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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. 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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: September 30, 2020

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 144,491,212 shares of the registrant’s common stock outstanding at October 16, 2020.

 

 

 
 

DANA INCORPORATED – FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

 

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

29

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4

Controls and Procedures

44

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1

Legal Proceedings

45

 

 

 

Item 1A

Risk Factors

45

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 6

Exhibits

46

 

 

 

Signatures

 

47

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Dana Incorporated

Consolidated Statement of Operations (Unaudited)

(In millions, except per share amounts)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net sales

  $ 1,994     $ 2,164     $ 4,998     $ 6,633  

Costs and expenses

                               

Cost of sales

    1,780       1,882       4,588       5,725  

Selling, general and administrative expenses

    111       128       299       404  

Amortization of intangibles

    4       2       10       8  

Restructuring charges, net

    2       5       21       23  

Impairment of goodwill

                (51 )      

Pension settlement charge

          (2 )           (260 )
Other income (expense), net     (8 )     (8 )     (5 )     (31 )

Earnings before interest and income taxes

    89       137       24       182  
Write-off deferred financing costs                 (5 )      

Interest income

    3       3       7       8  

Interest expense

    38       31       99       92  

Earnings (loss) before income taxes

    54       109       (73 )     98  

Income tax expense (benefit)

    16       5       34       (27 )

Equity in earnings of affiliates

    7       8       17       22  

Net income (loss)

    45       112       (90 )     147  
Less: Noncontrolling interests net income     4       3       6       9  
Less: Redeemable noncontrolling interests net loss     (4 )     (2 )     (25 )     (3 )

Net income (loss) attributable to the parent company

  $ 45     $ 111     $ (71 )   $ 141  
                                 

Net income (loss) per share available to common stockholders

                               
Basic   $ 0.31     $ 0.77     $ (0.49 )   $ 0.98  
Diluted   $ 0.31     $ 0.77     $ (0.49 )   $ 0.97  
                                 

Weighted-average common shares outstanding

                               

Basic

    144.5       144.0       144.4       144.0  

Diluted

    145.2       144.8       144.4       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

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income (loss)

  $ 45     $ 112     $ (90 )   $ 147  

Other comprehensive income (loss), net of tax:

                               

Currency translation adjustments

    14       (46 )     (133 )     (16 )

Hedging gains and losses

    1       8       40       15  

Defined benefit plans

    4       5       11       365  

Other comprehensive income (loss)

    19       (33 )     (82 )     364  

Total comprehensive income (loss)

    64       79       (172 )     511  

Less: Comprehensive (income) loss attributable to noncontrolling interests

    (15 )     9       (7 )     4  

Less: Comprehensive (income) loss attributable to redeemable noncontrolling interests

    8       (3 )     25       (6 )

Comprehensive income (loss) attributable to the parent company

  $ 57     $ 85     $ (154 )   $ 509  

 

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)

 

   

September 30,

   

December 31,

 
   

2020

   

2019

 

Assets

               

Current assets

               
Cash and cash equivalents   $ 956     $ 508  
Marketable securities     22       19  

Accounts receivable

               
Trade, less allowance for doubtful accounts of $7 in 2020 and $9 in 2019     1,239       1,103  
Other     171       202  
Inventories     1,087       1,193  
Other current assets     129       137  

Total current assets

    3,604       3,162  
Goodwill     458       493  
Intangibles     235       240  
Deferred tax assets     594       580  
Other noncurrent assets     126       120  
Investments in affiliates     174       182  
Operating lease assets     177       178  
Property, plant and equipment, net     2,154       2,265  

Total assets

  $ 7,522     $ 7,220  
                 

Liabilities and equity

               

Current liabilities

               
Short-term debt   $ 12     $ 14  
Current portion of long-term debt     35       20  
Accounts payable     1,187       1,255  
Accrued payroll and employee benefits     193       206  
Taxes on income     59       46  
Current portion of operating lease liabilities     43       42  
Other accrued liabilities     308       262  

