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: September 30, 2017
Commission File Number: 1-1063
Dana Incorporated
(Exact name of registrant as specified in its charter)
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| | |
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 144,870,955 shares of the registrant’s common stock outstanding at October 20, 2017.
DANA INCORPORATED – FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS
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| | 10-Q Pages |
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PART I – FINANCIAL INFORMATION | |
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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) | |
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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 | |
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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)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net sales | $ | 1,831 |
| | $ | 1,384 |
| | $ | 5,372 |
| | $ | 4,379 |
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Costs and expenses | | | |
| | |
| | |
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Cost of sales | 1,562 |
| | 1,176 |
| | 4,564 |
| | 3,739 |
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Selling, general and administrative expenses | 125 |
| | 99 |
| | 379 |
| | 303 |
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Amortization of intangibles | 4 |
| | 2 |
| | 9 |
| | 6 |
|
Restructuring charges, net | 2 |
| | 17 |
| | 14 |
| | 23 |
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Other income (expense), net | 1 |
| | 6 |
| | (8 | ) | | 9 |
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Earnings before interest and income taxes | 139 |
| | 96 |
| | 398 |
| | 317 |
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Loss on extinguishment of debt | (13 | ) | |
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| | (19 | ) | | (17 | ) |
Interest income | 3 |
| | 3 |
| | 8 |
| | 8 |
|
Interest expense | 25 |
| | 27 |
| | 79 |
| | 84 |
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Earnings before income taxes | 104 |
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| 72 |
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| 308 |
|
| 224 |
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Income tax expense | 33 |
| | 13 |
| | 94 |
| | 66 |
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Equity in earnings of affiliates | 2 |
| | 2 |
| | 12 |
| | 6 |
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Net income | 73 |
| | 61 |
| | 226 |
| | 164 |
|
Less: Noncontrolling interests net income | 3 |
| | 4 |
| | 13 |
| | 9 |
|
Less: Redeemable noncontrolling interests net income (loss) | 1 |
| |
|
| | (2 | ) | |
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Net income attributable to the parent company | $ | 69 |
| | $ | 57 |
| | $ | 215 |
| | $ | 155 |
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| | | | | | | |
Net income per share available to common stockholders | |
| | |
| | |
| | |
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Basic | $ | 0.47 |
| | $ | 0.40 |
| | $ | 1.46 |
| | $ | 1.06 |
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Diluted | $ | 0.46 |
| | $ | 0.39 |
| | $ | 1.45 |
| | $ | 1.05 |
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| | | | | | | |
Weighted-average common shares outstanding | | | | | | | |
Basic | 145.0 |
| | 144.0 |
| | 144.8 |
| | 146.7 |
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Diluted | 146.9 |
| | 144.6 |
| | 146.5 |
| | 147.1 |
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| | | | | | | |
Cash dividends declared per share | $ | 0.06 |
| | $ | 0.06 |
| | $ | 0.18 |
| | $ | 0.18 |
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The accompanying notes are an integral part of the consolidated financial statements.
Dana Incorporated
Consolidated Statement of Comprehensive Income (Unaudited)
(In millions)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 73 |
| | $ | 61 |
| | $ | 226 |
| | $ | 164 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Currency translation adjustments | (1 | ) | | (8 | ) | | (2 | ) | | (2 | ) |
Hedging gains and losses | (14 | ) | | (11 | ) | | (13 | ) | | (21 | ) |
Investment and other gains and losses |
|
| | (5 | ) | |
|
| | (2 | ) |
Defined benefit plans | 19 |
| |
|
| | 29 |
| | 13 |
|
Other comprehensive income (loss) | 4 |
| | (24 | ) | | 14 |
| | (12 | ) |
Total comprehensive income | 77 |
| | 37 |
| | 240 |
| | 152 |
|
Less: Comprehensive income attributable to noncontrolling interests | (5 | ) | | (4 | ) | | (18 | ) | | (10 | ) |
Less: Comprehensive income attributable to redeemable noncontrolling interests | (1 | ) | |
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Comprehensive income attributable to the parent company | $ | 71 |
| | $ | 33 |
| | $ | 222 |
| | $ | 142 |
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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)
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| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Assets | |
| | |
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Current assets | |
| | |
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Cash and cash equivalents | $ | 558 |
| | $ | 707 |
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Marketable securities | 38 |
| | 30 |
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Accounts receivable | |
| | |
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Trade, less allowance for doubtful accounts of $9 in 2017 and $6 in 2016 | 1,074 |
| | 721 |
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Other | 176 |
| | 110 |
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Inventories | |
| | |
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Raw materials | 430 |
| | 321 |
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Work in process and finished goods | 481 |
| | 317 |
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Other current assets | 86 |
| | 78 |
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Total current assets | 2,843 |
| | 2,284 |
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Goodwill | 138 |
| | 90 |
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Intangibles | 177 |
| | 109 |
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Deferred tax assets | 567 |
| | 588 |
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Other noncurrent assets | 68 |
| | 226 |
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Investments in affiliates | 155 |
| | 150 |
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Property, plant and equipment, net | 1,762 |
| | 1,413 |
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Total assets | $ | 5,710 |
| | $ | 4,860 |
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Liabilities and equity | |
| | |
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Current liabilities | |
| | |
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Notes payable, including current portion of long-term debt | $ | 26 |
