Dana Incorporated — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in millions, except per-share data. Dana supplies driveline, sealing, thermal-management, and electrification technologies to vehicle and industrial markets.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $2,054 | $1,840 | $4,192 | $3,541 |
| Gross margin | $308; 15.0% | $277; 15.1% | $615; 14.7% | $541; 15.3% |
| Net income attributable to parent | $124 | $71 | $232 | $146 |
| Diluted EPS | $0.85 | $0.47 | $1.58 | $0.99 |
| Adjusted EBITDA | $246 | $217 | $494 | $422 |
| Operating cash flow | $141 | $169 | $113 | $180 |
| Free cash flow | $61 | $96 | $(32) | $11 |
Revenue increased 12% in Q2 and 18% in the first half. First-half organic sales growth was 14%; currency added $110 and acquisitions net of divestitures added $56. Adjusted EBITDA is a non-GAAP measure. First-half operating cash flow fell as working capital used $232, versus $104 a year earlier; property, plant and equipment purchases were $145.
At June 30, cash and cash equivalents were $339, marketable securities $37, and total liquidity $950, including $579 available under the revolver. Debt was approximately $1,809, including current debt; long-term debt net of issuance costs was $1,765. Dana reported compliance with its debt covenants and no revolver borrowings (with $21 used for letters of credit).
Changes, operating results, and unusual items
- Q2 operating earnings improved to $138 from $130; parent-attributable net income rose to $124 from $71. The comparison includes a Q2 2018 income-tax benefit and a nonrecurring impairment charge.
- Segment EBITDA improved in Commercial Vehicle ($41 vs. $30) and Off-Highway ($79 vs. $57); Light Vehicle was $92 vs. $93, and Power Technologies $39 vs. $41. Off-Highway benefited from stronger demand; Power Technologies faced program roll-offs and weaker passenger-car demand.
- Higher commodity prices reduced year-over-year earnings by about $24 in Q2 and $42 in the first half. Pricing and material-recovery actions partly offset the impact. Management also cited engineering costs, launch costs, premium freight, and manufacturing inefficiencies.
- Q2 included a $20 impairment of acquired in-process R&D after customers redirected development away from combustion-engine applications. The Brazil suspension-components disposal closed in July for $2 proceeds; Dana reversed $3 of a previously recorded loss in Q2.
- Q2 tax expense was a benefit of $4, including a $46 benefit from U.S. state-law changes and tax planning, partly offset by $7 of other tax expense. Excluding discrete items, the first-half effective tax rate was 31%, compared with the reported 16%.
- Dana acquired 55% of electric-drive supplier TM4 for $125 cash in June, consolidating the business and recording $102 of redeemable noncontrolling interest. The remaining interest is subject to a fair-value put right exercisable after June 22, 2021.
Outlook, commentary, and risks
Management maintained 2018 sales guidance of approximately $8.05 billion and adjusted EBITDA guidance of approximately $980 million. It expected adjusted EBITDA margin to exceed 12%, with improved performance in the second half. Full-year free cash flow guidance was about $280 million, or 3.5% of sales, and capital expenditures about 4% of sales. These are management estimates, not guarantees.
Management described generally stable-to-improving vehicle and off-highway markets, with strong North American heavy-truck demand and continued off-highway recovery. Risks cited include trade-policy uncertainty and potential tariffs, rising steel and aluminum costs, currency volatility, Brexit-related uncertainty, and demand changes across vehicle markets. Argentina was deemed highly inflationary; U.S.-dollar remeasurement of its operations began July 1, 2018. Dana expects sufficient liquidity for anticipated needs over the next 12 months, while noting that some non-U.S. cash faces repatriation restrictions.
Other matters include planned termination of a U.S. pension plan, subject to regulatory approval and market conditions, with settlement expected in the first half of 2019; ordinary-course legal proceedings; product-liability and environmental accruals; and a guarantee of certain divested-business leases through June 2025. Management said these contingencies were not expected to materially harm liquidity or results.
Important facts for investors to verify
- Whether second-half margins and the $980 million adjusted EBITDA target were achieved, given first-half cost pressures and weaker gross margin.
- Whether working-capital demands reverse and full-year free cash flow reaches the approximately $280 million outlook.
- How commodity prices, customer recovery actions, tariffs, and foreign-exchange movements affect costs and sales, including Argentina’s currency remeasurement.
- TM4’s integration, performance, provisional purchase accounting, and potential future put obligation.
- The timing and financial effects of the pension-plan termination and any material developments in legal, product-liability, or environmental matters.