Total current liabilities

    1,837       1,845  
Long-term debt, less debt issuance costs of $31 in 2020 and $28 in 2019     2,839       2,336  
Noncurrent operating lease liabilities     141       140  
Pension and postretirement obligations     457       459  
Other noncurrent liabilities     303       305  

Total liabilities

    5,577       5,085  

Commitments and contingencies (Note 13)

                 
Redeemable noncontrolling interests     152       167  

Parent company stockholders' equity

               
Preferred stock, 50,000,000 shares authorized, $0.01 par value, no shares outstanding            
Common stock, 450,000,000 shares authorized, $0.01 par value, 144,491,212 and 143,942,539 shares outstanding     2       2  
Additional paid-in capital     2,392       2,386  
Retained earnings     535       622  
Treasury stock, at cost (10,437,276 and 10,111,191 shares)     (156 )     (150 )
Accumulated other comprehensive loss     (1,070 )     (987 )

Total parent company stockholders' equity

    1,703       1,873  
Noncontrolling interests     90       95  

Total equity

    1,793       1,968  

Total liabilities and equity

  $ 7,522     $ 7,220  

 

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

 

 

 

Dana Incorporated

Consolidated Statement of Cash Flows (Unaudited)

(In millions)

 

   

Nine Months Ended

 
   

September 30,

 
   

2020

   

2019

 

Operating activities

               

Net income (loss)

  $ (90 )   $ 147  
Depreciation     257       235  
Amortization     15       12  
Amortization of deferred financing charges     6       5  
Write-off of deferred financing costs     5        
Earnings of affiliates, net of dividends received     5       (3 )
Stock compensation expense     5       15  
Deferred income taxes     (28 )     (120 )
Pension expense, net     3       207  
Impairment of goodwill     51          
Change in working capital     (50 )     (197 )
Other, net     16       (13 )

Net cash provided by operating activities

    195       288  

Investing activities

               
Purchases of property, plant and equipment     (181 )     (298 )
Acquisition of businesses, net of cash acquired     (6 )     (666 )
Purchases of marketable securities     (36 )     (24 )
Proceeds from sales and maturities of marketable securities     32       25  
Settlements of undesignated derivatives     (5 )     (20 )
Other, net     3       (12 )

Net cash used in investing activities

    (193 )     (995 )

Financing activities

               
Net change in short-term debt     (2 )     92  
Proceeds from long-term debt     512       675  
Repayment of long-term debt     (12 )     (121 )
Deferred financing payments     (13 )     (16 )
Dividends paid to common stockholders     (15 )     (43 )
Distributions to noncontrolling interests     (10 )     (14 )
Sale of interest to noncontrolling shareholder           53  
Contributions from noncontrolling interests     10       4  
Payments to acquire noncontrolling interests     (1 )      
Repurchases of common stock           (25 )
Other, net     (3 )      

Net cash provided by financing activities

    466       605  

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

    468       (102 )
Cash, cash equivalents and restricted cash – beginning of period     518       520  
Effect of exchange rate changes on cash balances     (20 )     (6 )

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

  $ 966     $ 412  
                 

Non-cash investing activity

               
Purchases of property, plant and equipment held in accounts payable   $ 54     $ 79  

 

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.

Financing Agreements

 

 

12.

Fair Value Measurements and Derivatives

 

 

13.

Commitments and Contingencies

 

 

14.

Warranty Obligations

 

 

15.

Income Taxes

 

 

16.

Other Income (Expense), Net

 

 

17.

Revenue from Contracts with Customers

 

 

18.

Segments

 

 

19.

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, 2019 (the 2019 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 million impairment charge recorded for the Commercial Vehicle reporting unit during the quarter ended March 31, 2020, $20 million 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 is not required. In accordance with ASC Topic 250, "Accounting Changes and Error Corrections," we have corrected the error in the prior period by revising the year-to-date consolidated financial statements appearing herein. The first quarter of 2020 not presented herein will be revised, as applicable, in future filings. 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.