| | $ | 69 |
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Accounts payable | 1,154 |
| | 819 |
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Accrued payroll and employee benefits | 215 |
| | 149 |
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Taxes on income | 34 |
| | 15 |
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Other accrued liabilities | 224 |
| | 201 |
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Total current liabilities | 1,653 |
| | 1,253 |
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Long-term debt, less debt issuance costs of $22 in 2017 and $21 in 2016 | 1,765 |
| | 1,595 |
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Pension and postretirement obligations | 564 |
| | 565 |
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Other noncurrent liabilities | 384 |
| | 205 |
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Total liabilities | 4,366 |
| | 3,618 |
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Commitments and contingencies (Note 14) |
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| |
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Redeemable noncontrolling interests | 47 |
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Parent company stockholders' equity | |
| | |
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Preferred stock, 50,000,000 shares authorized, $0.01 par value, no shares outstanding | — |
| | — |
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Common stock, 450,000,000 shares authorized, $0.01 par value, 144,861,213 and 143,938,280 shares outstanding | 2 |
| | 2 |
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Additional paid-in capital | 2,348 |
| | 2,327 |
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Retained earnings | 202 |
| | 195 |
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Treasury stock, at cost (7,001,051 and 6,812,784 shares) | (87 | ) | | (83 | ) |
Accumulated other comprehensive loss | (1,277 | ) | | (1,284 | ) |
Total parent company stockholders' equity | 1,188 |
| | 1,157 |
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Noncontrolling interests | 109 |
| | 85 |
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Total equity | 1,297 |
| | 1,242 |
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Total liabilities and equity | $ | 5,710 |
| | $ | 4,860 |
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The accompanying notes are an integral part of the consolidated financial statements.
Dana Incorporated
Consolidated Statement of Cash Flows (Unaudited)
(In millions)
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| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Operating activities | |
| | |
|
Net income | $ | 226 |
| | $ | 164 |
|
Depreciation | 162 |
| | 129 |
|
Amortization of intangibles | 10 |
| | 7 |
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Amortization of deferred financing charges | 4 |
| | 4 |
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Call premium on debt | 15 |
| | 12 |
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Write-off of deferred financing costs | 4 |
| | 5 |
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Earnings of affiliates, net of dividends received | 2 |
| | 3 |
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Stock compensation expense | 17 |
| | 11 |
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Deferred income taxes | 10 |
| | 1 |
|
Pension contributions, net | (4 | ) | | (12 | ) |
Gain on sale of subsidiary | (3 | ) | | |
Change in working capital | (80 | ) | | (142 | ) |
Other, net | (2 | ) | |
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|
Net cash provided by operating activities | 361 |
| | 182 |
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Investing activities | |
| | |
|
Purchases of property, plant and equipment | (251 | ) | | (198 | ) |
Acquisition of businesses, net of cash acquired | (184 | ) | | (18 | ) |
Purchases of marketable securities | (23 | ) | | (41 | ) |
Proceeds from sales of marketable securities | 1 |
| | 47 |
|
Proceeds from maturities of marketable securities | 16 |
| | 33 |
|
Proceeds from sale of subsidiary | 3 |
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Other |
|
| | (10 | ) |
Net cash used in investing activities | (438 | ) | | (187 | ) |
| | | |
Financing activities | |
| | |
|
Net change in short-term debt | (96 | ) | | 14 |
|
Proceeds from long-term debt | 676 |
| | 441 |
|
Repayment of long-term debt | (640 | ) | | (378 | ) |
Call premium on debt | (15 | ) | | (12 | ) |
Deferred financing payments | (9 | ) | | (10 | ) |
Dividends paid to common stockholders | (26 | ) | | (26 | ) |
Distributions to noncontrolling interests | (7 | ) | | (16 | ) |
Repurchases of common stock |
|
| | (81 | ) |
Other | 4 |
| | (4 | ) |
Net cash used in financing activities | (113 | ) | | (72 | ) |
| | | |
Net decrease in cash and cash equivalents | (190 | ) | | (77 | ) |
Cash and cash equivalents – beginning of period | 707 |
| | 791 |
|
Effect of exchange rate changes on cash balances | 41 |
| | 13 |
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Cash and cash equivalents – end of period | $ | 558 |
| | $ | 727 |
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| | | |
Non-cash investing activity | | | |
Purchases of property, plant and equipment held in accounts payable | $ | 113 |
| | $ | 82 |
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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 |
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3. | Disposal Groups |
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4. | Goodwill and Other Intangible Assets |
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5. | Restructuring of Operations |
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6. | Stockholders' Equity |
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7. | Redeemable Noncontrolling Interests |
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8. | Earnings per Share |
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9. | Stock Compensation |
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10. | Pension and Postretirement Benefit Plans |
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11. | Marketable Securities |
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12. | Financing Agreements |
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13. | Fair Value Measurements and Derivatives |
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14. | Commitments and Contingencies |
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15. | Warranty Obligations |
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16. | Income Taxes |
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17. | Other Income (Expense), Net |
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18. | Segments |
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19. | 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 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 2016 Form 10-K.
