DANA Inc annual report, FY2018

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Dana Incorporated (NYSE: DAN) — 2018 Form 10-K Summary

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; fourth-quarter figures are unaudited. Dana supplies driveline, sealing, thermal-management and fluid-power products to light-vehicle, commercial-vehicle and off-highway markets through four operating segments. It operated in 33 countries and employed approximately 30,900 people.

Financial performance

  • Revenue: Full-year sales were $8.143 billion, up $934 million (13%) from 2017. Organic growth was $861 million (12%); currency added $16 million and acquisitions, net of divestitures, added $57 million. Sales by segment: Light Vehicle $3.575 billion; Commercial Vehicle $1.612 billion; Off-Highway $1.844 billion; Power Technologies $1.112 billion.
  • Profit and margins: Net income was $440 million, with $427 million attributable to Dana’s parent company, versus $116 million and $111 million, respectively, in 2017. Diluted EPS was $2.91 versus $0.71. Gross margin was $1.157 billion, or 14.2% of sales, compared with $1.066 billion, or 14.8%. Adjusted EBITDA, a non-GAAP measure, rose to $957 million from $835 million; 2018 adjusted EBITDA margin was 11.8%, up 20 basis points.
  • Fourth quarter: Sales were $1.973 billion versus $1.837 billion in Q4 2017. Gross margin was $256 million in both periods. Net income was $106 million, compared with a $110 million loss; diluted EPS was $0.69 versus a loss of $0.74 per share.
  • Cash flow and investment: Operating cash flow was $568 million, up from $554 million. Capital expenditures were $325 million, down from $393 million; free cash flow (operating cash flow less capital expenditures) was $243 million versus $161 million. Working capital used $113 million of cash, compared with $8 million in 2017.
  • Debt and liquidity: Year-end balance-sheet debt was $1.783 billion; cash and marketable securities totaled $531 million. Dana reported total liquidity of $1.105 billion, including $579 million of unused revolving-credit capacity. It reported compliance with debt covenants and no revolver borrowings outstanding, apart from $21 million used for letters of credit.
  • Other measures: Dana declared dividends of $0.40 per share for 2018, up from $0.24 in 2017, and repurchased $25 million of shares. The filing separately describes consolidated debt obligations of $1.801 billion; investors should check the company’s debt definitions and reconciliation.

Material changes versus 2017

  • Growth was driven by stronger vehicle and off-highway demand and new business. Off-Highway sales increased to $1.844 billion from $1.521 billion, and segment EBITDA rose to $285 million from $212 million. Commercial Vehicle sales rose to $1.612 billion from $1.412 billion; Light Vehicle sales rose to $3.575 billion from $3.172 billion. Power Technologies sales were broadly flat at $1.112 billion versus $1.104 billion, while segment EBITDA declined to $149 million from $168 million.
  • Gross margin percentage declined 60 basis points. Higher commodity costs reduced year-over-year earnings by approximately $115 million; material recovery and other pricing actions added approximately $80 million, with about $35 million of increased commodity costs unrecovered by year-end. Dana also cited engineering costs, premium supply-chain costs and manufacturing inefficiencies.
  • Operating cash flow improved modestly, but cash used for working capital increased substantially. Capital expenditures declined from the prior-year elevated level.
  • Reported earnings comparisons were affected by 2017’s $186 million noncash tax charge following U.S. tax reform. The 2018 result included a $20 million impairment of an in-process research and development asset.

Outlook, management commentary and risks

  • 2019 outlook: Assuming the Oerlikon Drive Systems acquisition closes in Q1 2019, Dana projected sales of $8.95–$9.35 billion and adjusted EBITDA of $1.085–$1.165 billion, with adjusted EBITDA margin expected to exceed 12%. Management forecast operating cash flow of approximately 5.5% of sales, capital expenditures of approximately 4% of sales, and adjusted free cash flow of approximately 3% of sales; its narrative also estimated adjusted free cash flow at about $275 million. These are non-GAAP outlook measures where indicated.
  • Management expected approximately $350 million of net new-business backlog to convert to sales in 2019, with additional expected conversion of $200 million in 2020 and $150 million in 2021. It anticipated higher-margin new business and Oerlikon synergies, partly offset by commodity costs, electrification investment and acquisition integration costs.
  • Market expectations were mixed: North American Class 8 truck demand was forecast to rise modestly, while Classes 5–7 and light-vehicle engine production were expected to decline. Management anticipated modest growth in several international markets, but weaker medium/heavy truck production in Asia Pacific.
  • Transactions: Dana acquired a 55% interest in electric-drive supplier TM4 in June 2018 for $125 million; TM4 contributed $11 million of 2018 sales. The planned Oerlikon Drive Systems acquisition was valued at approximately CHF 625 million, with committed financing arranged. After year-end, Dana acquired SME for $88 million, comprising $62 million cash and a $26 million five-year note.
  • Other unusual items: Dana recorded $25 million of 2018 restructuring charges and reversed $3 million of a previously recorded loss on the sale of its Brazil suspension-components business. A $40 million GKN transaction breakup fee partly offset 2018 strategic transaction expenses. The 2018 impairment followed customers’ decision to redirect development away from Dana’s combustion-engine CVP technology toward electrification.
  • Key risks: Customer concentration is significant: Ford represented approximately 20% of 2018 sales, FCA 11%, and the ten largest customers collectively 58%. Other material exposures include vehicle-market cyclicality, tariffs and commodity inflation, foreign-exchange movements, supplier interruptions, pricing pressure, labor disruptions, product-liability and warranty claims, pension funding, and technology shifts toward electrified and autonomous vehicles. Dana identified Argentina as highly inflationary effective July 1, 2018.
  • Dana expected to settle a U.S. defined-benefit pension plan in the first half of 2019; estimated unfunded obligations at year-end were $165 million, subject to settlement costs and participant elections. The filing states that the financial statements received an unqualified audit opinion and internal control was effective; TM4 was excluded from the internal-control assessment because it was acquired during 2018.

Investor verification priorities

  • Reconcile the $1.783 billion balance-sheet debt figure with the filing’s separate $1.801 billion description of consolidated debt obligations, and assess refinancing and interest-rate exposure.
  • Confirm the closing, financing, integration costs and realized synergies for Oerlikon, and the post-year-end accounting and performance of SME and TM4.
  • Track whether 2019 guidance and the $700 million 2019–2021 net new-business backlog convert to revenue and cash flow as projected.
  • Monitor commodity-cost recovery, margins, working-capital requirements and the performance of the Power Technologies segment.
  • Assess pension-plan settlement funding, customer concentration, tariff and currency impacts, and the pace of electrification-related product adoption.