Dana Incorporated — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in millions of dollars except per-share figures. Dana supplies driveline, sealing, thermal-management and electric-propulsion products to vehicle and industrial markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,306 | $2,054 | $4,469 | $4,192 |
| Gross margin | $326; 14.1% | $308; 15.0% | $626; 14.0% | $615; 14.7% |
| Net income (loss) attributable to Dana | $(68) | $124 | $30 | $232 |
| Diluted earnings (loss) per share | $(0.47) | $0.85 | $0.21 | $1.58 |
| Adjusted EBITDA (non-GAAP) | $286 | $246 | $543 | $494 |
| Net cash from operating activities | $73 | $141 | $57 | $113 |
- Quarterly sales rose 12%, but included $214 from net acquisitions and were reduced by $56 from currency effects; organic sales increased $94, or 5%. First-half sales rose 7%, including $295 from net acquisitions, offset by $134 of currency headwinds; organic sales increased $116, or 3%.
- Q2 operating loss before interest and taxes was $95, versus earnings of $138 a year earlier. The result included a $258 pre-tax pension settlement charge. The reported quarterly tax benefit was $52, including discrete tax benefits; therefore, reported net loss is not a clean measure of underlying operating performance.
- Gross margin fell 90 basis points in Q2 and 70 basis points for the first half. Management cited higher commodity costs, depreciation and other costs, partly offset by material savings. First-half commodity costs reduced earnings by about $44; recovery and pricing actions added about $22.
- Adjusted EBITDA is a company-defined non-GAAP measure. It increased year over year, while segment results were mixed: Light Vehicle and Off-Highway EBITDA rose, Commercial Vehicle was flat in Q2, and Power Technologies declined.
Cash, debt and liquidity
- Cash and cash equivalents were $289 at June 30, 2019, down from $510 at year-end 2018; marketable securities were $15. Reported total liquidity was $1,028, including $729 of undrawn revolving-facility availability after letters of credit.
- Six-month operating cash flow was $57, compared with $113 in 2018. Working capital used $247 of cash and capital expenditures were $190. Reported free cash flow was negative $133; adjusted free cash flow, which adds back the $62 discretionary pension contribution, was negative $71.
- Debt increased primarily to fund the Oerlikon Drive Systems acquisition. At quarter-end, short-term debt was $14, current long-term debt $42 and long-term debt, net of issuance costs, $2,418. Dana reported compliance with financing covenants and no revolver borrowings.
- Current assets were $3,370 and current liabilities $2,064. The filing notes that some non-U.S. cash is subject to local repatriation restrictions and that practical limits, including withholding taxes, may affect access to certain subsidiary cash.
Material developments and outlook
- Dana acquired Oerlikon Drive Systems (ODS) in February for $626 at closing, primarily debt-funded; ODS contributed $211 of Q2 sales and $25 of adjusted EBITDA. Dana also acquired SME in January and the remaining 50% of PEPS in June, expanding its electric-mobility portfolio. Acquisition purchase allocations remain provisional.
- In June, Dana transferred the remaining obligations of a U.S. defined-benefit pension plan to insurers after contributing $62. The transfer reduced unfunded pension obligations by approximately $165 and generated the $258 settlement charge.
- On July 29, 2019, after the reporting date, Hydro-Québec acquired a 45% redeemable noncontrolling interest in SME and increased its PEPS interest to 45%. Dana received $65, comprising $53 cash and a $12 five-year note.
- Full-year 2019 outlook was unchanged from February: sales of $8.95–$9.35 billion; adjusted EBITDA of $1.085–$1.165 billion; adjusted EBITDA margin above 12%; operating cash flow of approximately 7% of sales; capital spending of approximately 4.7% of sales; and adjusted free cash flow of approximately $275 million, or 3% of sales. These are management targets, not guarantees; adjusted measures are non-GAAP.
- Management expected weaker North American light-vehicle demand, continued softness in Asia-Pacific light-vehicle markets, and slower North American and European construction/mining demand. Risks discussed include volatile foreign exchange, tariffs and commodity costs, customer and market production changes, and uncertainty related to Brexit and trade policy. Management said legal proceedings were not expected to materially affect the company, and reported no material change to previously disclosed risk factors.
Key investor verification points
- Assess recurring earnings apart from the pension settlement charge and significant discrete tax benefits; compare GAAP results with the company’s non-GAAP adjustments.
- Check whether acquired-business contributions, integration costs and provisional purchase accounting support the expected EBITDA and margin improvement.
- Monitor working-capital use, capital spending and cash conversion against the full-year cash-flow outlook.
- Track debt, covenant headroom and access to cash held outside the United States following the ODS-funded borrowing increase.
- Review market, currency and commodity trends, as well as the financial and governance effects of Hydro-Québec’s post-quarter investments in SME and PEPS.