We have added the subtotal "Earnings before interest and income taxes" to our consolidated statement of operations. Interest income, interest expense and loss on extinguishment of debt are presented below the new subtotal but above the subtotal "Earnings before income taxes." Interest income was previously included in Other income (expense), net. Prior year amounts have been reclassified to conform to the 2017 presentation.
Recently adopted accounting pronouncements
In October 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-16, Income Taxes – Intra-Entity Transfers of Assets Other Than Inventory, guidance that simplifies the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. GAAP had prohibited the recognition in earnings of current and deferred income taxes for an intra-entity transfer until the asset was sold to an outside party or recovered through use. This amendment simplifies the accounting by requiring entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new guidance, which requires modified retrospective application, becomes effective January 1, 2018 with early adoption permitted in 2017 prior to the issuance of interim financial statements. We adopted this guidance effective January 1, 2017. The adoption of the new guidance resulted in a decrease in Other current assets of $10, a decrease in Other noncurrent assets of $169 and a decrease in Retained earnings at January 1, 2017 of $179.
We also adopted the following standards during the first nine months of 2017, none of which had a material impact on our financial statements or financial statement disclosures:
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Standard | | Effective Date |
2016-07 | | Investments – Equity Method and Joint Ventures – Simplifying the Transition to the Equity Method of Accounting | | January 1, 2017 |
2016-06 | | Derivatives and Hedging – Contingent Put and Call Options in Debt Instruments | | January 1, 2017 |
2016-05 | | Derivatives and Hedging – Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships | | January 1, 2017 |
2015-11 | | Inventory – Simplifying the Measurement of Inventory | | January 1, 2017 |
Recently issued accounting pronouncements
In September 2017, the FASB issued ASU 2017-13, Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, guidance which
delays the mandatory adoption of ASC 606 and 842 for certain entities, revises the guidance related to performance-based incentive fees in ASC 605 and revises the guidance related to leases in ASC 840 and 842. The revisions to the lease guidance eliminate language specific to certain sale-leaseback arrangements, guarantees of lease residual assets and loans made by lessees to owner-lessors. Also included is an amendment to ASC 842 to retain the guidance in ASC 840 covering the impact of changes in tax rates on investments in leveraged leases. This guidance, which is effective immediately, generally relates to the adoption of ASC 606 and 842 and is not expected to impact our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging – Targeted Improvements to Accounting for Hedging Activities, guidance that more closely aligns hedge accounting with companies' risk management programs and simplifies its application. More hedging strategies are now eligible for hedge accounting. The new standard permits a qualitative assessment for effectiveness for certain hedges on an ongoing basis after an initial quantitative test to establish that the hedge relationship is highly effective. In addition, if a cash flow hedge is highly effective, all changes in fair value of the derivative hedging instrument will be recorded in other comprehensive income until the hedged item impacts earnings. The standard also provides prescriptive guidance on presentation. The change in fair value of the derivative is presented in the same income statement line item as the earnings effect of the hedged item. Timing of effectiveness assessments and additional disclosure requirements are also addressed in the standard. This guidance becomes effective January 1, 2019. Early adoption is permitted. We are evaluating the impact this guidance will have 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. 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 May 2017, the FASB issued ASU 2017-09, Stock Compensation – Scope of Modification Accounting, guidance that clarifies that all changes to share-based payment awards are not necessarily accounted for as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. This guidance is effective prospectively beginning January 1, 2018. Early adoption is permitted. This guidance will apply to any future modifications. We do not expect this guidance to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Retirement Benefits – Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, guidance that requires entities to present the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the income statement line items where they report compensation cost. Entities will present all other components of net benefit cost outside operating income, if this subtotal is presented. The rules related to the timing of when costs are recognized or how they are measured have not changed. This amendment only impacts where those costs are reflected within the income statement. In addition, only the service cost component will be eligible for capitalization in inventory and other assets. This guidance becomes effective January 1, 2018. Early adoption is permitted. Upon adoption, we expect to classify the nonservice cost components of net periodic pension expense in Other income (expense), net.
