Dana Incorporated — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; quarterly results below identify the fourth quarter. Amounts are in millions of U.S. dollars except per-share data.
Business context
Dana supplies driveline, sealing, thermal-management and fluid-power products to light-vehicle, commercial-vehicle and off-highway markets through four segments: Light Vehicle, Commercial Vehicle, Off-Highway and Power Technologies. It operated in 33 countries, employed approximately 30,100 people and reported sales of $7,209.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $7,209 | $5,826 |
| Gross profit / margin | $1,062 / 14.7% | $844 / 14.5% |
| EBIT | $490 | $332 |
| Income before tax | $380 | $215 |
| Net income | $116 | $653 |
| Diluted EPS | $0.71 | $4.36 |
| Operating cash flow | $554 | $384 |
| Capital expenditures | $393 | $322 |
| Free cash flow (non-GAAP) | $161 | $62 |
Adjusted EBITDA, a non-GAAP measure, was $835, up from $660. Segment EBITDA was $855. Gross margin increased 20 basis points; management attributed improvement mainly to higher production and fixed-cost absorption, material savings and lower warranty costs, partly offset by commodity inflation and launch costs.
At year-end, cash and marketable securities totaled $643; debt was approximately $1.8 billion. Reported liquidity was $1,214, including $578 of unused revolving-credit availability. Dana reported compliance with financing covenants. Current assets were $2,882 and current liabilities $1,702.
Changes versus prior period and unusual items
- Sales rose 24% year over year. Management attributed $829 to organic growth, $500 to acquisitions net of divestitures, and $54 to currency effects. Organic gains reflected stronger demand, new programs and higher off-highway volumes.
- Acquisitions included 80% interests in Brevini Fluid Power and Brevini Power Transmission, and USM-Warren; together they contributed substantial 2017 sales. Dana also acquired SIFCO assets in late 2016.
- Net income fell sharply despite stronger operating results. The 2017 tax expense of $283 included a provisional, non-cash $186 charge from U.S. tax reform and remeasurement of deferred tax assets. The 2016 result included a $501 benefit from releasing U.S. deferred-tax valuation allowances.
- Fourth-quarter 2017 net loss was $110, including the $186 tax charge and a $27 pre-tax loss on the planned divestiture of the Brazil suspension-components business. The sale, for no consideration and with a required $10 cash contribution, was expected to close in Q1 2018 subject to antitrust approval.
- Dana issued $400 of 2025 notes and drew a $275 term facility, using proceeds in part to refinance debt; it redeemed $450 of 2021 notes. Interest expense declined to $102 from $113.
- Cash dividends were $0.24 per share in 2017. A new $100 share-repurchase authorization was approved; no shares were repurchased under the prior program in 2017.
Outlook, commentary and risks
For 2018, management forecast sales of $7.5–$7.7 billion and adjusted EBITDA of $910–$960. It expected operating cash flow of about 7.5% of sales, capital spending of about 4% and free cash flow of about 3.5% of sales. The company expected EBITDA margin to exceed 12%, supported by new business, cost improvements and acquisition synergies, partly offset by investment in electrification. Management also announced an increase in the quarterly dividend to $0.10 per share for 2018.
Management anticipated generally comparable to slightly higher global sales, with stronger North American heavy-truck demand and improving off-highway markets, but softer or mixed outlooks in some vehicle categories and regions. Risks include OEM production cyclicality and customer concentration (Ford represented 22% of sales), pricing pressure, commodity and foreign-exchange movements, sole-source supplier disruptions, labor actions, program-launch execution, acquisition integration, pension funding and evolving vehicle technology. The 2018 forecast is subject to market, currency and execution uncertainty.
Dana began steps to terminate a U.S. pension plan, subject to approvals and market conditions, with settlement expected in 2019. The plan had $1,064 of obligations and $900 of assets at year-end; actual settlement funding may differ. The auditor and management concluded internal control over financial reporting was effective, but the 2017 acquisitions were excluded from the control assessment and are to be brought into compliance in 2018.
Key facts investors should verify
- How much of 2017 growth and future earnings is attributable to acquired businesses versus sustainable organic volumes, pricing and new programs.
- The final accounting and cash implications of U.S. tax reform, including the provisional $186 charge, NOL utilization and future cash taxes.
- Progress toward 2018 sales, adjusted EBITDA, margin and free-cash-flow targets, including acquisition synergies and electrification spending.
- Completion and final cost of the Brazil divestiture, and the outcome of the Brevini purchase-price and noncontrolling-interest arrangements.
- Funding needs and timing for the pension-plan termination, and Dana’s ability to manage debt, liquidity and customer/supplier concentration risks.