Dana Holding Corporation — Q2 2016 Form 10-Q
Business context and period. Global supplier of driveline, sealing and thermal-management products to light-vehicle, commercial-vehicle and off-highway markets. This unaudited report covers the quarter and six months ended June 30, 2016; financial amounts are in millions except per-share data. Comparisons are with the corresponding 2015 periods.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1,546 | $1,609 | $2,995 | $3,217 |
| Gross margin | $233; 15.1% | $236; 14.7% | $432; 14.4% | $464; 14.4% |
| Net income attributable to parent | $53 | $59 | $98 | $122 |
| Diluted EPS | $0.36 | $0.36 | $0.66 | $0.74 |
| Adjusted EBITDA (non-GAAP) | $178 | $180 | $326 | $356 |
| Net cash from operating activities | $185 vs. $148 | $158 | $128 | |
| Free cash flow (non-GAAP) | $108 vs. $88 | $10 | $6 |
Q2 segment EBITDA was $71 for Light Vehicle, $32 for Commercial Vehicle, $37 for Off-Highway and $43 for Power Technologies. First-half figures were $129, $58, $69 and $78, respectively.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $745 and marketable securities were $164. Total assets were $4,567; current assets $2,637 and current liabilities $1,237.
- Long-term debt, net of issuance costs, was $1,637, with $31 in notes payable including current maturities. Total debt principal was $1,674. The company reported compliance with financing covenants.
- Reported operating liquidity was $1,233, including available cash, marketable securities and $475 available under the revolving facility; total liquidity before deducting subsidiary-held liquidity was $1,375. Some cash is subject to local restrictions or subsidiary approval requirements.
- First-half investing cash use was $168, including $148 of capital expenditures and $18 for the Magnum acquisition. Financing cash use was $47; cash declined $57 to $745.
Material changes versus prior period
- Sales fell $63 in Q2 and $222 in the first half. Currency reduced first-half sales by $116; organic sales declined $105, primarily due to weaker off-highway demand, lower commercial-vehicle production in North America and Brazil, and reduced sales to a major North American commercial-vehicle customer.
- Q2 gross margin rate improved 40 basis points to 15.1%; first-half gross margin rate was unchanged at 14.4%. Lower material costs and the absence of prior-year supplier-transition costs helped, while lower volumes, higher warranty costs and engineering expenses weighed on results.
- Parent-attributable net income declined $6 in Q2 and $24 in the first half. Higher interest expense and a $17 Q2 debt-extinguishment loss contributed to the decline. Q2 share count was also lower, with 147.0 million diluted weighted-average shares versus 163.2 million a year earlier.
- First-half operating cash flow increased to $158 from $128, while working capital still used $65. Capital expenditures rose to $148 from $122, leaving first-half free cash flow at $10.
Outlook, commentary and risks
- Management’s 2016 outlook: sales of $5.8–$6.0 billion; adjusted EBITDA of $640–$670; operating cash flow of $450–$470; capital expenditures of $320–$340; and free cash flow of $120–$140. These include non-GAAP measures; the filing does not provide a reconciliation of adjusted EBITDA guidance to GAAP net income.
- Management expects weaker currencies to reduce full-year sales by approximately $150–$200 and projects adjusted EBITDA margin slightly above 2015. It increased capital-spending expectations by $40 for new customer programs, reducing free-cash-flow guidance accordingly.
- Market outlook is mixed: North American light vehicles remain relatively strong, but the Class 8 production forecast was cut to 230,000–240,000 units from 240,000–260,000. Brazil and global off-highway markets remain weak; Europe faces uncertainty following Brexit. Foreign-exchange exposure, commodity costs and customer/market demand remain relevant risks.
- Q2 restructuring included the announced closure of the Glasgow, Kentucky Commercial Vehicle facility, expected to finish by mid-2017. Associated cash expenditures are estimated at $15–$20; the filing also reports $19 of estimated future restructuring costs to complete approved initiatives.
- Debt refinancing: Dana issued $375 of 6.5% senior notes due 2026 and redeemed $350 of 2021 notes, recording a $17 extinguishment loss. It also renewed a $500 revolving facility maturing in 2021; no borrowings were outstanding at quarter-end, with $25 used for letters of credit.
- The company said a release of up to approximately $500 of U.S. deferred-tax valuation allowance may be reasonably possible within 12 months if sustained profitability and market conditions support it; no release was recorded in Q2.
- Supplier continuity remains uncertain under interim arrangements with SIFCO, which is in reorganization proceedings in Brazil. Other contingencies include asbestos claims: 25,000 active pending claims, a $74 accrued liability and a $49 recorded insurance-recovery asset. Management did not expect other pending legal matters to materially affect results or liquidity.
Investor verification priorities
- Track whether sales and margins stabilize as currency effects, North American heavy-truck weakness, Brazil conditions and off-highway demand evolve.
- Compare full-year guidance with realized adjusted EBITDA, operating cash flow, capital spending and free cash flow; review the associated non-GAAP definitions.
- Assess working-capital needs and whether the $475 revolving availability and reported liquidity remain accessible, considering restricted or subsidiary-held cash.
- Monitor debt refinancing costs, leverage and covenant compliance, as well as continuing share repurchases and dividends.
- Verify SIFCO supply continuity, Glasgow closure costs and timing, asbestos insurance recoveries, and the conditions required for any U.S. deferred-tax valuation-allowance release.