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 for us 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 January 2017, the FASB issued ASU 2017-01, Business Combinations – Clarifying the Definition of a Business, guidance that revises the definition of a business. The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill impairment and consolidation. When substantially all of the fair value of gross assets acquired
is concentrated in a single asset (or a group of similar assets), the asset acquired would not represent a business. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. The new guidance provides a framework to evaluate when an input and a substantive process are present. This guidance becomes effective January 1, 2018. Early adoption is permitted.
In November 2016, the FASB released ASU 2016-18, Statement of Cash Flows – Restricted Cash, guidance that addresses the diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance becomes effective January 1, 2018 and must be applied on a retrospective basis. This guidance is not expected to have a material impact on our consolidated statement of cash flows.
In August 2016, the FASB released ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments, guidance intended to reduce diversity in practice in how certain cash receipts and cash payments are classified in the statement of cash flows. This guidance becomes effective January 1, 2018 and must be applied on a retrospective basis. This guidance is not expected to have a material impact on our consolidated statement of cash flows.
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, including our assessment of the likelihood of renewal of leases that provide such an option. We continue to evaluate the impact this guidance will have on our consolidated financial statements. This guidance becomes effective January 1, 2019 with early adoption permitted.
In January 2016, the FASB issued 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 currently classified as available-for-sale and carried at fair value, with changes in fair value reported in other comprehensive income (OCI), will be carried at fair value determined on an exit price notion and changes in fair value will be 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. This guidance, which becomes effective January 1, 2018, is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue – Revenue from Contracts with Customers, guidance that 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. The new guidance will also require new disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance will be effective January 1, 2018 for Dana. We intend to adopt this standard using the modified retrospective method, recognizing the cumulative effect of initially applying the standard as an adjustment to opening retained earnings. We are finalizing the assessment of our customer contracts, identifying contractual provisions that may result in a change in the timing or the amount of revenue recognized in comparison with current guidance, as well as assessing the enhanced disclosure requirements of the new guidance. Under current guidance we generally recognize revenue when products are shipped and risk of loss has transferred to the customer. Under the proposed requirements, the customized nature of some of our products and contractual provisions in certain of our customer contracts that provide us with an enforceable right to payment, may require us to recognize revenue prior to the product being shipped to the customer. We are also assessing pricing provisions contained in certain of our customer contracts. Pricing provisions contained in some of our customer contracts represent variable consideration or may provide the customer with a material right, potentially resulting in a different allocation
of the transaction price than under current guidance. We continue to evaluate the impact this guidance will have on our financial statements.
Note 2. Acquisitions
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 will increase Dana's revenue from light and commercial vehicle manufacturers and will vertically integrate 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 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 |
|
Inventories | | 9 |
|
Other current assets | | 7 |
|
Goodwill | | 5 |
|
Intangibles | | 33 |
|
Property, plant and equipment | | 46 |
|
Accounts payable | | (35 | ) |
Accrued payroll and employee benefits | | (3 | ) |
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 twelve 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 income (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. During the first nine months of 2017, the business contributed sales of $69 and net income of $4.
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. The purchase price is subject to adjustment upon 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 timing of the real estate purchase may extend beyond November 1, 2017, pending the seller obtaining required permits. 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 | | $ | 181 |
|
| | |
Cash and cash equivalents | | $ | 75 |
|
Accounts receivable - Trade | | 78 |
|
Accounts receivable - Other | | 14 |
|
Inventories | | 137 |
|
Other current assets | | 6 |
|
Goodwill | | 29 |
|
Intangibles | | 41 |
|
Deferred tax assets | | 3 |
|
Other noncurrent assets | | 4 |
|
Property, plant and equipment | | 145 |
|
Notes payable, including current portion of long-term debt | | (131 | ) |
Accounts payable | | (51 | ) |
Accrued payroll and employee benefits | | (14 | ) |
Other accrued liabilities | | (18 | ) |
Long-term debt | | (51 | ) |
Pension and postretirement obligations | | (12 | ) |
Other noncurrent liabilities | | (16 | ) |
Redeemable noncontrolling interest | | (44 | ) |
Noncontrolling interests | | (14 | ) |
Total purchase consideration allocation | | $ | 181 |
|
The purchase consideration and fair value of the assets acquired and liabilities assumed are preliminary and could be revised as a result of adjustments made to the purchase price, 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 property, plant and equipment and intangibles.
