DANA Inc quarterly report, Q3 FY2016

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Dana Incorporated (formerly Dana Holding Corporation) — Q3 2016 Form 10-Q

Business context and period: Global supplier of driveline, sealing and thermal-management products. The report covers the quarter and nine months ended September 30, 2016; the company changed its legal name effective August 1, 2016. Financial amounts below are in millions of dollars except per-share data and where noted.

Financial results and liquidity

  • Q3 revenue: $1,384, down 5.7% from $1,468 a year earlier. Currency reduced sales by $29; lower organic volumes were partly offset by $12 of pricing recovery and $2 from the Magnum acquisition.
  • Q3 profitability: Gross margin was $208, or 15.0% of sales, versus $213 and 14.5% a year earlier. Net income attributable to Dana was $57 ($0.39 diluted per share), down from $119 ($0.75). Adjusted EBITDA, a non-GAAP measure, was $168 versus $167.
  • Nine-month results: Revenue was $4,379, down 6.5%; net income attributable to Dana was $155 ($1.05 diluted per share), versus $241 ($1.48). Gross margin was 14.6% versus 14.5%. Adjusted EBITDA was $494 versus $523.
  • Cash flow: Nine-month operating cash flow was $182 versus $266, with working capital using $142 versus $92. Capital expenditures were $198 versus $192; free cash flow was negative $16 versus positive $74. Q3 free cash flow was negative $26 versus positive $68.
  • Balance sheet and liquidity: September 30 cash and cash equivalents were $727 and marketable securities $126. Debt carrying value was approximately $1,665, including current debt; long-term debt was $1,615. Total liquidity was $1,323, and operating liquidity was $1,180. The $500 revolving facility had $478 available after letters of credit. Dana reported covenant compliance.
  • Margins and segments: Q3 segment EBITDA increased in Light Vehicle ($73 versus $63) and Power Technologies ($42 versus $40), but declined in Commercial Vehicle ($23 versus $31) and Off-Highway ($28 versus $35). Nine-month EBITDA declined in all but Light Vehicle and Power Technologies, with weaker volumes weighing particularly on Commercial Vehicle and Off-Highway.

Material changes versus comparable periods

  • Q3 sales declined mainly from weaker North American heavy-truck production and global Off-Highway demand; the prior-year comparison also included a $36 long-lived-asset impairment charge, absent in 2016.
  • Q3 parent-attributable earnings fell $62 year over year. The comparison is materially affected by the 2015 quarter’s $100 U.S. deferred-tax valuation-allowance release, which contributed to a $77 tax benefit; Q3 2016 recorded $13 tax expense.
  • For the first nine months, the lower earnings also reflect $17 of debt-extinguishment loss and $23 of restructuring charges in 2016. The 2015 period included the $36 impairment and the $100 tax-allowance release.
  • Debt refinancing replaced $350 of notes due 2021 with $375 of notes due 2026; the new notes carry a 6.5% coupon, economically converted to euro debt at 5.14% through cross-currency swaps. The company also amended its revolving facility to $500, expiring in 2021.
  • Dana repurchased $81 of shares in the first half of 2016 and none in Q3; management said it did not expect further repurchases during the remainder of 2016.

Outlook, management commentary and risks

  • 2016 outlook: Sales of approximately $5,800; adjusted EBITDA of approximately $655; operating cash flow of approximately $440; capital expenditures around $320; and free cash flow around $120. These include non-GAAP measures, and Dana did not provide a reconciliation of adjusted EBITDA guidance to GAAP net income.
  • Management expected adjusted EBITDA margin of about 11.2%, approximately 40 basis points above 2015. The sales outlook was at the low end of the prior range, reflecting weaker North American heavy truck, global Off-Highway and Brazil demand. The company expected full-year currency effects to reduce sales by about $150.
  • Class 8 production outlook was reduced to 220,000–230,000 units; medium-duty production outlook remained 230,000–240,000. Management cited stronger light-vehicle demand in parts of North America, Europe and Asia Pacific, but continuing weakness in South America and Off-Highway markets.
  • SIFCO supplier exposure: Dana’s product supply depends partly on SIFCO’s compliance with an interim supply agreement. Dana submitted a bid to acquire SIFCO assets for approximately $85, subject to a court-supervised auction and regulatory approvals. Dana cautioned that uninterrupted supply before any closing was uncertain.
  • Tax uncertainty: Dana retained a valuation allowance against U.S. deferred tax assets. A release of approximately $500 within 12 months was considered reasonably possible if sustained profitability and market conditions support it, but no release was recorded in Q3.
  • Other items and contingencies: Q3 restructuring charges were $17, primarily for headcount reductions; the Glasgow facility closure was expected by mid-2017. The company reported about 25,000 active asbestos claims, with a $73 liability and $48 recorded insurance-recovery asset. Management said other pending legal matters were not expected to materially affect results or liquidity.
  • Management identified currency movements, commodity costs, market demand, warranty costs, working-capital requirements and pension discount rates as factors that could affect results. It estimated potential year-end actuarial losses of about $35 for each of U.S. and German pension plans under specified assumptions.

Important facts for investors to verify

  • Whether operating cash flow and free cash flow improve from the nine-month levels, particularly as working capital and planned capital spending evolve.
  • Whether heavy-truck, Off-Highway and Brazil demand stabilizes, and whether segment profitability holds up against lower volumes and warranty costs.
  • Whether SIFCO supply remains uninterrupted and whether Dana’s proposed asset acquisition receives court and regulatory approval.
  • Whether the conditions for any U.S. deferred-tax valuation-allowance release are met; the possible release is not assured guidance.
  • How foreign-exchange movements, pension assumptions and the reported warranty accrual affect future earnings and cash needs.
  • The filing notes a non-material prior-quarter cash-flow classification error: six-month 2016 capital purchases should have been $18 lower, with a corresponding offset to working-capital change; total net cash flow was unchanged.