 

   

Three Months Ended March 31,

 
   

2020

 
    As Previously Reported    

Adjustment

   

As Revised

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

Less: Noncontrolling interests net income

    2             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 )   $     $ (84 )
Less: Comprehensive loss attributable to noncontrolling interests     17             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  

 

8

 

Recently adopted accounting pronouncements

 

On January 1, 2020, we adopted Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, using the modified retrospective approach and an application date of January 1, 2020. This guidance introduces a new approach to estimating credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The adoption resulted in a noncash cumulative effect adjustment to retained earnings on our opening consolidated balance sheet as of January 1, 2020. 

 

We also adopted the following standard during the first nine months of 2020, which did not have a material impact on our financial statements or financial statement disclosures:

 

Standard

 

Effective Date

2018-15

 

Intangibles – Goodwill and Other – Internal-Use Software, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

 

January 1, 2020

2018-14   Compensation – Retirement Benefits – Defined Benefit Plans – General, Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans   January 1, 2020
2018-13   Fair Value Measurement, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement   January 1, 2020

 

Recently issued accounting pronouncements

 

In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance is intended to provide temporary optional expedients and exceptions to the US 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 this ASU are elective and are effective upon issuance for all entities through December 31, 2022. We are currently assessing the impact of this guidance on our consolidated financial statements.

 

In December 2019, the FASB issued 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. This guidance becomes effective January 1, 2021 and early adoption is permitted. Adoption of this guidance requires certain changes to primarily be made prospectively, with some changes to be made retrospectively. We are currently assessing the impact of this guidance on our consolidated financial statements.

 

 

 

Note 2. Acquisitions

 

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 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.

 

9

 

Nordresa — On August 26, 2019, we acquired a 100% ownership interest in Nordresa 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 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.

 

Hydro-Québec Relationship — On July 29, 2019, we broadened our relationship with Hydro-Québec, with Hydro-Québec acquiring an indirect 45% redeemable noncontrolling interest in S.M.E. S.p.A. (SME) and increasing its existing indirect 22.5% noncontrolling interest in Prestolite E-Propulsion Systems (Beijing) Limited (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 Note 7 for additional information. See below for a discussion of Dana's acquisitions of PEPS and SME. 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.

 

Prestolite E-Propulsion Systems (Beijing) Limited — On June 6, 2019, we acquired Prestolite Electric Beijing Limited's (PEBL) 50% ownership interest in 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 in China, 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. See Hydro-Québec relationship discussion above for details of subsequent changes in our ownership interest in PEPS.

 

We paid $50 at closing using cash on hand. The purchase consideration and related allocation to the acquisition date fair values of the assets acquired and liabilities assumed are presented in the following table:

 

Purchase consideration paid at closing

  $ 50  

Fair value of previously held equity method investment

    45  

Total purchase consideration

  $ 95  
         

Cash and cash equivalents

  $ 2  

Accounts receivable - Trade

    17  

Inventories

    9  

Goodwill

    63  
Intangibles     10  

Property, plant and equipment

    2  

Accounts payable

    (4 )

Other accrued liabilities

    (3 )
Other noncurrent liabilities     (1 )

Total purchase consideration allocation

  $ 95  

 

Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce and is not deductible for tax purposes. We used a combination of the discounted cash flow method, an income approach, and the guideline public company method, a market approach, to value our previously held equity method investment in PEPS. The fair value assigned to intangibles includes $10 allocated to customer relationships. We used the multi-period excess earnings method, an income approach, to value customer relationships. The customer relationships intangible asset is being amortized on a straight-line basis over seven years.

 

The results of operations of the business are reported in our Commercial Vehicle operating segment from the date of acquisition. 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. PEPS had an insignificant impact on our consolidated results of operations during 2019.

 

Oerlikon Drive Systems — On February 28, 2019, we acquired a 100% ownership interest in the Oerlikon Drive Systems (ODS) segment of the Oerlikon 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. The acquisition of ODS is expected to deliver significant long-term value by accelerating our commitment to vehicle electrification and strengthening the technology portfolio for each of our end markets while further expanding and balancing the manufacturing presence of our off-highway business in key geographical markets.