Goodwill recognized in this transaction is primarily attributable to synergies expected to arise after the acquisition and the assembled workforce, is not deductible for tax purposes and will be assigned to and evaluated for impairment at the operating segment level. 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 customer 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 fifteen 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 income (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. During the first nine months of 2017, the businesses
contributed sales of $284 and a net loss of $11, inclusive of a restructuring charge recorded in the second quarter of 2017. See Note 5 for more information.
SIFCO — On December 23, 2016, we acquired strategic assets of SIFCO S.A.'s (SIFCO) commercial vehicle steer axle systems and related forged components businesses. The acquisition enables us to enhance our vertically integrated supply chain, which will further improve our cost structure and customer satisfaction by leveraging SIFCO's extensive experience and knowledge of sophisticated forged components. In addition to strengthening our position as a central source for products that use forged and machined parts throughout the region, this acquisition enables us to better accommodate the local content requirements of our customers, which reduces their import and other region-specific costs.
SIFCO contributed the strategic assets to SJT Forjaria Ltda., a newly created legal entity, and Dana acquired all of the issued and outstanding quotas of SJT Forjaria Ltda. The strategic assets were acquired by Dana free and clear of any liens, claims or encumbrances. The acquisition was funded using cash on hand and 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:
|
| | | | |
Purchase price, cash consideration | | $ | 60 |
|
Purchase price, deferred consideration | | 10 |
|
Total purchase consideration | | $ | 70 |
|
| | |
Accounts receivable - Trade | | $ | 1 |
|
Accounts receivable - Other | | 1 |
|
Inventories | | 10 |
|
Goodwill | | 7 |
|
Intangibles | | 3 |
|
Property, plant and equipment | | 59 |
|
Accounts payable | | (2 | ) |
Accrued payroll and employee benefits | | (9 | ) |
Total purchase consideration allocation | | $ | 70 |
|
The purchase consideration and fair value of the assets acquired and liabilities assumed are preliminary and could be revised as a result of adjustments made to the purchase price, 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 property, plant and equipment and intangibles. The deferred consideration, less any claims for indemnification made by Dana, is to be paid on December 23, 2017.
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 $2 allocated to developed technology and $1 allocated to trade names. We used the relief from royalty method, an income approach, to value developed technology and trade names. We used a replacement cost method to value fixed assets. The developed technology and trade name intangible assets are being amortized on a straight-line basis over seven and five years respectively, and property, plant and equipment is being depreciated on a straight-line basis over useful lives ranging from three to ten years.
The results of operations of the business are reported in our Commercial Vehicle operating segment from the date of acquisition. As a result of the acquisition, we incurred transaction related expenses totaling $5 during 2016, which were charged to Other income (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.
Magnum — On January 29, 2016, we acquired the aftermarket distribution business of Magnum® Gaskets (Magnum), a U.S.-based supplier of gaskets and sealing products for automotive and commercial-vehicle applications, for a purchase price of $18 at closing and additional cash payments of up to $2 contingent upon the achievement of certain sales metrics over the two-year period following the acquisition. As of the closing date of the acquisition, the contingent consideration was assigned a fair value of approximately $1. Assets acquired included trademarks and trade names, customer relationships and goodwill. The results of operations of Magnum are reported within our Power Technologies operating segment. We acquired Magnum using cash on hand. 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
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. DCLLC had net assets of $165 at the time of sale including cash and cash equivalents, marketable securities and rights to insurance coverage in place to satisfy a significant portion of its liabilities. We received cash proceeds of $88 – $29 net of cash divested – with $3 retained by the purchaser subject to the satisfaction of certain future conditions. We recognized a pre-tax loss of $77 in 2016 upon completion of the transaction. During the second quarter of 2017 the conditions associated with the retained purchase price were satisfied. Dana received the remaining proceeds and recognized $3 of income in Other income (expense), net. Following completion of the sale, Dana has no obligation with respect to current or future asbestos claims.
Divestiture of Nippon Reinz — On November 30, 2016, we sold our 53.7% interest in Nippon Reinz Co. Ltd. (Nippon Reinz) to Nichias Corporation. Dana received net cash proceeds of $5 and recognized a pre-tax loss of $3 on the divestiture of Nippon Reinz, inclusive of the $12 gain on derecognition of the noncontrolling interest. Nippon Reinz had sales of $42 in 2016 through the transaction date.
