Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2018
Commission File Number: 1-1063
Dana Incorporated
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 26-1531856 |
(State of incorporation) | | (IRS Employer Identification Number) |
| | |
3939 Technology Drive, Maumee, OH | | 43537 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (419) 887-3000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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| | | |
Large accelerated filer þ | Non-accelerated filer o | | Smaller reporting company o |
Accelerated filer o | (Do not check if a smaller reporting company) | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 144,544,761 shares of the registrant’s common stock outstanding at July 13, 2018.
DANA INCORPORATED – FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018
TABLE OF CONTENTS
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| | |
| | 10-Q Pages |
PART I – FINANCIAL INFORMATION | |
| | |
Item 1 | Financial Statements | |
| Consolidated Statement of Operations (Unaudited) | |
| Consolidated Statement of Comprehensive Income (Unaudited) | |
| Consolidated Balance Sheet (Unaudited) | |
| Consolidated Statement of Cash Flows (Unaudited) | |
| Notes to Consolidated Financial Statements (Unaudited) | |
| | |
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 3 | Quantitative and Qualitative Disclosures About Market Risk | |
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Item 4 | Controls and Procedures | |
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PART II – OTHER INFORMATION | |
| | |
Item 1 | Legal Proceedings | |
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Item 1A | Risk Factors | |
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Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 6 | Exhibits | |
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Signatures | | |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Dana Incorporated
Consolidated Statement of Operations (Unaudited)
(In millions, except per share amounts)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net sales | $ | 2,054 |
| | $ | 1,840 |
| | $ | 4,192 |
| | $ | 3,541 |
|
Costs and expenses | | | |
| | |
| | |
|
Cost of sales | 1,746 |
| | 1,563 |
| | 3,577 |
| | 3,000 |
|
Selling, general and administrative expenses | 134 |
| | 133 |
| | 264 |
| | 253 |
|
Amortization of intangibles | 2 |
| | 3 |
| | 4 |
| | 5 |
|
Restructuring charges, net | 7 |
| | 10 |
| | 8 |
| | 12 |
|
Impairment of indefinite-lived intangible asset | (20 | ) | |
|
| | (20 | ) | |
|
|
Adjustment in fair value of disposal group held for sale | 3 |
| |
|
| | 3 |
| |
|
|
Other expense, net | (10 | ) | | (1 | ) | | (10 | ) | | (12 | ) |
Earnings before interest and income taxes | 138 |
|
| 130 |
|
| 312 |
|
| 259 |
|
Loss on extinguishment of debt |
|
| | (6 | ) | |
|
| | (6 | ) |
Interest income | 2 |
| | 2 |
| | 5 |
| | 5 |
|
Interest expense | 23 |
| | 27 |
| | 47 |
| | 54 |
|
Earnings before income taxes | 117 |
|
| 99 |
|
| 270 |
|
| 204 |
|
Income tax expense (benefit) | (4 | ) | | 31 |
| | 44 |
| | 61 |
|
Equity in earnings of affiliates | 6 |
| | 5 |
| | 12 |
| | 10 |
|
Net income | 127 |
| | 73 |
| | 238 |
| | 153 |
|
Less: Noncontrolling interests net income | 3 |
| | 5 |
| | 5 |
| | 10 |
|
Less: Redeemable noncontrolling interests net income (loss) |
|
| | (3 | ) | | 1 |
| | (3 | ) |
Net income attributable to the parent company | $ | 124 |
| | $ | 71 |
| | $ | 232 |
| | $ | 146 |
|
| | | | | | | |
Net income per share available to common stockholders | |
| | |
| | |
| | |
|
Basic | $ | 0.85 |
| | $ | 0.48 |
| | $ | 1.60 |
| | $ | 1.00 |
|
Diluted | $ | 0.85 |
| | $ | 0.47 |
| | $ | 1.58 |
| | $ | 0.99 |
|
| | | | | | | |
Weighted-average common shares outstanding | | | | | | | |
Basic | 145.1 |
| | 144.8 |
| | 145.3 |
| | 144.7 |
|
Diluted | 146.5 |
| | 146.2 |
| | 147.0 |
| | 146.1 |
|
| | | | | | | |
Cash dividends declared per share | $ | 0.10 |
| | $ | 0.06 |
| | $ | 0.20 |
| | $ | 0.12 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Dana Incorporated
Consolidated Statement of Comprehensive Income (Unaudited)
(In millions)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 127 |
| | $ | 73 |
| | $ | 238 |
| | $ | 153 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Currency translation adjustments | (56 | ) | | (31 | ) | | (46 | ) | | (1 | ) |
Hedging gains and losses | (6 | ) | | 5 |
| | (14 | ) | | 1 |
|
Defined benefit plans | 6 |
| | 5 |
| | 13 |
| | 10 |
|
Other comprehensive income (loss) | (56 | ) | | (21 | ) | | (47 | ) | | 10 |
|
Total comprehensive income | 71 |
| | 52 |
| | 191 |
| | 163 |
|
Less: Comprehensive (income) loss attributable to noncontrolling interests | 2 |
| | (6 | ) | |
|
| | (13 | ) |
Less: Comprehensive loss attributable to redeemable noncontrolling interests | 2 |
| |
|
| |
|
| | 1 |
|
Comprehensive income attributable to the parent company | $ | 75 |
| | $ | 46 |
| | $ | 191 |
| | $ | 151 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Dana Incorporated
Consolidated Balance Sheet (Unaudited)
(In millions, except share and per share amounts)
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Assets | |
| | |
|
Current assets | |
| | |
|
Cash and cash equivalents | $ | 339 |
| | $ | 603 |
|
Marketable securities | 37 |
| | 40 |
|
Accounts receivable | |
| | |
|
Trade, less allowance for doubtful accounts of $9 in 2018 and $8 in 2017 | 1,231 |
| | 994 |
|
Other | 180 |
| | 172 |
|
Inventories | 1,046 |
| | 969 |
|
Other current assets | 104 |
| | 97 |
|
Current assets of disposal group held for sale | 10 |
| | 7 |
|
Total current assets | 2,947 |
| | 2,882 |
|
Goodwill | 211 |
| | 127 |
|
Intangibles | 177 |
| | 174 |
|
Deferred tax assets | 453 |
| | 420 |
|
Other noncurrent assets | 70 |
| | 71 |
|
Investments in affiliates | 260 |
| | 163 |
|
Property, plant and equipment, net | 1,806 |
| | 1,807 |
|
Total assets | $ | 5,924 |
| | $ | 5,644 |
|
| | | |
Liabilities and equity | |
| | |
|
Current liabilities | |
| | |
|
Short-term debt | $ | 24 |
| | $ | 17 |
|
Current portion of long-term debt | 20 |
| | 23 |
|
Accounts payable | 1,244 |
| | 1,165 |
|
Accrued payroll and employee benefits | 187 |
| | 219 |
|
Taxes on income | 85 |
| | 53 |
|
Other accrued liabilities | 246 |
| | 220 |
|
Current liabilities of disposal group held for sale | 6 |
| | 5 |
|
Total current liabilities | 1,812 |
| | 1,702 |
|
Long-term debt, less debt issuance costs of $20 in 2018 and $22 in 2017 | 1,765 |
| | 1,759 |
|
Pension and postretirement obligations | 578 |
| | 607 |
|
Other noncurrent liabilities | 367 |
| | 413 |
|
Noncurrent liabilities of disposal group held for sale | 2 |
| | 2 |
|
Total liabilities | 4,524 |
| | 4,483 |
|
Commitments and contingencies (Note 15) |
|
| |
|
|
Redeemable noncontrolling interests | 149 |
| | 47 |
|
Parent company stockholders' equity | |
| | |
|
Preferred stock, 50,000,000 shares authorized, $0.01 par value, no shares outstanding | — |
| | — |
|
Common stock, 450,000,000 shares authorized, $0.01 par value, 144,544,641 and 144,984,050 shares outstanding | 2 |
| | 2 |
|
Additional paid-in capital | 2,356 |
| | 2,354 |
|
Retained earnings | 290 |
| | 86 |
|
Treasury stock, at cost (8,255,763 and 7,001,017 shares) | (118 | ) | | (87 | ) |
Accumulated other comprehensive loss | (1,385 | ) | | (1,342 | ) |
Total parent company stockholders' equity | 1,145 |
| | 1,013 |
|
