenants to provide additional limitations on incurring additional liens, taking on additional debt, paying dividends, entering into certain transactions with affiliates, making certain investments and disposing of certain assets untilDecember 31, 2021 , unless Dana, in its sole discretion, elects to return the first lien net leverage ratio to its prior level prior toDecember 31, 2021 . AtJune 30, 2020 , we were in compliance with the covenants of our financing agreements. 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:
Six Months Ended
June 30,
2020 2019
Cash used for changes in working capital $ (228 ) $ (247 )
Other cash provided by operations 102 304
Net cash provided by (used in) operating activities (126 )
57
Net cash used in investing activities (141 ) (863 ) Net cash provided by financing activities 476
577
Net increase (decrease) in cash, cash equivalents and restricted cash$ 209 $ (229 ) Operating activities - Exclusive of working capital, other cash provided by operations was$102 and$304 in 2020 and 2019. The year-over-year decrease is primarily attributable to lower operating earnings as a result of the global COVID-19 pandemic, partially offset by a$62 discretionary pension contribution made to one of ourU.S. defined benefit pension plans in the second quarter of 2019. Reference is made to Note 10 of the consolidated financial statements in Item 1 of Part I for a discussion of the settlement of thisU.S. defined benefit pension plan. Working capital used cash of$228 and$247 in 2020 and 2019. Cash of$201 was provided by lower levels of receivables in 2020, while cash of$193 was used to finance increased receivables in 2019. The lower level of cash required for receivables in 2020 was due primarily to the rapid dissipation of customer demand beginning inMarch 2020 as a result of the global COVID-19 pandemic. Cash of$53 was provided by lower inventory levels in 2020, while cash of$47 was used to fund higher inventory levels in 2019. Cash of$482 and$7 was used to reduce accounts payable and other net liabilities in 2020 and 2019. The reduction in accounts payable and other net liabilities in 2020 was principally driven by lower raw material purchases beginning inMarch 2020 due to the rapid dissipation of customer demand resulting from the COVID-19 pandemic. Investing activities - Expenditures for property, plant and equipment were$121 and$190 during 2020 and 2019. The elevated level of capital spend during 2019 was primarily in support of new customer programs and information systems upgrades. During 2020, capital spending has been delayed where and when appropriate in response to the global COVID-19 pandemic. 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 2019, we paid$545 , net of cash and restricted cash acquired, to purchase ODS, we paid$61 to acquire SME and we paid$48 , net of cash acquired, to purchase PEPS. During 2019, we paid$21 to settle the undesignated Swiss franc notional deal contingent forward related to the ODS acquisition. During 2020 and 2019, purchases of marketable securities were largely funded by proceeds from sales and maturities of marketable securities. 43
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Financing activities - During 2020, we completed the issuance of$400 of ourJune 2028 Notes and the issuance of an additional$100 of ourNovember 2027 Notes, paying financing cost of$6 . During 2020, we entered into a$500 bridge facility, paying financing cost of$5 . We subsequently terminated the bridge facility. During 2019, we entered into an amended credit and guaranty agreement comprised of a$500 Term A Facility, a$450 Term B Facility and a$750 Revolving Facility. The Term A Facility was an expansion of our existing$275 term facility. We drew the$225 available under the Term A Facility and the$450 available under the Term B Facility. We paid financing costs of$12 to amend the credit and guaranty agreement. During 2019, we made combined principle payments of$17 on the Term A Facility and the Term B Facility. We used$15 and$29 for dividend payments to common stockholders during 2020 and 2019, respectively. We used$25 to repurchase 1,432,275 shares of our common stock during 2019. During the second quarter of 2020, we temporarily suspended the declaration and payment of dividends to common stockholders and temporarily suspended the repurchase of common stock under our existing common stock repurchase program in response to the global COVID-19 pandemic.
Off-Balance Sheet Arrangements
There have been no material changes atJune 30, 2020 in our off-balance sheet arrangements from those reported or estimated in the disclosures in Item 7 of our 2019 Form 10-K. Contractual Obligations
There have been no material changes in our contractual obligations from those disclosed in Item 7 of our 2019 Form 10-K.
Contingencies For a summary of litigation and other contingencies, see Note 13 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 2019 Form 10-K for a description of our critical accounting estimates and Note 1 to our consolidated financial statements in Item 8 of our 2019 Form 10-K for our significant accounting policies. There were no changes to our critical accounting estimates in the six months endedJune 30, 2020 . See Note 1 to our consolidated financial statements in this Form 10-Q for a discussion of new accounting guidance adopted during the first six months of 2020.
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