Dana Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Amounts are in millions of dollars except per-share data. Dana supplies driveline, sealing, thermal-management and electrification products to vehicle and industrial markets.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $2,163 | $2,138 |
| Gross margin | $300; 13.9% | $307; 14.4% |
| EBIT | $140 | $174 |
| Net income attributable to Dana | $98; diluted EPS $0.68 | $108; diluted EPS $0.73 |
| Adjusted EBITDA (non-GAAP) | $257 | $248 |
| Cash used in operating activities | $16 | $28 |
| Capital expenditures | $98 | $65 |
| Adjusted free cash flow (non-GAAP) | $(114) | $(93) |
Sales increased $25, or about 1%. Acquisitions contributed $81, while currency reduced sales by $78 and organic growth was $22. Adjusted EBITDA margin was about 11.9%, versus 11.6%. Gross margin declined 0.5 percentage point; cost of sales rose to 86.1% of sales from 85.6%.
At March 31, cash and cash equivalents were $383 and marketable securities were $20. Total debt was approximately $2,480, including short-term debt; long-term debt, including its current portion, was $2,466. Reported liquidity was $1,127, including $729 available under the revolving facility. Dana reported compliance with debt covenants. Current assets were $3,443 and current liabilities were $2,113.
Material changes and operating drivers
- On February 28, Dana acquired Oerlikon Drive Systems (ODS) for $626 at closing, primarily debt-funded. ODS contributed $75 of Q1 sales and $11 of adjusted EBITDA. The purchase-price allocation remains provisional.
- Dana acquired SME in January for $88, including a $26 five-year note; SME contributed $6 of sales and de minimis adjusted EBITDA.
- Segment EBITDA increased in Commercial Vehicle ($41 versus $34) and Off-Highway ($82 versus $72), with acquisitions contributing to Off-Highway. Light Vehicle was nearly flat at $102 versus $103. Power Technologies declined to $34 from $45.
- Reported income tax expense fell to $20 from $48. Q1 2019 included a $22 benefit from U.S. valuation-allowance releases, partly offset by $6 of expense from a U.S. state-law change; excluding these items, the stated effective tax rate would have been 31%.
- Working capital used $175 of cash, principally due to higher receivables and inventory. Investing cash use was $724, including acquisition spending; financing provided $610, principally from $675 of new term borrowings.
Outlook, commentary and risks
- 2019 guidance was unchanged from February: sales of $8.95–$9.35 billion; adjusted EBITDA of $1.085–$1.165 billion; and adjusted EBITDA margin above 12%. Management expects adjusted free cash flow of approximately $275, or about 3% of sales, and capital spending of about 4% of sales. These are non-GAAP measures where applicable.
- Management cited expected contributions from ODS and approximately $350 of 2019 net-new-business backlog, with ODS synergies and higher-margin new business expected to help offset commodities and electrification investment.
- Market outlooks were mixed: Dana reduced expectations for some European, South American and Asia-Pacific light-vehicle markets, while increasing its North American medium-duty truck outlook. China’s weakening economy and global production trends remain relevant to demand.
- Higher commodity costs reduced Q1 earnings by about $25; pricing and recovery actions added $8. Management noted that customer price recovery can lag cost increases. Currency weakened Q1 sales by $78; a 5% euro movement would affect annual sales by approximately $125 at current sales levels.
- Dana expected to complete termination of a U.S. defined-benefit pension plan in 2019. The plan had $938 of obligations and $773 of assets at December 31, 2018; final funding needs depend on settlement choices, annuity pricing and asset returns, and settlement could trigger recognition of deferred actuarial losses.
- Product-liability accruals were $19, environmental accruals $10, and warranty liabilities $95. Management said pending legal matters were not expected to materially harm liquidity, financial condition or results. Dana also guarantees certain divested-business facility leases through June 2025.
Important facts for investors to verify
- Whether ODS and SME deliver expected integration benefits, margins and cash generation, and how final purchase accounting changes provisional values.
- Whether the 2019 sales, adjusted EBITDA, margin and adjusted free-cash-flow outlooks are achieved, especially given market weakness and commodity-cost recovery lags.
- Debt reduction, interest costs, working-capital requirements and covenant headroom following the ODS-funded borrowing increase.
- The timing, cash funding requirement and accounting impact of the U.S. pension-plan termination.
- The durability of the tax benefit: the reported Q1 effective tax rate was influenced by discrete items, and Dana said additional valuation allowances of up to $86 could be released within twelve months.