Noncontrolling interests | 106 |
| | 101 |
|
Total equity | 1,251 |
| | 1,114 |
|
Total liabilities and equity | $ | 5,924 |
| | $ | 5,644 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Dana Incorporated
Consolidated Statement of Cash Flows (Unaudited)
(In millions)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Operating activities | |
| | |
|
Net income | $ | 238 |
| | $ | 153 |
|
Depreciation | 124 |
| | 104 |
|
Amortization of intangibles | 5 |
| | 6 |
|
Amortization of deferred financing charges | 2 |
| | 3 |
|
Call premium on debt |
|
| | 5 |
|
Write-off of deferred financing costs |
|
| | 1 |
|
Earnings of affiliates, net of dividends received | 5 |
| | (2 | ) |
Stock compensation expense | 9 |
| | 10 |
|
Deferred income taxes | (45 | ) | | 5 |
|
Pension contributions, net | 1 |
| | (3 | ) |
Impairment of indefinite-lived intangible asset | 20 |
| |
|
|
Gain on sale of subsidiary |
|
| | (3 | ) |
Adjustment in fair value of disposal group held for sale | (2 | ) | | |
Change in working capital | (232 | ) | | (104 | ) |
Other, net | (12 | ) | | 5 |
|
Net cash provided by operating activities | 113 |
| | 180 |
|
| | | |
Investing activities | |
| | |
|
Purchases of property, plant and equipment | (145 | ) | | (169 | ) |
Acquisition of businesses, net of cash acquired | (151 | ) | | (182 | ) |
Proceeds from previous acquisition | 9 |
| | |
Purchases of marketable securities | (29 | ) | | (17 | ) |
Proceeds from sales of marketable securities | 6 |
| | 1 |
|
Proceeds from maturities of marketable securities | 23 |
| | 13 |
|
Proceeds from sale of subsidiary |
|
| | 3 |
|
Other, net |
|
| | (1 | ) |
Net cash used in investing activities | (287 | ) | | (352 | ) |
| | | |
Financing activities | |
| | |
|
Net change in short-term debt | (5 | ) | | (79 | ) |
Proceeds from long-term debt |
|
| | 400 |
|
Repayment of long-term debt | (2 | ) | | (288 | ) |
Call premium on debt |
|
| | (5 | ) |
Deferred financing payments |
|
| | (6 | ) |
Dividends paid to common stockholders | (29 | ) | | (17 | ) |
Distributions to noncontrolling interests | (4 | ) | | (3 | ) |
Repurchases of common stock | (25 | ) | |
|
|
Other, net | (5 | ) | | 1 |
|
Net cash provided by (used in) financing activities | (70 | ) | | 3 |
|
| | | |
Net decrease in cash, cash equivalents and restricted cash | (244 | ) | | (169 | ) |
Cash, cash equivalents and restricted cash – beginning of period | 610 |
| | 716 |
|
Effect of exchange rate changes on cash balances | (13 | ) | | 30 |
|
Less: Cash contributed to disposal group | (10 | ) | | |
Cash, cash equivalents and restricted cash – end of period (Note 6) | $ | 343 |
| | $ | 577 |
|
| | | |
Non-cash investing activity | | | |
Purchases of property, plant and equipment held in accounts payable | $ | 75 |
| | $ | 113 |
|
The accompanying notes are an integral part of the consolidated financial statements.
Dana Incorporated
Index to Notes to Consolidated Financial Statements
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1. | Organization and Summary of Significant Accounting Policies |
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2. | Acquisitions |
| |
3. | Disposal Groups and Divestitures |
| |
4. | Goodwill and Other Intangible Assets |
| |
5. | Restructuring of Operations |
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6. | Supplemental Balance Sheet and Cash Flow Information |
| |
7. | Stockholders' Equity |
| |
8. | Redeemable Noncontrolling Interests |
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9. | Earnings per Share |
| |
10. | Stock Compensation |
| |
11. | Pension and Postretirement Benefit Plans |
| |
12. | Marketable Securities |
| |
13. | Financing Agreements |
| |
14. | Fair Value Measurements and Derivatives |
| |
15. | Commitments and Contingencies |
| |
16. | Warranty Obligations |
| |
17. | Income Taxes |
| |
18. | Other Expense, Net |
| |
19. | Revenue from Contracts with Customers |
| |
20. | Segments |
| |
21. | Equity Affiliates |
Notes to Consolidated Financial Statements (Unaudited)
(In millions, except share and per share amounts)
Note 1. Organization and Summary of Significant Accounting Policies
General
Dana Incorporated (Dana) is headquartered in Maumee, Ohio and was incorporated in Delaware in 2007. As a global provider of high technology driveline (axles, driveshafts and transmissions); sealing and thermal-management products; and motors, power inverters, and control systems for electric vehicles our customer base includes virtually every major vehicle manufacturer in the global light vehicle, medium/heavy vehicle and off-highway markets.
The terms "Dana," "we," "our" and "us," when used in this report, are references to Dana. These references include the subsidiaries of Dana unless otherwise indicated or the context requires otherwise.
Summary of significant accounting policies
Basis of presentation — Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information. These statements are unaudited, but in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods. The results reported in these consolidated financial statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the consolidated financial statements in Item 8 of our 2017 Form 10-K.
Foreign currency translation — We believe that Argentina's economy met the GAAP definition of a highly inflationary economy during the second quarter of 2018. As such, effective July 1, 2018 we will remeasure the financial statements of our Argentine subsidiaries as if their functional currency was the U.S. dollar. In assessing Argentina's economy as highly inflationary we considered its three-year cumulative inflation rate along with other factors. We believe the National Wholesale Price Index (WPI) provides the most reliable calculation of cumulative inflation for Argentina as the WPI has consistently provided national coverage and historically has been viewed as the most relevant and reliable measure by practitioners. Argentina's three-year cumulative inflation rate through May 2018 based on the WPI was 109%. In addition, management considered the Central Bank of Argentina increasing annual interest rates to 30% in April 2018 and further increasing them to 40% in May 2018, the Argentine government requesting financial assistance from the International Monetary Fund and the significant depreciation of the Argentine peso against the U.S. dollar during the second quarter of 2018.
Recently adopted accounting pronouncements
On January 1, 2018, we adopted ASU 2017-12, Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities, guidance that addresses effectiveness testing requirements, income statement presentation and disclosure and hedge accounting qualification criteria. Adoption of this standard results in a prospective change to the presentation of certain hedging-related gains and losses in our consolidated statement of operations. Effective with our permitted early adoption of this standard on January 1, 2018, realized gains and losses on forecasted transactions are recorded in the financial statement line item to which the underlying forecasted transaction relates (e.g., sales or cost of sales). Adoption also simplifies our ongoing effectiveness testing and reduces the complexity of hedge accounting requirements for new hedging contracts. The adoption of this standard, including the change in presentation within the consolidated statement of operations, did not have a material impact.
