Dana Incorporated — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Dana supplies driveline, sealing, thermal-management and related products to global vehicle manufacturers and industrial customers.
Financial performance
- Revenue: $2.138 billion, up $437 million (26%). The increase included $293 million of organic growth (17%), $88 million from currency and $56 million from acquisitions.
- Profit: Net income was $111 million versus $80 million; net income attributable to Dana was $108 million versus $75 million. Diluted EPS rose to $0.73 from $0.51.
- Margins: Gross margin was $307 million, or 14.4% of sales, versus $264 million, or 15.5%. Adjusted EBITDA, a non-GAAP measure, was $248 million versus $205 million; its margin was approximately 11.6% versus 12.1%.
- Cash flow: Operating cash flow was negative $28 million versus positive $11 million. Capital expenditures were $65 million versus $96 million; free cash flow, a non-GAAP measure, was negative $93 million versus negative $85 million. Working capital used $216 million of cash, primarily reflecting higher receivables and inventory.
- Liquidity and debt: Cash and cash equivalents were $479 million, down from $603 million at year-end 2017; marketable securities were $41 million. Reported total liquidity was $1.093 billion, including $578 million of revolver availability. Debt was approximately $1.8 billion on a principal basis. Dana had no revolver borrowings, was in covenant compliance, and reported a 2.00:1.00 maximum first-lien net leverage covenant.
- Shareholder returns: The quarterly dividend increased to $0.10 per share from $0.06. The board expanded the repurchase authorization to $200 million; no shares were repurchased in Q1.
Changes and drivers
- Organic growth reflected stronger light-truck, medium/heavy-truck and global off-highway demand, plus new business. Acquisitions—primarily Brevini and USM-Warren—also lifted sales.
- Gross margin declined 110 basis points. Management cited higher commodity costs (an approximately $18 million earnings headwind), launch and engineering costs, higher depreciation and premium supply-chain costs. Material savings, acquisition synergies and improved cost absorption partly offset these pressures.
- Operating income rose to $174 million from $129 million. Interest expense declined to $24 million from $27 million, while income tax expense increased to $48 million from $30 million.
- Segment EBITDA increased for Light Vehicle ($103 million versus $89 million), Commercial Vehicle ($34 million versus $28 million) and Off-Highway ($72 million versus $45 million); Power Technologies declined to $45 million from $50 million. Segment EBITDA and adjusted EBITDA are non-GAAP measures as presented by Dana.
Outlook, commentary and risks
- Dana raised its 2018 outlook to sales of $7.75–$8.05 billion (approximately $7.9 billion) and adjusted EBITDA of $950–$1,010 million (approximately $980 million). It expected operating cash flow of about 7.5% of sales, capital expenditures of about 4% of sales and free cash flow of about 3.5% of sales, or approximately $275 million.
- Management expected stronger international currencies to add about $150 million to 2018 sales, including an $88 million contribution in Q1. It noted that a 5% euro movement could affect annual sales by approximately $110 million.
- Market outlook was mixed: Dana raised its North American Class 8 production forecast to 300,000–320,000 units and its construction/mining demand outlook, but lowered its agriculture outlook. Management identified trade-policy uncertainty, interest rates, consumer debt, used-car prices, commodity inflation and foreign exchange as risks.
- The $40 million fee earned after Dana’s unsuccessful bid for GKN’s driveline business offset strategic transaction expenses in Q1; Dana received the fee in April. Other expense, net, was approximately zero versus an $11 million expense in Q1 2017.
- The planned sale of the Brazil suspension components business remained incomplete; Dana had contributed the required $10 million and could seek other buyers if the existing transaction did not close. Separately, termination of a U.S. pension plan remained subject to approvals and market conditions, with settlement expected in the first half of 2019 and potential recognition of deferred actuarial losses.
- Dana said pending legal matters were not expected to have a material adverse effect based on information then available. The filing reported no material changes to disclosed risk factors or market-risk exposures.
Important facts for investors to verify
- Whether the raised 2018 sales and adjusted EBITDA outlook is achieved, and the assumptions for market demand, currency and acquisition contributions.
- Whether working-capital investment reverses sufficiently to support the projected cash flow and free cash flow.
- Whether commodity, launch, engineering and premium-freight pressures ease or continue to weigh on margins.
- Completion and terms of the Brazil business divestiture, and the timing and amount of the Brevini purchase-price adjustment and real-estate transaction.
- Potential cash, earnings and balance-sheet effects of the pension-plan termination and Brevini noncontrolling-interest put/call rights.