Dana Incorporated: FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. Dana supplies driveline, motion, electrification, sealing and thermal-management products to light-vehicle, commercial-vehicle and off-highway markets, as well as industrial customers. The filing also reports unaudited fourth-quarter results.
Financial performance
| Metric (USD millions, except per-share data) | 2019 | 2018 |
|---|---|---|
| Net sales | $8,620 | $8,143 |
| Gross margin | $1,131; 13.1% | $1,157; 14.2% |
| Earnings before interest and taxes | $292 | $579 |
| Net income | $233 | $440 |
| Net income attributable to Dana; diluted EPS | $226; $1.56 | $427; $2.91 |
| Adjusted EBITDA (non-GAAP) | $1,019; 11.8% of sales | $957; 11.8% of sales |
| Operating cash flow | $637 | $568 |
| Capital expenditures | $426 | $325 |
| Adjusted free cash flow (non-GAAP) | $272 | $243 |
Sales rose 6%, but the increase was attributable to $654 of net acquisition sales; organic sales were essentially flat, while foreign exchange reduced sales by $177. Cost of sales rose faster than sales, reducing gross margin by 110 basis points. Adjusted EBITDA increased, with margin unchanged. Dana recorded a $259 pension-settlement charge and a $135 benefit from net discrete tax items; these unusual items materially affected reported earnings.
Segment sales and EBITDA: Light Vehicle $3,609 and $438; Commercial Vehicle $1,611 and $138; Off-Highway $2,360 and $330; Power Technologies $1,040 and $117. Off-Highway sales included substantial acquired-business contribution, while Power Technologies sales and EBITDA declined.
Fourth quarter: Sales were $1,987 versus $1,973 in Q4 2018; gross margin was $223 versus $256; net income was $86 versus $106; and diluted EPS was $0.58 versus $0.69. Q4 2019 included a $6 goodwill impairment and a $9 debt-extinguishment loss.
Debt and liquidity
At year-end, cash and cash equivalents were $508 and marketable securities $19. Reported total debt obligations were approximately $2,398; balance-sheet debt, net of issuance costs, was $2,370. The company reported total liquidity of $1,501, including $979 of unused revolving-credit availability. Current assets were $3,162 and current liabilities $1,845. Dana said it was in compliance with financing covenants and expected available liquidity and operating cash flow to meet anticipated needs for the next 12 months. Debt increased principally to fund the Oerlikon Drive Systems acquisition.
Material changes, outlook and risks
- 2019 acquisitions included Oerlikon Drive Systems (ODS), SME, PEPS and Nordresa. ODS contributed $630 of 2019 sales and $87 of adjusted EBITDA. These acquisitions expanded Dana’s off-highway and electrification capabilities.
- 2020 outlook: sales of $8.25–$8.75 billion; adjusted EBITDA of $950–$1,050 million, with an expected 11.8% margin; operating cash flow of approximately 9% of sales; capital spending of approximately 4.5% of sales; and adjusted free cash flow of 4.0%–4.5% of sales. Management also discussed adjusted free cash flow of approximately $375 million.
- Management expected weaker global markets, particularly a sharp decline in North American heavy-truck production, softer off-highway demand and contraction in parts of Asia. New-business backlog was $700 million for 2020–2022, with $350 million expected to be realized in 2020. Currency was expected to remain a modest headwind.
- Principal risks include vehicle-market cyclicality and downturns; reliance on major OEM customers (Ford represented about 20% of sales and FCA about 11%); commodity and tariff costs; supplier disruptions; foreign-exchange exposure; execution and integration of acquisitions; product warranty, liability and recall claims; pension funding; and risks from technological change and electrification. The filing noted that the potential effect of the coronavirus outbreak on results was uncertain.
- Other notable matters: Dana terminated certain U.S. and Canadian defined-benefit pension plans, recording the settlement charge and reducing unfunded obligations; Hydro-Québec holds put rights over interests in TM4, SME and PEPS exercisable after June 2021. Management reported effective disclosure controls and internal control over financial reporting; acquired businesses were excluded from the 2019 internal-control assessment and are expected to be included in 2020.
Most important facts for investors to verify
- How much of reported sales and EBITDA growth reflects acquisitions versus organic performance, and whether ODS synergies are being realized.
- Whether the 2020 market, sales, margin and cash-flow assumptions were achieved, particularly given heavy-truck and off-highway weakness.
- Debt reduction, interest expense, covenant headroom and the effect of floating-rate borrowings on financing costs.
- The recurring earnings and cash-tax implications of discrete tax benefits, pension actions and other unusual items.
- Integration and internal-control progress at acquired businesses, as well as potential obligations arising from Hydro-Québec’s put rights.