On January 1, 2018, we adopted ASU 2017-07, Retirement Benefits – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, guidance that changed the reporting of pension and other postretirement benefits (OPEB) costs in the income statement. The service cost components of net periodic pension and OPEB costs continue to be included in cost of sales and selling, general and administrative expenses as part of compensation cost and remain eligible for capitalization in inventory and other assets. The non-service components are now reported in other expense, net and are not eligible for capitalization. The impact of the new guidance on inventory at June 30, 2018 was not material. For the first half of 2017, we reclassified pension and OPEB costs of $2 from cost of sales and $1 from selling, general and administrative to other expense, net to conform to the 2018 presentation. We used the practical expedient in the guidance to quantify these impacts, which disregards the potential change in capitalized costs during the period. See Note 20 for information regarding the related impact on our segment reporting.
On January 1, 2018, we adopted ASU 2016-18, Statement of Cash Flows – Restricted Cash, guidance that requires the statement of cash flows to explain the change during the period in the total cash, cash equivalents and amounts generally described as restricted cash. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending total amounts shown on the statement of cash flows. Retrospective presentation is required. For the six months ended June 30, 2017, this change resulted in a $9 increase in cash, cash equivalents and restricted cash at the beginning and a $9 increase at the end of the period as presented on our consolidated statement of cash flow. In addition, removing the change in restricted cash from the consolidated statement of cash flows did not result in a change in our net cash used in investing activities for the six months ended June 30, 2017. See Note 6 for additional information.
On January 1, 2018, we adopted ASU 2016-01, Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities, an amendment that addresses the recognition, measurement, presentation and disclosure of certain financial instruments. Investments in equity securities that were classified as available-for-sale and carried at fair value, with changes in fair value reported in other comprehensive income (OCI), are now carried at fair value determined on an exit price notion and changes in fair value are now reported in net income. The new guidance also affects the assessment of deferred tax assets related to available-for-sale securities, the accounting for liabilities for which the fair value option is elected and the disclosures of financial assets and financial liabilities in the notes to the financial statements. The adoption resulted in a release of the deferred gain in accumulated other comprehensive income (AOCI) directly to retained earnings of $2.
Effective January 1, 2018, we adopted ASU 2014-09, Revenue – Revenue from Contracts with Customers, which requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration a company expects to be entitled to in exchange for those goods or services. We have elected to use the modified retrospective approach to transition to the new standard. Comparative prior periods have not been restated. We assessed our products in combination with the provisions of our current customer contracts to determine the cumulative effect of initially applying ASU 2014-09. Based on our assessment, the adoption date financial statement impact was limited to balance sheet reclassifications required to establish the refund asset, refund liability and contract liability concepts provided for in ASU 2014-09. There was no cumulative effect adjustment required to be recorded to retained earnings. The cumulative effects of the changes made to our January 1, 2018 consolidated balance sheet for the adoption of ASU 2014-09 were as follows:
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| | | | | | | | | | | | |
| | Balance at December 31, 2017 | | Adjustments Due to ASU 2014-09 | | Balance at January 1, 2018 |
Assets | | | | | | |
Current assets | | | | | | |
Accounts receivable - Trade | | $ | 994 |
| | $ | 15 |
| | $ | 1,009 |
|
Other current assets | | 97 |
| | 1 |
| | 98 |
|
| | | | | | |
Liabilities | | | | | | |
Current liabilities | | | | | | |
Other accrued liabilities | | $ | 220 |
| | $ | 16 |
| | $ | 236 |
|
The follow table shows the impact adopting ASC 606 had on our consolidated balance sheet as of June 30, 2018:
|
| | | | | | | | | | | | |
| | June 30, 2018 |
| | Balances Without Adoption of ASU 2014-09 | | Adjustments Due to ASU 2014-09 | | As Reported |
Assets | | | | | | |
Current assets | | | | | | |
Accounts receivable - Trade | | $ | 1,219 |
| | $ | 12 |
| | $ | 1,231 |
|
Other current assets | | 101 |
| | 3 |
| | 104 |
|
| | | | | | |
Liabilities | | | | | | |
Current liabilities | | | | | | |
Other accrued liabilities | | $ | 231 |
| | $ | 15 |
| | $ | 246 |
|
See Note 19 for additional information.
We also adopted the following standards during the first half of 2018, none of which had a material impact on our financial statements or financial statement disclosures:
|
| | | | |
Standard | | Effective Date |
2017-09 | | Stock Compensation – Scope of Modification Accounting | | January 1, 2018 |
2017-01 | | Business Combinations – Clarifying the Definition of a Business | | January 1, 2018 |
2016-15 | | Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments | | January 1, 2018 |
Recently issued accounting pronouncements
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This guidance allows entities to reclass stranded income tax effects resulting from the Tax Cuts and Jobs Act (the “Act”) from AOCI to retained earnings in their consolidated financial statements. As a result of the Act, deferred taxes were adjusted to reflect the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate by means of a credit or charge to income from continuing operations, leaving the tax effects of items within AOCI stranded at historical tax rates. This guidance becomes effective January 1, 2019 and may be early adopted in any interim period. The guidance is to be applied either in the period of adoption or retrospectively to each period that was affected by the change in the corporate tax rate under the Act. Adoption of this guidance will not have a material effect on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging – (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be considered "not indexed to an entity's own stock" and therefore accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. Down round features are most often found in warrants and conversion options embedded in debt or preferred equity instruments. In addition, the guidance re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity to a scope exception with no accounting effect. This guidance becomes effective January 1, 2019 and early adoption is permitted. We do not presently issue any equity-linked financial instruments and therefore this guidance has no impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Goodwill – Simplifying the Test for Goodwill Impairment, guidance that simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 of the goodwill impairment test. The new guidance quantifies goodwill impairment as the amount by which the carrying amount of a reporting unit, including goodwill, exceeds its fair value, with the impairment loss limited to the total amount of goodwill allocated to that reporting unit. This guidance becomes effective January 1, 2020 and will be applied on a prospective basis. Early adoption is permitted
for impairment tests performed after January 1, 2017. We do not expect the adoption of this guidance to impact our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Credit Losses – Measurement of Credit Losses on Financial Instruments, new guidance for the accounting for credit losses on certain financial instruments. This guidance introduces a new approach to estimating credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. This guidance, which becomes effective January 1, 2020, is not expected to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, its new lease accounting standard. The primary focus of the standard is on the accounting by lessees. This standard requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease) on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern in the income statement. Quantitative and qualitative disclosures are required to provide insight into the extent of revenue and expense recognized and expected to be recognized from leasing arrangements. Approximately three-fourths of our global lease portfolio represents leases of real estate, including manufacturing, assembly and office facilities, while the remainder represents leases of personal property, including manufacturing, material handling and IT equipment.
Many factors will impact the ultimate measurement of the lease obligation to be recognized upon adoption. We continue to evaluate the impact this guidance will have on our consolidated financial statements. With respect to the available practical expedients, we expect to elect the primary package of expedients whereby we will reassess neither the existence, nor the classification nor the amount and treatment of initial direct costs of existing leases. We do not expect to apply hindsight to the evaluation of lease options (e.g., renewal) and, accordingly, do not expect to utilize the practical expedient that would allow such an approach. Finally, we plan to separate the lease components from the non-lease components of each lease arrangement and, therefore, do not expect to elect the expedient that would enable us not to separate them. This guidance becomes effective January 1, 2019 with early adoption permitted.