 

10

 

We paid $626 at closing which was funded primarily through debt proceeds. See Note 11 for additional information. The purchase consideration and related allocation to the acquisition date fair values of the assets acquired and liabilities assumed are presented in the following table:

 

Purchase consideration paid at closing

  $ 626  

Less purchase consideration to be recovered for indemnified matters

    (11 )

Total purchase consideration

  $ 615  
         

Cash and cash equivalents

  $ 76  

Accounts receivable - Trade

    150  

Accounts receivable - Other

    15  

Inventories

    190  

Other current assets

    16  

Goodwill

    94  

Intangibles

    58  

Deferred tax assets

    24  

Other noncurrent assets

    2  

Investments in affiliates

    7  
Operating lease assets     4  

Property, plant and equipment

    333  

Current portion of long-term debt

    (2 )

Accounts payable

    (151 )

Accrued payroll and employee benefits

    (37 )
Current portion of operating lease liabilities     (1 )
Taxes on income     (5 )

Other accrued liabilities

    (61 )

Long-term debt

    (8 )

Pension and postretirement obligations

    (49 )
Noncurrent operating lease liabilities     (2 )

Other noncurrent liabilities

    (30 )

Noncontrolling interests

    (8 )

Total purchase consideration allocation

  $ 615  

 

Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce and is not deductible for tax purposes. The fair values assigned to intangibles includes $11 allocated to developed technology, $13 allocated to trademarks and trade names and $34 allocated to customer relationships. Various valuation techniques were used to determine the fair value of the intangible  assets, with the primary techniques being forms of the income approach, specifically, the relief from-royalty and excess earnings valuation methods, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, we are required to make estimates and assumptions about sales, operating margins, growth rates, customer attrition rates, royalty rates and discount rates based on anticipated future cash flows and marketplace data. We used a replacement cost method to value fixed assets. The developed technology, trademarks and trade names and customer relationship intangible assets are being amortized on a straight-line basis over seven, ten and twelve years, respectively. Property, plant and equipment is being depreciated on a straight-line basis over useful lives ranging from three to twenty-five years.

 

The results of operations of the business are primarily reported in our Off-Highway and Commercial Vehicle operating segments. Transaction related expenses associated with completion of the acquisition totaling $13 in 2019 were charged to other income (expense), net. During 2019, the business contributed sales of $630.

 

The following unaudited pro forma information has been prepared as if the ODS acquisition and the related debt financing had occurred on January 1, 2018.

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30, 2019

   

September 30, 2019

 

Net sales

  $ 2,164     $ 6,778  

Net income

  $ 115     $ 182  

 

The unaudited pro forma results include adjustments primarily related to purchase accounting, interest expense related to the debt proceeds used in connection with the acquisition of ODS, and non-recurring strategic transaction expenses. The unaudited pro forma financial information is not indicative of the operational results that would have been obtained had the transactions actually occurred as of that date, nor is it necessarily indicative of Dana’s future operational results.

 

SME — On January 11, 2019, we acquired a 100% ownership interest in 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. See Hydro-Québec relationship discussion above for details of subsequent changes in our ownership interest in SME.

 

11

 

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%. The purchase consideration and the related allocation to the acquisition date fair values of the assets acquired and liabilities assumed are presented in the following table:

 

Total purchase consideration

  $ 88  
         

Accounts receivable - Trade

  $ 4  

Accounts receivable - Other

    1  

Inventories

    8  

Goodwill

    68  

Intangibles

    24  

Property, plant and equipment

    5  

Short-term debt

    (8 )

Accounts payable

    (6 )

Accrued payroll and employee benefits

    (1 )

Other accrued liabilities

    (1 )

Other noncurrent liabilities

    (6 )

Total purchase consideration allocation

  $ 88  

 

Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce and is not deductible for tax purposes. The fair values assigned to intangibles include $15 allocated to developed technology and $9 allocated to customer relationships. We used the relief from royalty method, an income approach, to value developed technology. We used the multi-period excess earnings method, an income approach, to value customer relationships. We used a replacement cost method to value fixed assets. The developed technology and customer relationship intangible assets are being amortized on a straight-line basis over twelve and ten years, respectively, and property, plant and equipment is being depreciated on a straight-line basis over useful lives ranging from one to twenty years.