Note 4. Goodwill and Other Intangible Assets
Goodwill — The change in the carrying amount of goodwill in 2017 is primarily due to currency fluctuation and the acquisitions of USM – Warren and 80% interests in BFP and BPT. See Note 2 for additional information.
Changes in the carrying amount of goodwill by segment —
|
| | | | | | | | | | | | | | | | | | | |
| Light Vehicle | | Commercial Vehicle | | Off-Highway | | Power Technologies | | Total |
Balance, December 31, 2016 | $ | — |
| | $ | 6 |
| | $ | 78 |
| | $ | 6 |
| | $ | 90 |
|
Acquisitions | 4 |
| |
| | 39 |
| |
| | 43 |
|
Purchase accounting adjustments | 1 |
| | 1 |
| | (10 | ) | | | | (8 | ) |
Currency impact |
| |
| | 13 |
| |
| | 13 |
|
Balance, September 30, 2017 | $ | 5 |
| | $ | 7 |
| | $ | 120 |
| | $ | 6 |
| | $ | 138 |
|
Components of other intangible assets —
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| 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 | | $ | 95 |
| | $ | (88 | ) | | $ | 7 |
| | $ | 88 |
| | $ | (83 | ) | | $ | 5 |
|
Trademarks and trade names | 15 | | 19 |
| | (4 | ) | | 15 |
| | 6 |
| | (2 | ) | | 4 |
|
Customer relationships | 8 | | 468 |
| | (398 | ) | | 70 |
| | 389 |
| | (374 | ) | | 15 |
|
Non-amortizable intangible assets | | | | | | | | | | | | | |
Trademarks and trade names | | | 65 |
| |
|
| | 65 |
| | 65 |
| |
|
| | 65 |
|
Used in research and development activities | | | 20 |
| |
|
| | 20 |
| | 20 |
| |
|
| | 20 |
|
| | | $ | 667 |
| | $ | (490 | ) | | $ | 177 |
| | $ | 568 |
| | $ | (459 | ) | | $ | 109 |
|
The net carrying amounts of intangible assets, other than goodwill, attributable to each of our operating segments at September 30, 2017 were as follows: Light Vehicle — $53, Commercial Vehicle — $35, Off-Highway — $79 and Power Technologies — $10.
Amortization expense related to amortizable intangible assets —
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Charged to cost of sales | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
Charged to amortization of intangibles | 4 |
| | 2 |
| | 9 |
| | 6 |
|
Total amortization | $ | 4 |
| | $ | 3 |
| | $ | 10 |
| | $ | 7 |
|
The following table provides the estimated aggregate pre-tax amortization expense related to intangible assets for each of the next five years based on September 30, 2017 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 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
Amortization expense | $ | 3 |
| | $ | 9 |
| | $ | 8 |
| | $ | 7 |
| | $ | 7 |
|
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 third quarter of 2017, we recorded total restructuring expense of $2, including $1 of severance and benefit costs for headcount reduction actions in this year's third quarter and $1 of exit costs primarily associated with the continued execution of previously announced actions.
For the nine months ended September 30, 2017, total restructuring expense was $14, including $9 of severance and benefit costs and $5 of exit costs. The severance and benefit costs primarily relate to headcount reduction initiatives in our Off-Highway business, as part of the BPT and BFP acquisition integration, while the exit costs primarily represents costs associated with the continued execution of previously announced actions.
During the third quarter of 2016, we approved plans to implement certain headcount reduction initiatives, primarily in our Off-Highway business. Including costs associated with this action and with other previously announced initiatives, total restructuring expense during the third quarter of 2016 was $17, including $16 of severance and benefit costs and $1 of exit costs.
For the nine months ended September 30, 2016, total restructuring expense was $23, including $20 of severance and benefit costs and $3 of exit costs. In addition to the third quarter 2016 Off-Highway action described above, total restructuring expense for the nine months ended September 30, 2016 includes the impact of the planned closure of our Commercial Vehicle manufacturing facility in Glasgow, Kentucky and continuing exit costs associated with previously announced actions.
Accrued restructuring costs and activity, including noncurrent portion — |
| | | | | | | | | | | |
| Employee Termination Benefits | | Exit Costs | | Total |
Balance at June 30, 2017 | $ | 26 |
| | $ | 6 |
| | $ | 32 |
|
Charges to restructuring | 1 |
| | 1 |
| | 2 |
|
Cash payments | (3 | ) | | (1 | ) | | (4 | ) |
Currency impact | 1 |
| |
|
| | 1 |
|
Balance at September 30, 2017 | $ | 25 |
| | $ | 6 |
| | $ | 31 |
|
| | | | | |
Balance at December 31, 2016 | $ | 32 |
| | $ | 6 |
| | $ | 38 |
|
Charges to restructuring | 9 |
| | 5 |
| | 14 |
|
Cash payments | (18 | ) | | (5 | ) | | (23 | ) |
Currency impact | 2 |
| |
|
| | 2 |
|
Balance at September 30, 2017 | $ | 25 |
| | $ | 6 |
| | $ | 31 |
|
At September 30, 2017, the accrued employee termination benefits include costs to reduce approximately 400 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 September 30, 2017.