Note 2. Acquisitions
TM4 — On June 22, 2018, we acquired a 55% ownership interest in TM4 Inc. (TM4) from Hydro-Québec. TM4 designs and manufactures motors, power inverters, and control systems for electric vehicles, offering a complementary portfolio to Dana's electric gearboxes and thermal-management technologies for batteries, motors, and inverters. The transaction establishes Dana as the only supplier with full e-Drive design, engineering, and manufacturing capabilities - offering electro-mechanical propulsion solutions to each of its end markets. The transaction further strengthens Dana's position in China, the world's fastest-growing market for electric vehicles. TM4 owns a 50% interest in Prestolite E-Propulsion Systems Limited (PEPS), a joint venture in China with Prestolite Electric Beijing Limited, which offers electric mobility solutions throughout China and Asia.
We paid $125 at closing, using cash on hand. Dana will consolidate TM4 as the governing documents provide Dana with a controlling financial interest. The terms of the agreement provide Hydro-Québec with the right to put all, and not less than all, of its shares in TM4 to Dana at fair value any time after June 22, 2021.
The TM4 transaction closed just prior to the end of the current reporting period. As such, the fair value of the assets acquired and liabilities assumed are provisional and could be revised as a result of additional information obtained regarding liabilities assumed and revisions of provisional estimates of fair values, including but not limited to, the completion of independent appraisals and valuations related to intangibles, the equity method investment in PEPS, property, plant, and equipment, and the redeemable noncontrolling interest. The provisional amounts were determined with the assistance of an independent appraiser and are based on transaction specific information obtained to date and benchmark data from comparable transactions in relevant industries. The purchase consideration and the related provisional allocation to the acquisition date fair values of the assets acquired and liabilities assumed are presented in the following table:
|
| | | | |
Total purchase consideration | | $ | 125 |
|
| | |
Cash and cash equivalents | | $ | 3 |
|
Accounts receivable - Trade | | 5 |
|
Accounts receivable - Other | | 1 |
|
Inventories | | 4 |
|
Goodwill | | 87 |
|
Intangibles | | 30 |
|
Investments in affiliates | | 102 |
|
Property, plant and equipment | | 3 |
|
Accounts payable | | (2 | ) |
Accrued payroll and employee benefits | | (1 | ) |
Other accrued liabilities | | (5 | ) |
Redeemable noncontrolling interest | | (102 | ) |
Total purchase consideration allocation | | $ | 125 |
|
Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce and is not deductible for tax purposes. The provisional fair values assigned to intangibles include $11 allocated to customer relationships, $16 allocated to developed technology and $3 allocated to trademarks and trade names.
The results of operations of the business are reported in our Commercial Vehicle operating segment from the date of acquisition. Transaction related expenses associated with completion of the acquisition totaling $3 were charged to other expense, net. The pro forma effects of this acquisition would not materially impact our reported results for any period presented, and as a result no pro forma financial statements are presented.
USM – Warren — On March 1, 2017, we acquired certain assets and liabilities relating to the Warren, Michigan production unit of U.S. Manufacturing Corporation (USM). The production unit acquired is in the business of manufacturing axle housings, extruded tubular products and machined components for the automotive industry. The acquisition increases Dana's revenue from light and commercial vehicle manufacturers and vertically integrates a significant element of Dana's supply chain. It also provides Dana with new lightweight product and process technologies.
USM contributed certain assets and liabilities relating to its Warren, Michigan production unit to Warren Manufacturing LLC (USM – Warren), a newly created legal entity, and Dana acquired all of the company units of USM – Warren. The company units were acquired by Dana free and clear of any liens. We paid $104 at closing, including $25 to effectively settle trade payable obligations originating from product purchases Dana made from USM prior to the acquisition, and received $1 in the third quarter of 2017 for purchase price adjustments determined under the terms of the agreement. The acquisition has been accounted for as a business combination. The purchase consideration and the related allocation to the acquisition date fair values of the assets acquired and liabilities assumed are presented in the following table:
|
| | | | |
Total purchase consideration | | $ | 78 |
|
| | |
Accounts receivable - Trade | | $ | 17 |
|
Accounts receivable - Other | | 3 |
|
Inventories | | 9 |
|
Goodwill | | 3 |
|
Intangibles | | 33 |
|
Property, plant and equipment | | 50 |
|
Accounts payable | | (34 | ) |
Accrued payroll and employee benefits | | (2 | ) |
Other accrued liabilities | | (1 | ) |
Total purchase consideration allocation | | $ | 78 |
|
Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce and is deductible for tax purposes. Intangibles includes $30 allocated to customer relationships and $3 allocated to developed technology. We used the relief from royalty method, an income approach, to value developed
technology. We used the multi-period excess earnings method, an income approach, to value customer relationships. We used a replacement cost method to value fixed assets. The developed technology and customer relationship intangible assets are being amortized on a straight-line basis over eighteen and eleven years, respectively, and property, plant and equipment is being depreciated on a straight-line basis over useful lives ranging from one to seventeen years.
The results of operations of the business are reported in our Light Vehicle operating segment from the date of acquisition. We incurred transaction related expenses to complete the acquisition in 2017 totaling $5, which were charged to other expense, net. The pro forma effects of this acquisition would not materially impact our reported results for any period presented, and as a result no pro forma financial statements are presented.
BFP and BPT — On February 1, 2017, we acquired 80% ownership interests in Brevini Fluid Power S.p.A. (BFP) and Brevini Power Transmission S.p.A. (BPT) from Brevini Group S.p.A. (Brevini). The acquisition expands our Off-Highway operating segment product portfolio to include technologies for tracked vehicles, doubling our addressable market for off-highway driveline systems and establishing Dana as the only off-highway solutions provider that can manage the power to both move the equipment and perform its critical work functions. This acquisition also brings a platform of technologies that can be leveraged in our light and commercial-vehicle end markets, helping to accelerate our hybridization and electrification initiatives.
