Dana Incorporated — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Dana supplies driveline, sealing, thermal-management, and electrification technologies to vehicle and industrial markets through four operating segments. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,978 | $1,831 | $6,170 | $5,372 |
| Gross margin | $286; 14.5% | $269; 14.7% | $901; 14.6% | $810; 15.1% |
| Net income | $96 | $73 | $334 | $226 |
| Net income attributable to Dana | $95 | $69 | $327 | $215 |
| Diluted EPS | $0.65 | $0.46 | $2.23 | $1.45 |
| Adjusted EBITDA | $240 | $216 | $734 | $638 |
| Operating cash flow | $124 | $181 | $237 | $361 |
| Free cash flow | $34 | $99 | $2 | $110 |
Sales grew 8% in Q3 and 15% year to date. Nine-month sales growth included $674 of organic growth, $68 from currency, and $56 from acquisitions net of divestitures. Dana attributed higher demand to light trucks, medium/heavy trucks, off-highway markets, and new business. Adjusted EBITDA is a non-GAAP measure; prior-year amounts were not conformed for the pension-cost presentation change (management says comparable 2017 amounts would be $218 for Q3 and $643 year to date).
Gross margin percentage declined year over year as commodity, engineering, launch, depreciation, and supply-chain costs outpaced savings and pricing recovery. Higher commodity prices reduced earnings by about $37 in Q3 and $79 year to date; material recovery and other pricing actions added $22 and $44, respectively.
Liquidity, debt, and capital allocation
- At September 30, cash and cash equivalents were $322 and marketable securities were $36. Total liquidity, including $579 available under the revolving facility, was $932.
- Debt was approximately $1.8 billion, including $1.76 billion of long-term debt net of issuance costs, $20 of current long-term debt, and $16 of short-term debt. No revolving-facility borrowings were outstanding; $21 was used for letters of credit. Dana reported compliance with debt covenants.
- Nine-month operating cash flow fell to $237 from $361, principally amid a $269 working-capital cash outflow versus $80 in 2017. Capital expenditures were $235. Cash, cash equivalents, and restricted cash declined by $270 to $327.
- Dana paid $43 in common dividends and spent $25 repurchasing shares during the first nine months. The expanded repurchase authorization is $200 and expires December 31, 2019.
Material changes, outlook, and management commentary
- Segment EBITDA rose year over year in Q3 for Light Vehicle ($102 versus $91), Commercial Vehicle ($39 versus $33), and Off-Highway ($69 versus $55), but declined for Power Technologies ($33 versus $41). For the first nine months, the same pattern held: $297, $114, and $220 versus $273, $91, and $157, respectively; Power Technologies was $117 versus $132.
- Dana raised its 2018 sales outlook to approximately $8.05 billion, the high end of its prior range. It forecast adjusted EBITDA of approximately $965, below its prior expectation, and a margin of about 12%. Management cited roughly $40 of commodity costs expected to remain unrecovered by year-end.
- Full-year 2018 free-cash-flow guidance was reduced to approximately $240, or 3% of sales, from $280; capital expenditures were expected to be about $325, or 4% of sales. Management cited higher working-capital needs and lower adjusted EBITDA.
- On July 30, Dana agreed to acquire Oerlikon Drive Systems, subject to regulatory approval, with an expected closing in Q1 2019 and committed financing. The stated purchase price is “600 Swiss francs” in the filing text; the text does not clearly specify a larger unit. Dana also acquired 55% of TM4 for $125 in June and bought Brevini’s remaining 20% interests for $43, receiving $10 to settle claims.
- Dana recorded a $20 impairment of an in-process research and development intangible after customers redirected development from combustion-engine applications. The failed GKN transaction generated a $40 breakup fee, partly offsetting strategic transaction expenses. The Brazil suspension-components business was sold in July for $2 of proceeds, after a required $10 contribution.
- Effective July 1, Argentina was treated as a highly inflationary economy and its financial statements were remeasured using the U.S. dollar as functional currency. Dana cited trade-policy and tariff uncertainty, and said tariff-related costs may not be fully recovered.
- A U.S. defined-benefit pension plan termination remained subject to approval and market conditions, with settlement expected in the first half of 2019. Dana estimated the plan’s unfunded obligations could determine the required cash contribution; the final amount depends on settlement choices, annuity prices, and asset returns.
Key risks and contingencies
Risks highlighted include tariffs and retaliatory trade measures, commodity inflation and delayed customer recovery, foreign-currency volatility, uneven vehicle and off-highway demand, and working-capital requirements. Dana reported product-liability accruals of $10, environmental liabilities of $11, and a guarantee covering certain facility leases through June 2025. Management stated pending legal matters were not expected to materially affect liquidity, financial condition, or results, while noting outcomes are uncertain. Dana said it believed liquidity and operating cash flow would be sufficient for anticipated needs over the next 12 months.
Important facts for investors to verify
- Whether working capital normalizes and full-year free cash flow reaches the revised approximately $240 outlook.
- How much commodity and tariff cost Dana can recover, and the resulting effect on margins and adjusted EBITDA.
- Oerlikon’s stated transaction price and unit, financing terms, regulatory status, and expected closing timetable.
- The cash funding and accounting effects of the planned pension settlement, and the timing and value of any Argentina or Brazil valuation-allowance releases.
- The sustainability of segment performance, particularly the continued decline in Power Technologies EBITDA, and the conversion of strong sales growth into cash.