|
| | | | | | | | | | | | | | | |
| Expense Recognized | | Future Cost to Complete |
| Prior to 2017 | | 2017 | | Total to Date | |
Light Vehicle | $ | 10 |
| | $ | 2 |
| | $ | 12 |
| | $ | 1 |
|
Commercial Vehicle | 41 |
| | 3 |
| | 44 |
| | 13 |
|
Off-Highway | 6 |
| | 8 |
| | 14 |
| |
|
|
Corporate | | | 1 |
| | 1 |
| | |
Total | $ | 57 |
| | $ | 14 |
| | $ | 71 |
| | $ | 14 |
|
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. Stockholders’ Equity
Common stock — Our Board of Directors declared quarterly cash dividends of six cents per share of common stock in each of the first three quarters of 2017. 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 — Our Board of Directors approved a common stock share repurchase program up to $1,700 on January 11, 2016. The program expires on December 31, 2017. Approximately $219 remained available under the program for future share repurchases as of September 30, 2017.
Changes in equity —
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
Three Months Ended September 30, | | Attributable to Parent | | Attributable to Non- controlling Interests | | Total Equity | | Attributable to Parent | | Attributable to Non- controlling Interests | | Total Equity |
Balance, June 30 | | $ | 1,119 |
| | $ | 107 |
| | $ | 1,226 |
| | $ | 743 |
| | $ | 95 |
| | $ | 838 |
|
Net income | | 69 |
| | 3 |
| | 72 |
| | 57 |
| | 4 |
| | 61 |
|
Other comprehensive income (loss) | | 2 |
| | 2 |
| | 4 |
| | (24 | ) | | | | (24 | ) |
Common stock dividends | | (9 | ) | |
|
| | (9 | ) | | (8 | ) | |
|
| | (8 | ) |
Redeemable noncontrolling interests adjustment to redemption value | | (1 | ) | | | | (1 | ) | | | | | | — |
|
Distributions to noncontrolling interests | |
|
| | (2 | ) | | (2 | ) | |
|
| | (2 | ) | | (2 | ) |
Purchase of noncontrolling interests | | | | (1 | ) | | (1 | ) | | | | | | — |
|
Stock compensation | | 9 |
| |
|
| | 9 |
| | 5 |
| |
|
| | 5 |
|
Stock withheld for employee taxes | | (1 | ) | |
|
| | (1 | ) | |
|
| |
|
| | — |
|
Balance, September 30 | | $ | 1,188 |
| | $ | 109 |
| | $ | 1,297 |
| | $ | 773 |
| | $ | 97 |
| | $ | 870 |
|
| | | | | | | | | | | | |
Nine Months Ended September 30, | | |
| | |
| | |
| | |
| | |
| | |
|
Balance, December 31 | | $ | 1,157 |
| | $ | 85 |
| | $ | 1,242 |
| | $ | 728 |
| | $ | 103 |
| | $ | 831 |
|
Adoption of ASU 2016-16 tax adjustment, January 1, 2017 | | (179 | ) | |
|
| | (179 | ) | |
|
| |
|
| | — |
|
Net income | | 215 |
| | 13 |
| | 228 |
| | 155 |
| | 9 |
| | 164 |
|
Other comprehensive income | | 7 |
| | 5 |
| | 12 |
| | (13 | ) | | 1 |
| | (12 | ) |
Common stock dividends | | (26 | ) | |
|
| | (26 | ) | | (26 | ) | |
|
| | (26 | ) |
Redeemable noncontrolling interests adjustment to redemption value | | (3 | ) | | | | (3 | ) | | | | | | — |
|
Distributions to noncontrolling interests | |
|
| | (7 | ) | | (7 | ) | |
|
| | (16 | ) | | (16 | ) |
Common stock share repurchases | |
|
| |
|
| | — |
| | (81 | ) | |
|
| | (81 | ) |
Increase from business combination | |
|
| | 14 |
| | 14 |
| |
|
| |
|
| | — |
|
Purchase of noncontrolling interests | | | | (1 | ) | | (1 | ) | | | | | | — |
|
Stock compensation | | 21 |
| |
|
| | 21 |
| | 11 |
| |
|
| | 11 |
|
Stock withheld for employee taxes | | (4 | ) | |
|
| | (4 | ) | | (1 | ) | |
|
| | (1 | ) |
Balance, September 30 | | $ | 1,188 |
| | $ | 109 |
| | $ | 1,297 |
| | $ | 773 |
| | $ | 97 |
| | $ | 870 |
|
See Note 1 for additional information about adoption of new accounting guidance on January 1, 2017.