We paid $181 at closing, using cash on hand, and refinanced a significant portion of the debt assumed in the transaction during the first half of 2017. In December 2017, a purchase price reduction of $9 was agreed under the sale and purchase agreement provisions for determination of the net indebtedness and net working capital levels of BFP and BPT as of the closing date. The terms of the agreement provide Dana the right to call half of Brevini’s noncontrolling interests in BFP and BPT, and Brevini the right to put half of its noncontrolling interests in BFP and BPT to Dana, assuming Dana does not exercise its call right, after the 2017 BFP and BPT financial statements have been approved by the board of directors. Further, Dana has the right to call Brevini’s remaining noncontrolling interests in BFP and BPT, and Brevini the right to put its remaining noncontrolling interests in BFP and BPT to Dana, assuming Dana does not exercise its call right, after the 2019 BFP and BPT financial statements have been approved by the board of directors. The call and put prices are based on the amount Dana paid to acquire its initial 80% interest in BFP and BPT subject to adjustment based on the actual EBITDA and free cash flows, as defined in the agreement, of BFP and BPT. In connection with the acquisition of BFP and BPT, Dana agreed to purchase certain real estate currently being leased by BPT from a Brevini affiliate for €25 by November 1, 2017. The real estate purchase did not occur by November 1, 2017 due to document transfer requirements not having been fully satisfied. Completion of the real estate purchase and receipt of the purchase price adjustment occurred in the second quarter of 2018 with a net cash payment of $20. The purchase consideration and the related allocation to the acquisition date fair values of the assets acquired and liabilities assumed are presented in the following table:
|
| | | | |
Total purchase consideration | | $ | 201 |
|
| | |
Cash and cash equivalents | | $ | 75 |
|
Accounts receivable - Trade | | 78 |
|
Accounts receivable - Other | | 18 |
|
Inventories | | 134 |
|
Other current assets | | 9 |
|
Goodwill | | 20 |
|
Intangibles | | 41 |
|
Deferred tax assets | | 3 |
|
Other noncurrent assets | | 4 |
|
Property, plant and equipment | | 174 |
|
Notes payable, including current portion of long-term debt | | (130 | ) |
Accounts payable | | (51 | ) |
Accrued payroll and employee benefits | | (14 | ) |
Taxes on income | | (1 | ) |
Other accrued liabilities | | (19 | ) |
Long-term debt | | (51 | ) |
Pension and postretirement obligations | | (11 | ) |
Other noncurrent liabilities | | (22 | ) |
Redeemable noncontrolling interest | | (44 | ) |
Noncontrolling interests | | (12 | ) |
Total purchase consideration allocation | | $ | 201 |
|
Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce and is not deductible for tax purposes. Intangibles includes $29 allocated to customer relationships and $12 allocated to trademarks and trade names. We used the multi-period excess earnings method, an income approach, to value the customer relationships. We used the relief from royalty method, an income approach, to value trademarks and trade names. We used a replacement cost method to value fixed assets. We used a discounted cash flow approach to value the redeemable noncontrolling interests, inclusive of the put and call provisions. We used both discounted cash flow and cost approaches to value the noncontrolling interests. The customer relationships and trademarks and trade names intangible assets are being amortized on a straight-line basis over seventeen years, and property, plant and equipment is being depreciated on a straight-line basis over useful lives ranging from three to thirty years.
The results of operations of the businesses are reported in our Off-Highway operating segment from the date of acquisition. Transaction related expenses in 2017 associated with completion of the acquisition totaling $7 were charged to other expense, net. The pro forma effects of this acquisition would not materially impact our reported results for any period presented, and as a result no pro forma financial statements are presented.
Note 3. Disposal Groups and Divestitures
Disposal group held for sale — In December 2017, we entered into an agreement to divest our Brazil suspension components business (the disposal group) for no consideration to an unaffiliated company. The results of operations of the Brazil suspension components business are reported within our Commercial Vehicle operating segment. To effectuate the sale, Dana was obligated to contribute $10 of additional cash to the business prior to closing. We classified the disposal group as held for sale at December 31, 2017, recognizing a $27 loss to adjust the carrying value of the net assets to fair value and to recognize the liability for the additional cash required to be contributed to the business prior to closing. During the first quarter of 2018, we made the required cash contribution to the disposal group. After being unable to complete the transaction with the counterparty to the December 2017 agreement, we entered into an agreement with another third party in June 2018. The transaction with the new counterparty closed in July 2018 and we received cash proceeds of $2. We reversed $3 of the previously recognized $27 pre-tax loss, inclusive of the proceeds received in July 2018, during the second quarter of 2018. The carrying amounts of the major classes of assets and liabilities of our Brazil suspension components business are as follows:
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Cash and cash equivalents | $ | 2 |
| | $ | — |
|
Accounts receivable - Trade | 3 |
| | 3 |
|
Inventories | 5 |
| | 4 |
|
Current assets classified as held for sale | $ | 10 |
| | $ | 7 |
|
| | | |
Accounts payable | $ | 4 |
| | $ | 3 |
|
Accrued payroll and employee benefits | 1 |
| | 1 |
|
Other accrued liabilities | 1 |
| | 1 |
|
Current liabilities classified as held for sale | $ | 6 |
| | $ | 5 |
|
| | | |
Other noncurrent liabilities | $ | 2 |
| | $ | 2 |
|
Noncurrent liabilities classified as held for sale | $ | 2 |
| | $ | 2 |
|
Divestiture of Dana Companies — On December 30, 2016, we completed the divestiture of Dana Companies, LLC (DCLLC), a consolidated wholly-owned limited liability company that was established as part of our reorganization in 2008 to hold and manage personal injury asbestos claims retained by the reorganized Dana Corporation which was merged into DCLLC. The purchaser retained $3 of the proceeds with payment subject to the satisfaction of certain future conditions. The conditions associated with the retained purchase price were satisfied in the second quarter of 2017, at which time Dana received the remaining proceeds and recognized $3 of income in other expense, net. Following completion of the sale, Dana has no obligation with respect to current or future asbestos claims.
Note 4. Goodwill and Other Intangible Assets
Goodwill — The change in the carrying amount of goodwill in 2018 is due to currency fluctuation and the acquisition of a 55% interest in TM4.
Changes in the carrying amount of goodwill by segment —
|
| | | | | | | | | | | | | | | | | | | |
| Light Vehicle | | Commercial Vehicle | | Off-Highway | | Power Technologies | | Total |
Balance, December 31, 2017 | $ | 3 |
| | $ | 8 |
| | $ | 110 |
| | $ | 6 |
| | $ | 127 |
|
Acquisitions |
| | 87 |
| |
| |
| | 87 |
|
Currency impact |
| | (1 | ) | | (2 | ) | |
| | (3 | ) |
Balance, June 30, 2018 | $ | 3 |
| | $ | 94 |
| | $ | 108 |
| | $ | 6 |
| | $ | 211 |
|
Components of other intangible assets —
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2018 | | December 31, 2017 |
| Weighted Average Useful Life (years) | | Gross Carrying Amount | | Accumulated Impairment and Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Impairment and Amortization | | Net Carrying Amount |
Amortizable intangible assets | | | |
| | |
| | |
| | |
| | |
| | |
|
Core technology | 7 | | $ | 110 |
| | $ | (88 | ) | | $ | 22 |
| | $ | 95 |
| | $ | (88 | ) | | $ | 7 |
|
Trademarks and trade names | 15 | | 19 |
| | (3 | ) | | 16 |
| | 17 |
| | (2 | ) | | 15 |
|
Customer relationships | 8 | | 475 |
| | (401 | ) | | 74 |
| | 470 |
| | (403 | ) | | 67 |
|
Non-amortizable intangible assets | | | | | | | | | | | | | |
Trademarks and trade names | | | 65 |
| |
|
| | 65 |
| | 65 |
| |
|
| | 65 |
|
Used in research and development activities | | | 20 |
| | (20 | ) | | — |
| | 20 |
| |
|
| | 20 |
|
| | | $ | 689 |
| | $ | (512 | ) | | $ | 177 |
| | $ | 667 |
| | $ | (493 | ) | | $ | 174 |
|
During the third quarter of 2012, we entered a strategic alliance with Fallbrook Technologies Inc. (Fallbrook). The transaction with Fallbrook was accounted for as a business combination and the original purchase price allocation included $20 of intangible assets used in research and development activities, which had been classified as indefinite-lived. Since the third
quarter of 2012, we have been working with several customers to commercialize the continuously variable planetary (CVP) technology primarily in combustion engine applications. During the second quarter of 2018 key customers notified us of their intention to redirect their development efforts to electrification and cease further development efforts of the CVP technology in combustion engine applications. While we have not abandoned the CVP technology, we determined that it was more likely than not that the fair value of the related intangible assets was less than their carrying amount. We used the multi-period excess earnings method, an income approach, to fair value the assets used in research and development activities. Given the lack of adequate identifiable future revenue streams, it was determined that the $20 of intangible assets used in research and development activities was fully impaired during the second quarter of 2018.