 

The results of operations of the business are reported in our Off-Highway operating segment from the date of acquisition. 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. During 2019, the business contributed sales of $21.

 

 

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. We completed numerous acquisitions in 2018 and 2019 that are included in our Commercial Vehicle and Off-Highway reporting units. These acquisitions were recorded on the balance sheet at their estimated acquisition date fair values and therefore had no cushion of fair value over their carrying value. As a result of the effect of the 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.

 

As discussed in our 2019 Form 10-K, we estimate the fair value of the reporting units using various valuation methodologies, including discounted cash flow projections and multiples of current earnings. 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 gross margins, discount rates, terminal growth rates, and exit earnings multiples. If the estimated fair value of the reporting unit exceeds its carrying value, the goodwill is considered not impaired. If the carrying value of the reporting unit exceeds its estimated fair value, a goodwill impairment charge is recorded for the difference, with the impairment loss limited to the total amount of goodwill allocated to that reporting unit.

 

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. Our testing for the Off-Highway reporting unit indicated that fair value slightly exceeded carrying value and, accordingly, no impairment charge was required. The reduction in fair values, and the corresponding impairment charges, were primarily driven by the negative effect of the COVID-19 pandemic on each reporting unit’s near-term cash flows. The remaining balance of goodwill for the Commercial Vehicle and Off-Highway reporting units continues to be at risk for impairment. New shutdowns due to the COVID-19 pandemic or a significant reduction in demand caused by decreased consumer confidence and spending following the pandemic may result in the need to recognize an additional impairment charge in the Commercial Vehicle or Off-Highway reporting units.

 

The remaining change in the carrying amount of goodwill in 2020 is primarily due to the acquisition of Ashwoods, measurement period adjustments for the Nordresa acquisition and currency fluctuation. See Note 2 for additional information on recent acquisitions.

 

12

 

Changes in the carrying amount of goodwill by segment — 

 

   

Light Vehicle

   

Commercial Vehicle

   

Off-Highway

   

Power Technologies

   

Total

 

Balance, December 31, 2019

  $ 3     $ 228     $ 262     $     $ 493  
Acquisitions             (5 )     23               18  
Impairment     (3 )     (48 )                     (51 )
Currency impact             (6 )     4               (2 )

Balance, September 30, 2020

  $     $ 169     $ 289     $     $ 458  

 

Components of other intangible assets — 

 

         

September 30, 2020

   

December 31, 2019

 
   

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     $ 143     $ (99 )   $ 44     $ 133     $ (94 )   $ 39  

Trademarks and trade names

  13       30       (8 )     22       30       (6 )     24  

Customer relationships

  8       515       (421 )     94       509       (407 )     102  

Non-amortizable intangible assets

                                                     

Trademarks and trade names

          75               75       75               75  
          $ 763     $ (528 )   $ 235     $ 747     $ (507 )   $ 240  

 

 

The net carrying amounts of intangible assets, other than goodwill, attributable to each of our operating segments at  September 30, 2020 were as follows: Light Vehicle — $23, Commercial Vehicle — $67, Off-Highway — $138 and Power Technologies — $7.

 

Amortization expense related to amortizable intangible assets — 

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Charged to cost of sales

  $ 2     $ 2     $ 5     $ 4  

Charged to amortization of intangibles

    4       2       10       8  

Total amortization

  $ 6     $ 4     $ 15     $ 12  

 

The following table provides the estimated aggregate pre-tax amortization expense related to intangible assets for each of the next five years based on September 30, 2020 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 2020

   

2021

   

2022

   

2023

   

2024

 

Amortization expense

  $ 5     $ 19     $ 19     $ 19     $ 18  

 

13

 
 

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 $2 and $5 in the third quarters of 2020 and 2019 and $21 and $23 in the nine months ended September 30 of 2020 and 2019 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, June 30, 2020

