Dana Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019. Dana supplies driveline, sealing, thermal-management and electrification products to light-vehicle, commercial-vehicle and off-highway markets. Amounts below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $2,164 | $1,978 | $6,633 | $6,170 |
| Gross margin | $282; 13.0% | $286; 14.5% | $908; 13.7% | $901; 14.6% |
| Earnings before interest and taxes | $137 | $147 | $182 | $459 |
| Net income attributable to Dana | $111 | $95 | $141 | $327 |
| Diluted EPS | $0.77 | $0.65 | $0.97 | $2.23 |
| Adjusted EBITDA (non-GAAP) | $250 | $240 | $793 | $734 |
| Operating cash flow | $231 | $124 | $288 | $237 |
| Capital expenditures | $108 | $90 | $298 | $235 |
| Adjusted free cash flow (non-GAAP) | $125 | $34 | $54 | $2 |
- Q3 sales rose 9%, largely reflecting acquisitions; organic growth was 1%, while currency reduced sales by $25. Acquisitions contributed a net $189 to the year-over-year increase.
- Q3 gross margin fell 150 basis points to 13.0%. Higher commodity costs, depreciation and operating costs outweighed material savings. Adjusted EBITDA increased to $250, but reported EBIT declined to $137 as depreciation and other costs rose.
- Nine-month sales grew 8%; acquisitions added $484 and currency reduced sales by $159. Organic growth was 2%. Gross margin declined 90 basis points to 13.7%.
- Nine-month reported earnings were substantially lower year over year, principally reflecting a $258 pension settlement charge in Q2 2019 and the absence of the prior-year comparison’s $20 intangible impairment charge. The 2019 period also included significant tax benefits; the reported nine-month tax benefit was $27.
- Nine-month operating cash flow improved to $288, but working capital absorbed $197 and capital expenditures were $298. Investing cash outflow was $995, including business acquisitions; financing provided $605. Cash, cash equivalents and restricted cash ended at $412, including $402 of cash and cash equivalents.
Balance sheet, debt and liquidity
- At September 30, 2019, total assets were $7,231 and total liabilities were $5,179. Reported debt comprised $109 short-term debt, $13 current long-term debt and $2,346 long-term debt, net of issuance costs.
- Liquidity, as defined by Dana, was $1,296: $397 available cash, $879 undrawn revolving-facility availability and $20 marketable securities. The revolving facility had $100 drawn and $21 committed to letters of credit; Dana reported covenant compliance.
- Debt increased substantially from year-end 2018, mainly to fund the Oerlikon Drive Systems acquisition. Dana’s credit facilities are secured and include a first-lien net leverage maintenance covenant.
Material changes, outlook and risks
- Acquisitions expanded the business and electrification portfolio: Oerlikon Drive Systems (ODS), SME, PEPS and Nordresa. ODS contributed $179 of Q3 sales and $26 of adjusted EBITDA; its nine-month contribution was $465 of sales and $62 of adjusted EBITDA. Acquisitions materially affect comparisons and added debt and integration costs.
- Management lowered its 2019 sales outlook by about $275 from its July outlook, to $8.55–$8.85 billion, citing softer off-highway markets and weaker currencies. It forecast adjusted EBITDA of $1.00–$1.07 billion, an approximately 11.9% adjusted EBITDA margin, and adjusted free cash flow of about $260 million, or 3% of sales. Planned capital expenditures were approximately 4.9% of sales.
- Management’s market outlook reflected softer global construction/mining and agricultural demand, weakness in Asia-Pacific vehicle markets, and continued uncertainty in Europe. It cited tariffs, commodity inflation, currency movements, customer pricing-recovery lags and regional market conditions as risks. Higher commodity costs reduced year-over-year earnings by about $46 in the first nine months.
- Hydro-Québec acquired indirect 45% redeemable noncontrolling interests in SME and PEPS. It has a right, after June 22, 2021, to put all its interests in TM4, SME and PEPS to Dana at fair value, creating a potential future cash requirement.
- Dana contributed $62 to a U.S. pension plan before transferring approximately $165 of remaining obligations to insurers; the transfer generated the $258 settlement charge. Management expected no minimum U.S. pension funding requirement in 2020 and estimated year-end plan funding near 93%, subject to assumptions.
- Product liability accruals were $14 and environmental accruals were $9 at quarter-end. Management stated that pending legal matters were not expected to have a material adverse effect. No material changes to disclosed risk factors were reported; disclosure controls were deemed effective.
Key facts for investors to verify
- Whether 2019 guidance was achieved, particularly sales, adjusted EBITDA margin and adjusted free cash flow, given the softer market and currency assumptions.
- How much reported sales and profit growth reflects acquired businesses versus organic performance, and whether acquisition synergies offset integration, depreciation and financing costs.
- Debt reduction, interest expense, covenant headroom and the availability of cash held outside the United States.
- The sustainability of cash conversion given working-capital needs and elevated capital spending.
- The final purchase-price allocations for recent acquisitions and the potential value and timing of Hydro-Québec’s put rights.
- The effects of one-time pension and tax items when assessing underlying earnings and the comparability of reported results.