The net carrying amounts of intangible assets, other than goodwill, attributable to each of our operating segments at June 30, 2018 were as follows: Light Vehicle — $30, Commercial Vehicle — $63, Off-Highway — $75 and Power Technologies — $9.
Amortization expense related to amortizable intangible assets —
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Charged to cost of sales | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
Charged to amortization of intangibles | 2 |
| | 3 |
| | 4 |
| | 5 |
|
Total amortization | $ | 2 |
| | $ | 3 |
| | $ | 5 |
| | $ | 6 |
|
The following table provides the estimated aggregate pre-tax amortization expense related to intangible assets for each of the next five years based on June 30, 2018 exchange rates. Actual amounts may differ from these estimates due to such factors as currency translation, customer turnover, impairments, additional intangible asset acquisitions and other events.
|
| | | | | | | | | | | | | | | | | | | |
| Remainder of 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Amortization expense | $ | 6 |
| | $ | 12 |
| | $ | 11 |
| | $ | 11 |
| | $ | 11 |
|
Note 5. Restructuring of Operations
Our restructuring activities have historically included rationalizing our operating footprint by consolidating facilities, positioning operations in lower cost locations and reducing overhead costs. In recent years, however, in response to lower demand and other market conditions in certain businesses, our focus has primarily been headcount reduction initiatives to reduce operating costs. Restructuring expense includes costs associated with current and previously announced actions and is comprised of contractual and noncontractual separation costs and exit costs, including costs associated with lease continuation obligations and certain operating costs of facilities that we are in the process of closing.
During the second quarter of 2018, we approved plans to implement certain headcount reductions in our Commercial Vehicle operations and Corporate service functions in Brazil which resulted in restructuring expense of $5, primarily for severance and benefit costs. In last year's second quarter, we approved plans to implement certain headcount initiatives in our Off-Highway business as part of the BPT and BFP acquisition integration which resulted in restructuring expense of $8, primarily for severance and benefit costs. Remaining amounts in the quarter and six-month periods of both years relate to previously announced actions.
Accrued restructuring costs and activity, including noncurrent portion — |
| | | | | | | | | | | |
| Employee Termination Benefits | | Exit Costs | | Total |
Balance at March 31, 2018 | $ | 17 |
| | $ | 5 |
| | $ | 22 |
|
Charges to restructuring | 6 |
| | 1 |
| | 7 |
|
Cash payments | (3 | ) | | (2 | ) | | (5 | ) |
Currency impact | (1 | ) | |
|
| | (1 | ) |
Balance at June 30, 2018 | $ | 19 |
| | $ | 4 |
| | $ | 23 |
|
| | | | | |
Balance at December 31, 2017 | $ | 21 |
| | $ | 5 |
| | $ | 26 |
|
Charges to restructuring | 6 |
| | 2 |
| | 8 |
|
Cash payments | (7 | ) | | (3 | ) | | (10 | ) |
Currency impact | (1 | ) | |
|
| | (1 | ) |
Balance at June 30, 2018 | $ | 19 |
| | $ | 4 |
| | $ | 23 |
|
At June 30, 2018, the accrued employee termination benefits include costs to reduce approximately 200 employees to be completed over the next year. The exit costs relate primarily to lease continuation obligations.
Cost to complete — The following table provides project-to-date and estimated future restructuring expenses for completion of our approved restructuring initiatives for our business segments at June 30, 2018.
|
| | | | | | | | | | | | | | | |
| Expense Recognized | | Future Cost to Complete |
| Prior to 2018 | | 2018 | | Total to Date | |
Commercial Vehicle | 35 |
| | 6 |
| | 41 |
| | 10 |
|
Off-Highway | 21 |
| |
|
| | 21 |
| |
|
|
Corporate | | | 2 |
| | 2 |
| | |
Total | $ | 56 |
| | $ | 8 |
| | $ | 64 |
| | $ | 10 |
|
The future cost to complete includes estimated separation costs, primarily those associated with one-time benefit programs, and exit costs through 2021, including lease continuation costs, equipment transfers and other costs which are required to be recognized as closures are finalized or as incurred during the closure.
Note 6. Supplemental Balance Sheet and Cash Flow Information
Inventory components at —
|
| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
Raw materials | | $ | 469 |
| | $ | 442 |
|
Work in process and finished goods | | 638 |
| | 580 |
|
Inventory reserves | | (61 | ) | | (53 | ) |
Total | | $ | 1,046 |
| | $ | 969 |
|
Cash, cash equivalents and restricted cash at —
|
| | | | | | | | | | | | | | | | |
| | June 30, 2018 | | December 31, 2017 | | June 30, 2017 | | December 31, 2016 |
Cash and cash equivalents | | $ | 339 |
| | $ | 603 |
| | $ | 568 |
| | $ | 707 |
|
Restricted cash included in other current assets | |
| | 3 |
| | 5 |
| | 5 |
|
Restricted cash included in other noncurrent assets | | 4 |
| | 4 |
| | 4 |
| | 4 |
|
Total cash, cash equivalents and restricted cash | | $ | 343 |
| | $ | 610 |
| | $ | 577 |
| | $ | 716 |
|
Note 7. Stockholders’ Equity
Common stock — Our Board of Directors declared quarterly cash dividends of ten cents per share of common stock in the first and second quarters of 2018. Dividends accrue on restricted stock units (RSUs) granted under our stock compensation program and will be paid in cash or additional units when the underlying units vest.
Share repurchase program — On March 24, 2018 our Board of Directors approved an expansion of our existing common stock share repurchase program to $200. The program expires on December 31, 2019. Under the program, we spent $25 to repurchase 1,055,000 shares of our common stock during the second quarter of 2018 through open market transactions. Approximately $175 remained available for future share repurchases as of June 30, 2018.
