Dana Incorporated — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Amounts are in millions of U.S. dollars, except per-share data. Dana supplies driveline, sealing, thermal-management and fluid-power products to global vehicle and industrial markets.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,840 | $1,546 | $3,541 | $2,995 |
| Gross margin | $276; 15.0% | $233; 15.1% | $539; 15.2% | $432; 14.4% |
| Income before income taxes | $99 | $80 | $204 | $152 |
| Net income | $73 | $55 | $153 | $103 |
| Net income attributable to parent | $71 | $53 | $146 | $98 |
| Diluted EPS | $0.47 | $0.36 | $0.99 | $0.66 |
| Adjusted EBITDA (non-GAAP) | $217 | $178 | $422 | $326 |
| Net cash from operations | Not separately provided for quarter | Not separately provided for quarter | $180 | $140 |
| Capital expenditures | $73 | $59 | $169 | $130 |
| Free cash flow (non-GAAP) | $96 | $108 | $11 | $10 |
Q2 sales rose 19% year over year; first-half sales rose 18%. First-half gross margin improved 80 basis points, while Q2 gross margin slipped 10 basis points. First-half adjusted EBITDA margin was approximately 11.9%, versus 10.9% a year earlier. The effective tax rate for the first half was 30%, compared with 35%.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $568 and marketable securities were $36, versus $707 and $30 at December 31, 2016.
- Reported total debt was approximately $1.87 billion, including current maturities; long-term debt net of issuance costs was $1.841 billion. Dana issued $400 of 2025 senior notes and used proceeds in part to refinance debt. The company reported no revolver borrowings, $477 of revolver availability after letters of credit, and $1.075 billion of total liquidity.
- Total assets were $5.597 billion and total liabilities were $4.325 billion. Operating cash flow less capital expenditures produced first-half free cash flow of $11, as working capital used $104 of cash.
- First-half investing cash outflow was $352, including $169 of capital expenditures and acquisition spending. Cash decreased by $169 to $568.
- Dana said it was in compliance with its financing covenants. It considered liquidity and operating cash flow sufficient for anticipated needs over the next 12 months, while noting that some non-U.S. cash is subject to repatriation restrictions or practical limitations.
Material changes and business developments
- Q2 sales growth included $139 of net acquisition/divestiture effects and $165 of organic growth; currency translation reduced sales by $10. For the first half, net acquisition/divestiture effects added $219, organic growth added $343, and currency reduced sales by $16.
- Growth was led by Light Vehicle and Off-Highway. First-half segment sales/EBITDA were: Light Vehicle $1,564/$182; Commercial Vehicle $686/$58; Off-Highway $723/$102; Power Technologies $568/$91. Commercial Vehicle EBITDA was flat year over year for the first half; Power Technologies EBITDA improved by $13.
- Dana acquired 80% of Brevini Fluid Power and Brevini Power Transmission in February, expanding Off-Highway offerings; the businesses contributed $179 of first-half sales and a $13 net loss. Dana acquired USM–Warren in March to vertically integrate axle-housing production; it contributed $41 of first-half sales and $3 of net income. Purchase accounting and acquisition-related inventory charges affected reported results.
- First-half restructuring charges were $12, including $8 for Off-Highway integration headcount reductions. Accrued restructuring costs were $32 at quarter end, with approximately 400 employee reductions expected to be completed over the next year.
Outlook, commentary and risks
- Management raised full-year 2017 guidance to sales of $6.8–$7.0 billion, adjusted EBITDA of $790–$820, operating cash flow of $480–$520, capital expenditures of $380–$420, and free cash flow of $80–$120. Adjusted EBITDA and free cash flow are non-GAAP measures; Dana did not provide a reconciliation of adjusted EBITDA guidance to GAAP net income.
- Management cited stronger market demand, new business and acquisitions as growth drivers, while expecting operating leverage and further margin improvement. Dana expected currency translation to have a minimal full-year sales effect, based on stated exchange-rate assumptions.
- Market outlook was mixed: North American light-vehicle demand showed signs of weakening, and Class 8 truck production remained below prior-year levels; management expected sequential improvement in the second half. Europe, South America and Asia-Pacific markets generally strengthened, though China truck production could ease after accelerated buying ahead of regulations.
- Commodity costs increased by $14 in Q2 and $19 in the first half year over year; customer price recovery may lag cost changes. Other exposures include foreign-exchange volatility, customer and end-market demand, higher investment needs, working-capital requirements and acquisition integration.
- Brevini’s 20% noncontrolling stake has put/call provisions tied partly to future results; its reported redemption value was $46. Dana also committed to buy certain leased real estate for €25 if it was not sold to a third party by November 1, 2017.
- Dana disclosed product-liability and environmental accruals of $9 and $7, respectively, and a guarantee of certain facility leases through 2025. Management said pending legal matters were not expected to materially harm liquidity, financial condition or results. Dana stated that it has no obligations for current or future asbestos claims following the 2016 divestiture of Dana Companies.
- A new accounting standard adoption reduced retained earnings by $179 at January 1, 2017. Dana was still evaluating the impact of the revenue-recognition standard effective in 2018, including whether certain customized products or contract terms could shift revenue timing.
Most important facts for investors to verify
- Whether full-year sales and adjusted EBITDA guidance is achieved, and how much growth comes from organic demand versus acquisitions.
- Whether acquisition integration delivers the expected benefits, including management’s stated 2017 Brevini estimate of approximately $350 sales and $35 adjusted EBITDA, and USM–Warren estimate of approximately $75 sales and $15 adjusted EBITDA.
- Whether working-capital use and elevated capital spending constrain cash conversion; first-half free cash flow was $11 against full-year guidance of $80–$120.
- Debt levels, refinancing costs, covenant compliance and the potential cash cost of Brevini put/call rights and the real-estate commitment.
- Demand trends in North American light vehicles and commercial trucks, alongside foreign-exchange and commodity-cost movements.
- Potential effects of revenue-recognition adoption and the $179 retained-earnings adjustment on comparability of future results.