  $ 23     $     $ 23  

Charges to restructuring

    1       1       2  
Adjustments of accruals                        

Cash payments

    (3 )     (1 )     (4 )

Balance, September 30, 2020

  $ 21     $     $ 21  
                         

Balance, December 31, 2019

  $ 13     $ 1     $ 14  

Charges to restructuring

    19       3       22  

Adjustments of accruals

    (1 )             (1 )

Cash payments

    (10 )     (4 )     (14 )

Balance, September 30, 2020

  $ 21     $     $ 21  

 

At September 30, 2020, the accrued employee termination benefits include costs to reduce approximately 400 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 September 30, 2020.

 

   

Expense Recognized

         
   

Prior to 2020

   

2020

   

Total to Date

   

Future Cost to Complete

 

Commercial Vehicle

  $ 39     $ 1     $ 40     $ 3  
Power Technologies   $     $ 1     $ 1     $ 1  

 

The future cost to complete includes estimated separation costs, primarily those associated with one-time benefit programs, and exit costs through 2021, equipment transfers and other costs which are required to be recognized as closures are finalized or as incurred during the closure.

 

 

Note 5. Supplemental Balance Sheet and Cash Flow Information

 

Inventory components at

 

   

September 30, 2020

   

December 31, 2019

 
Raw materials   $ 471     $ 470  
Work in process and finished goods     693       787  
Inventory reserves     (77 )     (64 )

Total

  $ 1,087     $ 1,193  

 

Cash, cash equivalents and restricted cash at —

 

   

September 30, 2020

   

December 31, 2019

   

September 30, 2019

   

December 31, 2018

 
Cash and cash equivalents   $ 956     $ 508     $ 402     $ 510  
Restricted cash included in other current assets     7       6       7       7  
Restricted cash included in other noncurrent assets     3       4       3       3  

Total cash, cash equivalents and restricted cash

  $ 966     $ 518     $ 412     $ 520  

 

14

 
 

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 2020. 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 December 11, 2019 our Board of Directors approved an extension of our existing common stock share repurchase program through December 31, 2021. Approximately $150 remained available for future share repurchases as of September 30, 2020.

 

Changes in equity

 

   

Three Months Ended September 30,

 

2020

 

Common Stock

   

Additional Paid-In Capital

   

Retained Earnings

   

Treasury Stock

   

Accumulated Other Comprehensive Loss

   

Non-controlling Interests

   

Total Equity

 

Balance, June 30, 2020

  $ 2     $ 2,390     $ 490     $ (156 )   $ (1,082 )   $ 76     $ 1,720  

Net income

                    45                       4       49  

Other comprehensive income

                                    12       11       23  

Distributions to noncontrolling interests

                                            (2 )     (2 )
Purchase of noncontrolling interests                                           1       1  

Stock compensation

            2                                       2  

Balance, September 30, 2020

  $ 2     $ 2,392     $ 535     $ (156 )   $ (1,070 )   $ 90     $ 1,793  
                                                         

2019

                                                       

Balance, June 30, 2019

  $ 2     $ 2,376     $ 456     $ (150 )   $ (968 )   $ 98     $ 1,814  

Net income

                    111                       3       114  

Other comprehensive loss

                                    (26 )     (12 )     (38 )

Common stock dividends

                    (15 )                             (15 )

Distributions to noncontrolling interests

                                            (2 )     (2 )

Stock compensation

            5                                       5  

Balance, September 30, 2019

  $ 2     $ 2,381     $ 552     $ (150 )   $ (994 )   $ 87     $ 1,878  

 

   

Nine Months Ended September 30,

 

2020

 

Common Stock

   

Additional Paid-In Capital

   

Retained Earnings

   

Treasury Stock

   

Accumulated Other Comprehensive Loss

   

Non-controlling Interests

   

Total Equity

 