Changes in equity —
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
Three Months Ended June 30, | | Attributable to Parent | | Attributable to Non- controlling Interests | | Total Equity | | Attributable to Parent | | Attributable to Non- controlling Interests | | Total Equity |
Balance, March 31 | | $ | 1,104 |
| | $ | 111 |
| | $ | 1,215 |
| | $ | 1,078 |
| | $ | 105 |
| | $ | 1,183 |
|
Net income | | 124 |
| | 3 |
| | 127 |
| | 71 |
| | 5 |
| | 76 |
|
Other comprehensive income (loss) | | (49 | ) | | (5 | ) | | (54 | ) | | (25 | ) | | 1 |
| | (24 | ) |
Common stock dividends | | (15 | ) | |
|
| | (15 | ) | | (8 | ) | |
|
| | (8 | ) |
Redeemable noncontrolling interests adjustment to redemption value | |
|
| |
|
| | — |
| | (2 | ) | |
|
| | (2 | ) |
Distributions to noncontrolling interests | |
|
| | (3 | ) | | (3 | ) | |
|
| | (4 | ) | | (4 | ) |
Common stock share repurchases | | (25 | ) | |
|
| | (25 | ) | |
|
| |
|
| | — |
|
Stock compensation | | 6 |
| |
|
| | 6 |
| | 5 |
| |
|
| | 5 |
|
Balance, June 30 | | $ | 1,145 |
| | $ | 106 |
| | $ | 1,251 |
| | $ | 1,119 |
| | $ | 107 |
| | $ | 1,226 |
|
| | | | | | | | | | | | |
Six Months Ended June 30, | | |
| | |
| | |
| | |
| | |
| | |
|
Balance, December 31 | | $ | 1,013 |
| | $ | 101 |
| | $ | 1,114 |
| | $ | 1,157 |
| | $ | 85 |
| | $ | 1,242 |
|
Adoption of ASU 2016-16 tax adjustment, January 1, 2017 | |
|
| |
|
| | — |
| | (179 | ) | |
|
| | (179 | ) |
Net income | | 232 |
| | 5 |
| | 237 |
| | 146 |
| | 10 |
| | 156 |
|
Other comprehensive income | | (41 | ) | | (5 | ) | | (46 | ) | | 5 |
| | 3 |
| | 8 |
|
Common stock dividends | | (30 | ) | |
|
| | (30 | ) | | (17 | ) | |
|
| | (17 | ) |
Redeemable noncontrolling interests adjustment to redemption value | |
|
| |
|
| | — |
| | (2 | ) | |
|
| | (2 | ) |
Distributions to noncontrolling interests | |
|
| | (4 | ) | | (4 | ) | |
|
| | (5 | ) | | (5 | ) |
Common stock share repurchases | | (25 | ) | |
|
| | (25 | ) | |
|
| |
|
| | — |
|
Increase from business combination | |
|
| |
|
| | — |
| |
|
| | 14 |
| | 14 |
|
Purchase of noncontrolling interests | | (9 | ) | | 9 |
| | — |
| |
|
| |
|
| | — |
|
Stock compensation | | 11 |
| |
|
| | 11 |
| | 12 |
| |
|
| | 12 |
|
Stock withheld for employee taxes | | (6 | ) | |
|
| | (6 | ) | | (3 | ) | |
|
| | (3 | ) |
Balance, June 30 | | $ | 1,145 |
| | $ | 106 |
| | $ | 1,251 |
| | $ | 1,119 |
| | $ | 107 |
| | $ | 1,226 |
|
See Note 1 for additional information about adoption of new accounting guidance on January 1, 2018 and 2017. During the first quarter of 2018, a wholly-owned subsidiary of Dana purchased the ownership interest in Dana Spicer (Thailand) Limited (a non wholly-owned consolidated subsidiary of Dana) held by ROC Spicer, Ltd. (a non wholly-owned consolidated subsidiary of Dana). Dana maintained its controlling financial interest in Dana Spicer (Thailand) Limited and accordingly accounted for the purchase as an equity transaction. The excess of the fair value of the consideration paid over the carrying value of the investment attributable to the noncontrolling interest in ROC Spicer, Ltd. was recognized as additional noncontrolling interest with a corresponding reduction of the additional paid-in capital of Dana.
Changes in each component of accumulated other comprehensive income (AOCI) of the parent —
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Parent Company Stockholders |
| Foreign Currency Translation | | Hedging | | Investments | | Defined Benefit Plans | | Total |
Balance, March 31, 2018 | $ | (661 | ) | | $ | (72 | ) | | $ | — |
| | $ | (603 | ) | | $ | (1,336 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustments | (54 | ) | | | | | | | | (54 | ) |
Holding gain on net investment hedge | 5 |
| | | | | | | | 5 |
|
Holding gains and losses | | | 58 |
| |
| | | | 58 |
|
Reclassification of amount to net income (a) | | | (64 | ) | |
| | | | (64 | ) |
Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | | | | | | | 8 |
| | 8 |
|
Tax expense |
| |
| |
| | (2 | ) | | (2 | ) |
Other comprehensive income (loss) | (49 | ) | | (6 | ) | | — |
| | 6 |
| | (49 | ) |
Balance, June 30, 2018 | $ | (710 | ) | | $ | (78 | ) | | $ | — |
| | $ | (597 | ) | | $ | (1,385 | ) |
| | | | | | | | | |
Balance, March 31, 2017 | $ | (617 | ) | | $ | (38 | ) | | $ | — |
| | $ | (599 | ) | | $ | (1,254 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustments | (32 | ) | | | | | | | | (32 | ) |
Holding loss on net investment hedge | (3 | ) | | | | | | | | (3 | ) |
Holding gains and losses | | | (63 | ) | |
| | | | (63 | ) |
Reclassification of amount to net income (a) | | | 68 |
| |
| | | | 68 |
|
Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | | | | | | | 7 |
| | 7 |
|
Tax expense |
| |
| |
| | (2 | ) | | (2 | ) |
Other comprehensive income (loss) | (35 | ) | | 5 |
| | — |
| | 5 |
| | (25 | ) |
Balance, June 30, 2017 | $ | (652 | ) | | $ | (33 | ) | | $ | — |
| | $ | (594 | ) | | $ | (1,279 | ) |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company Stockholders |
| Foreign Currency Translation | | Hedging | | Investments | | Defined Benefit Plans | | Total |
Balance, December 31, 2017 | $ | (670 | ) | | $ | (64 | ) | | $ | 2 |
| | $ | (610 | ) | | $ | (1,342 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustments | (40 | ) | | | | | | | | (40 | ) |
Holding gains and losses | | | 20 |
| |
| | | | 20 |
|
Reclassification of amount to net income (a) | | | (35 | ) | |
| | | | (35 | ) |
Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | | | | | | | 17 |
| | 17 |
|
Tax (expense) benefit |
| | 1 |
| |
| | (4 | ) | | (3 | ) |
Other comprehensive income (loss) | (40 | ) | | (14 | ) | | — |
| | 13 |
| | (41 | ) |
Adoption of ASU 2016-01 financial instruments adjustment, January 1, 2018 | | | | | (2 | ) | | | | (2 | ) |
Balance, June 30, 2018 | $ | (710 | ) | | $ | (78 | ) | | $ | — |
| | $ | (597 | ) | | $ | (1,385 | ) |
| | | | | | | | | |
Balance, December 31, 2016 | $ | (646 | ) | | $ | (34 | ) | | $ | — |
| | $ | (604 | ) | | $ | (1,284 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustments | 2 |
| | | | | | | | 2 |
|
Holding loss on net investment hedge | (8 | ) | | | | | | | | (8 | ) |
Holding gains and losses | | | (75 | ) | |
| | | | (75 | ) |
Reclassification of amount to net income (a) | | | 74 |
| |
| | | | 74 |
|
Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | | | | | | | 15 |
| | 15 |
|
Tax (expense) benefit |
| | 2 |
| |
| | (5 | ) | | (3 | ) |
Other comprehensive income (loss) | (6 | ) | | 1 |
| | — |
| | 10 |
| | 5 |
|
Balance, June 30, 2017 | $ | (652 | ) | | $ | (33 | ) | | $ | — |
| | $ | (594 | ) | | $ | (1,279 | ) |
(a) For 2018, realized gains and losses from currency-related forward contracts associated with forecasted transactions or from other derivative instruments treated as cash flow hedges are reclassified from AOCI into the same line item in the consolidated statement of operations in which the underlying forecasted transaction or other hedged item is recorded. See Note 14 for additional details. For 2017, reclassifications from AOCI were included in other expense, net.
(b) See Note 11 for additional details.
Note 8. Redeemable Noncontrolling Interests
In connection with the acquisition of a controlling interest in TM4 from Hydro-Québec on June 22, 2018, we recognized $102 for Hydro-Québec's 45% redeemable noncontrolling interest. The terms of the agreement provide Hydro-Québec with the right to put all, and not less than all, of its shares to Dana at fair value any time after June 22, 2021. See Note 2 for additional information.
