Dana Incorporated — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Dollar amounts are in millions except per-share data. Dana supplies driveline, sealing, thermal-management and fluid-power products to vehicle and industrial markets.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,831 | $1,384 | $5,372 | $4,379 |
| Gross margin | $269; 14.7% | $208; 15.0% | $808; 15.0% | $640; 14.6% |
| Operating earnings (EBIT) | $139 | $96 | $398 | $317 |
| Net income attributable to parent | $69 | $57 | $215 | $155 |
| Diluted EPS | $0.46 | $0.39 | $1.45 | $1.05 |
| Operating cash flow | $181 | $42 | $361 | $182 |
| Free cash flow (non-GAAP) | $99 | $(26) | $110 | $(16) |
Q3 sales increased 32% year over year, including $286 of organic growth and $133 net from acquisitions and divestitures; currency added $28. Parent-attributable net income rose 21%. Nine-month sales increased 23%, while parent-attributable net income rose 39%. Nine-month Adjusted EBITDA, a non-GAAP measure, was $638 versus $494.
Balance-sheet cash was $558 at September 30, down from $707 at December 31, 2016. Total liquidity, as defined by Dana, was $1,169, including $579 available under its revolver. The balance sheet reported $26 of current notes payable and $1,765 of long-term debt, net of issuance costs. Dana had no revolver borrowings, was in compliance with debt covenants, and reported $47 of redeemable noncontrolling interests. Working capital consumed $80 of cash in the first nine months; capital expenditures were $251.
Operating trends and changes
- Q3 gross margin percentage declined 30 basis points year over year, partly reflecting acquired businesses, higher commodity costs ($17), and $8 of launch costs. Excluding acquisitions and divestitures, management reported improved cost-of-sales performance, helped by volume and cost savings.
- For the first nine months, gross margin percentage improved 40 basis points. Cost savings and lower warranty expense more than offset commodity inflation and launch costs.
- All four segments reported higher Q3 sales. Off-Highway sales included $105 from the Brevini acquisitions; Light Vehicle sales benefited from stronger North American light-truck programs. Segment EBITDA was $220 for Q3 and $653 year to date, versus $166 and $500, respectively.
- Cash from operations improved substantially year over year. Investing outflows rose to $438, including $184 for business acquisitions and $251 for capital spending; financing outflows were $113. Cash declined by $190 before a $41 favorable currency effect.
- Acquisitions included 80% interests in Brevini Fluid Power and Brevini Power Transmission (BFP/BPT) and USM-Warren. BFP/BPT contributed $284 of nine-month sales and a net loss of $11, including restructuring. USM-Warren contributed $69 of sales and $4 of net income.
Outlook, management commentary and risks
- Dana raised its full-year 2017 outlook to approximately $7.1 billion in sales, $835 in Adjusted EBITDA, $550 in operating cash flow, $400 in capital expenditures and $150 in free cash flow. These are company outlooks; Adjusted EBITDA and free cash flow are non-GAAP measures.
- Management cited stronger global off-highway demand, improving markets outside the U.S., and continued North American light-truck strength. Its market outlook anticipated softer North American light-vehicle engine production but stronger Class 8 truck production and growth in several international markets.
- Key exposures include vehicle-production cycles, uncertain trade and economic policy, Brexit and currency volatility, commodity-price changes and the lag before customer pricing recovers cost inflation. A 5% euro movement was estimated to affect annual sales by about $90.
- In October 2017, the board authorized Dana to pursue termination of a U.S. defined-benefit pension plan, subject to market conditions and regulatory approval. Settlement is expected in the first half of 2019 if pursued; Dana estimates a $330–$415 pretax settlement charge. Under current assumptions, a roughly $175 cash contribution could be required, though the final amount depends on settlement choices, annuity pricing and investment performance.
- Debt actions included issuing $400 of 2025 notes and drawing a $275 term facility to refinance debt, including redemption of the remaining 2021 notes. Dana recorded $19 of nine-month debt-extinguishment losses. Other notable items include $14 of restructuring charges year to date and $20 of strategic transaction expenses.
- Dana said ordinary-course legal proceedings were not expected to materially affect its financial position. It reported effective disclosure controls and no material changes in risk factors from its 2016 Form 10-K.
Important facts for investors to verify
- Whether the raised 2017 sales, Adjusted EBITDA and free-cash-flow outlooks were achieved, and the assumptions underlying those non-GAAP targets.
- Acquisition integration, BFP/BPT performance and potential costs associated with Brevini’s put rights, the remaining noncontrolling interests and the agreed real-estate purchase.
- Cash conversion and working-capital needs alongside elevated capital spending and the use of cash for debt repayment and acquisitions.
- The actual timing, funding requirement and accounting charge if the proposed pension-plan termination proceeds.
- Effects of market, currency and commodity changes, plus headroom under debt covenants and access to revolver liquidity.