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 (loss)                     (71 )                     6       (65 )
Other comprehensive income (loss)                                     (83 )     1       (82 )
Common stock dividends                     (15 )                             (15 )
Distributions to noncontrolling interests                                             (10 )     (10 )
Purchase of noncontrolling interests             1                               (2 )     (1 )
Stock compensation             5                                       5  
Stock withheld for employee taxes                             (6 )                     (6 )

Balance, September 30, 2020

  $ 2     $ 2,392     $ 535     $ (156 )   $ (1,070 )   $ 90     $ 1,793  
                                                         

2019

                                                       

Balance, December 31, 2018

  $ 2     $ 2,368     $ 456     $ (119 )   $ (1,362 )   $ 97     $ 1,442  
Adoption of ASU 2016-02 leases, January 1, 2019                     (1 )                             (1 )
Net income                     141                       9       150  
Other comprehensive income (loss)                                     368       (13 )     355  
Common stock dividends                     (44 )                             (44 )
Distributions to noncontrolling interests                                             (14 )     (14 )
Increase from business combination                                             8       8  
Common stock share repurchases                             (25 )                     (25 )
Stock compensation             13                                       13  
Stock withheld for employee taxes                             (6 )                     (6 )

Balance, September 30, 2019

  $ 2     $ 2,381     $ 552     $ (150 )   $ (994 )   $ 87     $ 1,878  

 

15

 

Changes in each component of accumulated other comprehensive income (AOCI) of the parent

 

   

Parent Company Stockholders

 
   

Foreign Currency Translation

   

Hedging

   

Defined Benefit Plans

   

Accumulated Other Comprehensive Loss

 

Balance, June 30, 2020

  $ (855 )   $ 9     $ (236 )   $ (1,082 )

Other comprehensive income (loss):

                               

Currency translation adjustments

    7                       7  

Holding gains and losses

            (51 )             (51 )

Reclassification of amount to net income (a)

            52               52  

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

                    5       5  

Tax expense

                    (1 )     (1 )

Other comprehensive income

    7       1       4       12  

Balance, September 30, 2020

  $ (848 )   $ 10     $ (232 )   $ (1,070 )
                                 

Balance, June 30, 2019

  $ (694 )   $ (47 )   $ (227 )   $ (968 )

Other comprehensive income (loss):

                               

Currency translation adjustments

    (39 )                     (39 )

Holding gains and losses

            57               57  

Reclassification of amount to net income (a)

            (49 )             (49 )

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

                    6       6  

Tax expense

                    (1 )     (1 )

Other comprehensive income (loss)

    (39 )     8       5       (26 )

Balance, September 30, 2019

  $ (733 )   $ (39 )   $ (222 )   $ (994 )

 

 

   

Parent Company Stockholders

 
   

Foreign Currency Translation

   

Hedging

   

Defined Benefit Plans

   

Accumulated Other Comprehensive Loss

 

Balance, December 31, 2019

  $ (714 )   $ (30 )   $ (243 )   $ (987 )

Other comprehensive income (loss):

                               

Currency translation adjustments

    (134 )                     (134 )

Holding gains and losses

            (29 )             (29 )

Reclassification of amount to net income (a)

            68               68  

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

                    15       15  

Tax (expense) benefit

          1       (4 )     (3 )

Other comprehensive income (loss)

    (134 )     40       11       (83 )

Balance, September 30, 2020

  $ (848 )   $ 10     $ (232 )   $ (1,070 )
                                 

Balance, December 31, 2018

  $ (721 )   $ (54 )   $ (587 )   $ (1,362 )

Other comprehensive income (loss):

                               

Currency translation adjustments

    (12 )                     (12 )

Holding gains and losses

            77               77  

Reclassification of amount to net income (a)

            (62 )             (62 )

Net actuarial gains

                    104       104  

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

                    282       282  

Tax expense

                    (21 )     (21 )

Other comprehensive income (loss)

    (12 )     15       365       368  

Balance, September 30, 2019

  $ (733 )   $ (39 )   $ (222 )   $ (994 )

(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 12 for additional details.

(b) See Note 10 for additional details.