In connection with the acquisition of a controlling interest in BFP and BPT from Brevini on February 1, 2017, we recognized $45 for Brevini's 20% redeemable noncontrolling interests. The terms of the agreement provide Dana the right to call Brevini's noncontrolling interests in BFP and BPT, and Brevini the right to put its noncontrolling interests in BFP and BPT to Dana, assuming Dana does not exercise its call rights, at dates and prices defined in the agreement. The call and put prices are based on the amount Dana paid to acquire its initial ownership interest in BFP and BPT subject to adjustment based on the actual EBITDA and free cash flows, as defined in the agreement, of BFP and BPT. See Note 2 for additional information.
Redeemable noncontrolling interests reflected as of the balance sheet date are the greater of the redeemable noncontrolling interest balances adjusted for comprehensive income items and distributions or the redemption values (i.e., the "floor"). Redeemable noncontrolling interest adjustments of redemption value to the floor are recorded in retained earnings and included as an adjustment to net income available to parent company stockholders in the calculation of earnings per share. See Note 9 for additional information.
Reconciliation of changes in redeemable noncontrolling interests —
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Balance, beginning of period | | $ | 49 |
| | $ | 44 |
| | $ | 47 |
| | $ | — |
|
Initial fair value of redeemable noncontrolling interests of acquired businesses | | 102 |
| |
| | 102 |
| | 45 |
|
Net income (loss) attributable to redeemable noncontrolling interests | |
| | (3 | ) | | 1 |
| | (3 | ) |
Other comprehensive income (loss) attributable to redeemable noncontrolling interests | | (2 | ) | | 3 |
| | (1 | ) | | 2 |
|
Retained earnings adjustments: | |
| |
| |
| |
|
Adjustment to redemption value | |
| | 2 |
| |
| | 2 |
|
Balance, end of period | | $ | 149 |
| | $ | 46 |
| | $ | 149 |
| | $ | 46 |
|
Note 9. Earnings per Share
Reconciliation of the numerators and denominators of the earnings per share calculations —
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income attributable to the parent company | $ | 124 |
| | $ | 71 |
| | $ | 232 |
| | $ | 146 |
|
Less: Redeemable noncontrolling interests adjustment to redemption value | — |
| | (2 | ) | | — |
| | (2 | ) |
Net income available to common stockholders - Numerator basic and diluted | $ | 124 |
| | $ | 69 |
| | $ | 232 |
| | $ | 144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: | | | | | | | |
Weighted-average common shares outstanding - Basic | 145.1 |
|
| 144.8 |
|
| 145.3 |
|
| 144.7 |
|
Employee compensation-related shares, including stock options | 1.4 |
|
| 1.4 |
|
| 1.7 |
|
| 1.4 |
|
Weighted-average common shares outstanding - Diluted | 146.5 |
|
| 146.2 |
|
| 147.0 |
|
| 146.1 |
|
The share count for diluted earnings per share is computed on the basis of the weighted-average number of common shares outstanding plus the effects of dilutive common stock equivalents (CSEs) outstanding during the period. We excluded 0.1 million and 0.3 million CSEs from the calculations of diluted earnings per share for the second quarters of 2018 and 2017 and excluded 0.1 million and 0.2 million CSEs for the respective year-to-date periods as the effect of including them would have been anti-dilutive.
Note 10. Stock Compensation
The Compensation Committee of our Board of Directors approved the grant of RSUs and performance share units (PSUs) shown in the table below during 2018.
|
| | | | | | |
| Granted (In millions) | | Grant Date Fair Value* |
RSUs | 0.6 |
| | $ | 28.33 |
|
PSUs | 0.2 |
| | $ | 27.13 |
|
* Weighted-average per share
We calculated the fair value of the RSUs at grant date based on the closing market price of our common stock at the date of grant. The number of PSUs that ultimately vest is contingent on achieving specified return on invested capital targets and specified margin targets, with an even distribution between the two targets. We estimated the fair value of the PSUs at grant date based on the closing market price of our common stock at the date of grant adjusted for the value of assumed dividends over the period because the awards are not dividend protected.
We received $2 of cash from the exercise of stock options related to 0.1 million shares. We paid $2 of cash to settle SARs and RSUs. We issued 0.5 million and 0.2 million shares of common stock based on the vesting of RSUs and PSUs during 2018. We recognized stock compensation expense of $5 and $6 during the second quarters of 2018 and 2017 and $9 and $10 during the respective year-to-date periods. At June 30, 2018, the total unrecognized compensation cost related to the nonvested awards granted and expected to vest was $33. This cost is expected to be recognized over a weighted-average period of 2.0 years.
Note 11. Pension and Postretirement Benefit Plans
We have a number of defined contribution and defined benefit, qualified and nonqualified, pension plans covering eligible employees. Other postretirement benefits (OPEB), including medical and life insurance, are provided for certain employees upon retirement.
Components of net periodic benefit cost (credit) —
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | |
| | 2018 | | 2017 | | OPEB - Non-U.S. |
Three Months Ended June 30, | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | 2018 | | 2017 |
Interest cost | | $ | 10 |
| | $ | 2 |
| | $ | 13 |
| | $ | 2 |
| | $ | 1 |
| | $ | 1 |
|
Expected return on plan assets | | (17 | ) | |
|
| | (21 | ) | | (1 | ) | |
|
| |
|
|
Service cost | |
|
| | 2 |
| |
|
| | 2 |
| |
|
| |
|
|
Amortization of net actuarial loss | | 7 |
| | 1 |
| | 6 |
| | 1 |
| |
|
| |
|
|
Net periodic benefit cost (credit) | | $ | — |
| | $ | 5 |
| | $ | (2 | ) | | $ | 4 |
| | $ | 1 |
| | $ | 1 |
|
| | | | | | | | | | | | |
Six Months Ended June 30, | | |
| | |
| | |
| | |
| | |
| | |
|
Interest cost | | $ | 21 |
| | $ | 3 |
| | $ | 26 |
| | $ | 4 |
| | $ | 2 |
| | $ | 2 |
|
Expected return on plan assets | | (35 | ) | | (1 | ) | | (42 | ) | | (2 | ) | |
|
| |
|
|
Service cost | |
|
| | 4 |
| |
|
| | 3 |
| |
|
| |
|
|
Amortization of net actuarial loss | | 14 |
| | 3 |
| | 12 |
| | 3 |
| |
|
| |
|
|
Net periodic benefit cost (credit) | | $ | — |
| | $ | 9 |
| | $ | (4 | ) | | $ | 8 |
| | $ | 2 |
| | $ | 2 |
|
Pension expense for 2018 increased versus the same period in 2017 as a result of a lower assumed return on plan assets and an increase in amortization of the net actuarial loss in the U.S., partially offset by lower interest expense. The components of net periodic benefit cost other than the service cost component are included in other expense, net in the consolidated statement of operations.
Plan termination — In October 2017, upon authorization by the Dana Board of Directors, we commenced the process of terminating one of our U.S. defined benefit pension plans. Ultimate plan termination is subject to regulatory approval and to prevailing market conditions and other considerations, including interest rates and annuity pricing. In the event that approvals are received and we proceed with effecting termination, settlement of the plan obligations is expected to occur in the first half of 2019. At December 31, 2017, this plan had benefit obligations of $1,064 and assets of $900. The benefit obligations have been valued at the amount expected to be required to settle the obligations, using assumptions regarding the portion of obligations expected to be settled through participant acceptance of lump sum payments or annuities and the cost to purchase those annuities. The unrecognized actuarial losses of the plan in AOCI totaled $369 at the end of 2017. If the settlement is effected as expected in 2019, the plan's deferred actuarial losses remaining in AOCI at that time will be recognized as expense.
Note 12. Marketable Securities
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| |