Dana Incorporated — 2016 Form 10-K Summary
Business and period: Dana is a global supplier of driveline, sealing and thermal-management products to light-vehicle, commercial-vehicle and off-highway manufacturers. This annual report covers the fiscal year ended December 31, 2016; it also reports fourth-quarter results. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $5,826 | $6,060 |
| Gross margin | $844; 14.5% of sales | $849; 14.0% of sales |
| Income before interest and taxes | $332 | $394 |
| Income from continuing operations before tax | $215 | $292 |
| Net income attributable to Dana | $640 | $159 |
| Diluted earnings per share | $4.36 | $0.99 |
| Adjusted EBITDA, non-GAAP | $660 | $652 |
| Cash from operating activities | $384 | $406 |
| Capital expenditures | $322 | $260 |
| Free cash flow, non-GAAP | $62 | $146 |
| Total debt | $1,664 | $1,575 |
Adjusted EBITDA was approximately 11.3% of sales, compared with 10.8% in 2015. The reported increase in net income substantially reflects a $501 tax benefit from releasing most U.S. deferred-tax valuation allowances; the company also recorded a $25 tax expense for a Brazilian valuation allowance. Thus, reported net income and EPS are not a straightforward measure of the year’s operating improvement.
At year-end, Dana reported $707 cash and cash equivalents and $30 marketable securities. It reported total liquidity of $1,209, including $478 available under its revolving credit facility. No revolver borrowings were outstanding, and Dana said it complied with financing covenants. Interest expense was $113, unchanged from 2015.
Changes versus 2015
- Sales fell $234, or about 4%, including a $173 adverse currency effect. Organic sales declined $65; acquisitions and divestitures together added about $4.
- Gross margin increased by 0.5 percentage points despite lower sales. Cost savings and lower material costs helped, while lower volumes, higher engineering and launch costs, and commodity inflation were offsets.
- Operating cash flow declined $22, while capital spending rose $62. Free cash flow consequently fell $84, as investment supported new customer programs.
- Commercial Vehicle sales declined to $1,254 from $1,533, largely due to weaker North American Class 8 and Brazilian truck markets. Off-Highway sales fell to $909 from $1,040 on weak end-market demand. Light Vehicle and Power Technologies sales increased.
- The company recorded $36 of restructuring charges, compared with $15 in 2015, and an $80 loss on subsidiary divestitures. The 2015 comparison included a $36 long-lived-asset impairment and a $39 impairment of an equity-method investment.
Outlook, commentary and risks
- For 2017, management forecast sales of $6,200–$6,400, adjusted EBITDA of $695–$725, operating cash flow of $410–$450, capital expenditures of $350–$370, and free cash flow of $50–$90. Adjusted EBITDA and free cash flow are non-GAAP measures; the filing does not provide net income guidance.
- Management expected generally comparable overall markets, with strong but potentially softer North American light-vehicle production, weaker heavy-truck production, and off-highway demand remaining weak but relatively stable. It anticipated currency-related sales headwinds. The filing gives estimates of approximately $150 and $150–$200 for the 2017 currency impact in different passages.
- The filing gives differing estimates for Brevini’s expected 2017 sales contribution: approximately $350 in the acquisition discussion and approximately $400 in the sales outlook discussion. The acquisition of an 80% interest closed on February 1, 2017; management also cited expected adjusted EBITDA of about $35.
- Management highlighted growth initiatives in Asia, new customer programs, technology commercialization, and hybrid and electric vehicle products. Net new-business backlog for 2017–2019 was $750 at year-end 2016.
- Customer concentration is significant: Ford represented about 22% of 2016 sales, and the ten largest customers together represented about 62%. Dana also cited risks from vehicle-market downturns, pricing pressure, foreign exchange, supplier concentration and disruption, labor actions, commodity costs, program launches, and political and trade uncertainty.
- Defined-benefit pension obligations, underfunded multi-employer plans, tax examinations, product liability and warranty claims, environmental compliance, and cybersecurity are additional risks. Dana said pending legal matters were not expected to materially affect liquidity, financial condition or results.
Important facts for investors to verify
- How much of 2016’s reported earnings increase is attributable to the deferred-tax valuation allowance release, and how sustainable are earnings excluding that benefit?
- Whether 2017 sales, adjusted EBITDA and free-cash-flow guidance are achieved, particularly given elevated capital spending and the stated currency headwinds.
- The actual sales and earnings contribution, financing needs and integration progress for Brevini; reconcile the filing’s differing sales-contribution estimates.
- Whether customer concentration, weaker commercial-vehicle and off-highway markets, and supplier risks affect volumes, margins or customer relationships.
- Whether pension funding needs, tax matters, and other contingencies develop materially differently from management’s estimates.