 

16

 
 

Note 7. Redeemable Noncontrolling Interests

 

In connection with the acquisition of a controlling financial interest in TM4 from Hydro-Québec on June 22, 2018, we recognized $102 for Hydro-Québec's 45% redeemable noncontrolling interest in TM4. On July 29, 2019, we broadened our relationship with Hydro-Québec, with Hydro-Québec acquiring an indirect 45% redeemable noncontrolling interest in SME and an additional indirect 22.5% redeemable noncontrolling interest in PEPS which resulted in recognition of additional redeemable noncontrolling interest of $64. On  April 14, 2020, Hydro-Québec acquired an indirect 45% redeemable noncontrolling interest in Ashwoods which resulted in recognition of additional redeemable noncontrolling interest of $7. The terms of the agreement provide Hydro-Québec with the right to put all, and not less than all, of its ownership interests in TM4, SME, PEPS and Ashwoods 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. 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

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Balance, beginning of period

  $ 159     $ 105     $ 167     $ 100  

Capital contribution from redeemable noncontrolling interest

    1       2       10       4  
Sale of redeemable noncontrolling interest           64             64  

Comprehensive income (loss) adjustments:

                               
Net loss attributable to redeemable noncontrolling interests     (4 )     (2 )     (25 )     (3 )
Other comprehensive income (loss) attributable to redeemable noncontrolling interests     (4 )     5             9  

Balance, end of period

  $ 152     $ 174     $ 152     $ 174  

 

 

Note 8. Earnings per Share

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income (loss) available to common stockholders - Numerator basic and diluted

  $ 45     $ 111     $ (71 )   $ 141  
                                 

Denominator:

                               
Weighted-average common shares outstanding - Basic     144.5       144.0       144.4       144.0  
Employee compensation-related shares, including stock options     0.7       0.8             0.8  

Weighted-average common shares outstanding - Diluted

    145.2       144.8       144.4       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 1.6 million and 0.6 million CSEs from the calculation of diluted earnings per share for the third quarters of 2020 and 2019 and excluded 1.3 million and 0.2 million of CSEs for the respective year-to-date periods as the effect of including them would have been anti-dilutive. In addition, we excluded CSEs that satisfied the definition of potentially dilutive shares of 0.5 million for the year-to-date 2020 period since there was no net income available to common stockholders for these periods.

 

 

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 2020

 

   

Granted

   

Grant Date

 
   

(In millions)

   

Fair Value*

 

RSUs

    1.2     $ 15.50  

PSUs

    0.5     $ 14.42  

* 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 margin targets and specified free cash flow targets, with an even distribution between the two targets. 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.

 

We paid $1 of cash to settle RSUs. We issued 0.5 million and 0.3 million shares of common stock based on the vesting of RSUs and PSUs during 2020. We recognized stock compensation expense of $2 and $5 during the third quarters of 2020 and 2019 and expense of $5 and $15 during the respective year-to-date periods. At September 30, 2020, the total unrecognized compensation cost related to the nonvested awards granted and expected to vest was $20. This cost is expected to be recognized over a weighted-average period of 1.9 years.

 

17

 
 

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 — 

 

   

Pension

   

OPEB

 
   

2020

   

2019

   

2020

   

2019

 

Three Months Ended September 30,

 

U.S.

   

Non-U.S.

   

U.S.

   

Non-U.S.

   

U.S.

   

Non-U.S.

   

Non-U.S.

 

Interest cost

  $ 6     $ 1     $ 7     $ 1     $     $ 1     $ 1  

Expected return on plan assets

    (9 )     (1 )     (10 )                                

Service cost

            2               2                          
Settlement charge                             2                          

Amortization of net actuarial loss

    2       3       3       2                          

Net periodic benefit cost

  $ (1 )   $ 5     $     $ 7     $     $ 1     $ 1  
                                                         

Nine Months Ended September 30,

                                                       

Interest cost

  $ 16     $ 4     $ 33     $ 5     $     $ 2     $ 2  
Expected return on plan assets     (26 )     (3 )     (42 )     (2 )                        
Service cost             6               6