Dana Incorporated — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Dana is a global supplier of driveline, sealing, thermal-management and fluid-power products to vehicle, engine and industrial markets. Financial amounts are in U.S. dollars, millions, except per-share data.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,701 | $1,449 |
| Gross margin | $263; 15.5% | $199; 13.7% |
| Income before interest and taxes | $129 | $96 |
| Net income attributable to Dana | $75; diluted EPS $0.51 | $45; diluted EPS $0.30 |
| Adjusted EBITDA (non-GAAP) | $205 | $148 |
| Operating cash flow | $11 | $(27) |
| Free cash flow (non-GAAP) | $(85) | $(98) |
Sales increased 17% year over year. Acquisitions contributed a net $80 to the increase, organic growth contributed $178, and currency translation reduced sales by $6. Gross margin improved 1.8 percentage points, principally from higher production and cost absorption and material savings. Net income included $5 of equity earnings from affiliates; interest expense remained $27.
Operating cash flow benefited from higher earnings but was substantially offset by a $133 working-capital outflow, including increased receivables. Capital spending was $96. Cash and equivalents were $423 at quarter-end, down from $707 at December 31, 2016. Total debt on the balance sheet was approximately $1,836, including current debt; long-term debt was $1,623. Reported total liquidity was $925, including $417 available cash, $477 of revolver availability and $31 of marketable securities. Dana had no revolver borrowings and was in covenant compliance.
Segments and material changes
| Segment | Sales, 2017 vs. 2016 | Segment EBITDA, 2017 vs. 2016 |
|---|---|---|
| Light Vehicle | $761 vs. $613 | $89 vs. $58 |
| Commercial Vehicle | $329 vs. $333 | $28 vs. $26 |
| Off-Highway | $328 vs. $241 | $45 vs. $32 |
| Power Technologies | $283 vs. $262 | $50 vs. $35 |
Growth was strongest in Light Vehicle, supported by higher light-truck production and new programs. Commercial Vehicle sales were affected by a steep decline in North American Class 8 production, partly offset by performance improvements. Off-Highway benefited from stronger demand and the Brevini acquisition. Segment EBITDA totaled $212, up from $151; segment EBITDA is a non-GAAP measure and differs from consolidated adjusted EBITDA.
During the quarter Dana acquired 80% of Brevini Fluid Power and Brevini Power Transmission for $181 cash consideration and acquired USM-Warren for $104, including settlement of $25 in trade payables. Brevini contributed $69 in sales and a $2 net loss; USM-Warren contributed $11 in sales. Dana also assumed debt in the Brevini transaction. Purchase-price allocations remain preliminary.
Outlook, commentary and risks
- Full-year 2017 guidance was maintained at sales of $6.2–$6.4 billion, adjusted EBITDA of $695–$725 million, operating cash flow of $410–$450 million, capital spending of $350–$370 million and free cash flow of $50–$90 million. Management expected sales and adjusted EBITDA near the upper ends of their ranges, but free cash flow nearer the low end.
- The 2017 outlook includes estimated Brevini sales of approximately $350 million and adjusted EBITDA of $35 million, and USM-Warren sales of approximately $75 million and adjusted EBITDA of $15 million. These are management expectations, not reported results.
- Management expected currency translation to reduce 2017 sales by approximately $75 million. Exposure includes the euro, Brazilian real, Mexican peso and British pound; Brexit and potential U.S. trade-policy changes add uncertainty.
- Market risks include softer North American light-vehicle demand after several strong years, depressed heavy-truck production, uneven global markets and continued weakness or volatility in Brazil. Commodity-price changes can affect costs, and customer price recoveries may lag.
- Subsequent to quarter-end, Dana issued $400 million of 5.75% notes due 2025, receiving $394 million net proceeds, to refinance subsidiary debt and redeem $100 million of 2021 notes. The redemption resulted in a $5 million extinguishment loss to be recorded in April.
- Dana reported no material changes to its previously disclosed risk factors. It considered pending legal matters unlikely to materially affect liquidity, financial condition or results. Accrued product-liability and environmental costs were $4 million and $7 million, respectively; Dana also guarantees certain facility leases through 2025.
- Adoption of new intra-entity tax-transfer guidance reduced retained earnings by $179 million at January 1, 2017 through a write-off of tax assets; this was an opening-equity adjustment, not a Q1 operating expense.
Investor verification priorities
- Track working-capital needs, cash conversion and the effect of elevated capital spending on the full-year free-cash-flow target.
- Verify Brevini and USM-Warren integration, contribution to earnings and cash flow, and final purchase accounting; assess the Brevini assumed debt and remaining 20% put/call arrangements.
- Monitor the refinancing’s actual debt-repayment effects, interest costs, maturities and compliance with covenants.
- Compare market demand, currency movements and commodity costs with management’s 2017 assumptions and guidance.
- Distinguish GAAP results from adjusted EBITDA, segment EBITDA and free cash flow, which are non-GAAP measures.