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, June 30, 2017 | $ | (652 | ) | | $ | (33 | ) | | $ | — |
| | $ | (594 | ) | | $ | (1,279 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustments | (3 | ) | | | | | | | | (3 | ) |
Holding gains and losses | | | (48 | ) | |
| | | | (48 | ) |
Reclassification of amount to net income (a) | | | 35 |
| |
| | | | 35 |
|
Actuarial gain on census update | | | | | | | 21 |
| | 21 |
|
Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | | | | | | | 7 |
| | 7 |
|
Tax expense |
| | (1 | ) | |
| | (9 | ) | | (10 | ) |
Other comprehensive income (loss) | (3 | ) | | (14 | ) | | — |
| | 19 |
| | 2 |
|
Balance, September 30, 2017 | $ | (655 | ) | | $ | (47 | ) | | $ | — |
| | $ | (575 | ) | | $ | (1,277 | ) |
| | | | | | | | | |
Balance, June 30, 2016 | $ | (603 | ) | | $ | (14 | ) | | $ | 5 |
| | $ | (551 | ) | | $ | (1,163 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustments | (8 | ) | | | | | | | | (8 | ) |
Holding gains and losses | | | (17 | ) | | 2 |
| | | | (15 | ) |
Reclassification of amount to net income (a) | | | 6 |
| | (7 | ) | | | | (1 | ) |
Actuarial loss on census update | | | | | | | (6 | ) | | (6 | ) |
Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | | | | | | | 7 |
| | 7 |
|
Tax expense |
| |
| |
| | (1 | ) | | (1 | ) |
Other comprehensive loss | (8 | ) | | (11 | ) | | (5 | ) | | — |
| | (24 | ) |
Balance, September 30, 2016 | $ | (611 | ) | | $ | (25 | ) | | $ | — |
| | $ | (551 | ) | | $ | (1,187 | ) |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| Parent Company Stockholders |
| Foreign Currency Translation | | Hedging | | Investments | | Defined Benefit Plans | | Total |
Balance, December 31, 2016 | $ | (646 | ) | | $ | (34 | ) | | $ | — |
| | $ | (604 | ) | | $ | (1,284 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustments | (1 | ) | | | | | | | | (1 | ) |
Holding loss on net investment hedge | (8 | ) | | | | | | | | (8 | ) |
Holding gains and losses | | | (123 | ) | |
| | | | (123 | ) |
Reclassification of amount to net income (a) | | | 109 |
| |
| | | | 109 |
|
Actuarial gain on census update | | | | | | | 21 |
| | 21 |
|
Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | | | | | | | 22 |
| | 22 |
|
Tax (expense) benefit |
| | 1 |
| |
| | (14 | ) | | (13 | ) |
Other comprehensive income (loss) | (9 | ) | | (13 | ) | | — |
| | 29 |
| | 7 |
|
Balance, September 30, 2017 | $ | (655 | ) | | $ | (47 | ) | | $ | — |
| | $ | (575 | ) | | $ | (1,277 | ) |
| | | | | | | | | |
Balance, December 31, 2015 | $ | (608 | ) | | $ | (4 | ) | | $ | 2 |
| | $ | (564 | ) | | $ | (1,174 | ) |
Other comprehensive income (loss): | | | | | | | | | |
Currency translation adjustments | (3 | ) | | | | | | | | (3 | ) |
Holding gains and losses | | | (30 | ) | | 5 |
| | | | (25 | ) |
Reclassification of amount to net income (a) | | | 9 |
| | (7 | ) | | | | 2 |
|
Actuarial loss on census update | | | | | | | (6 | ) | | (6 | ) |
Reclassification adjustment for net actuarial losses included in net periodic benefit cost (b) | | | | | | | 20 |
| | 20 |
|
Tax expense |
| |
| |
| | (1 | ) | | (1 | ) |
Other comprehensive income (loss) | (3 | ) | | (21 | ) | | (2 | ) | | 13 |
| | (13 | ) |
Balance, September 30, 2016 | $ | (611 | ) | | $ | (25 | ) | | $ | — |
| | $ | (551 | ) | | $ | (1,187 | ) |
(a) Foreign currency contract and investment reclassifications are included in Other income (expense), net.
(b) See Note 10 for additional details.
Note 7. Redeemable Noncontrolling Interests
In connection with the acquisition of a controlling interest in Brevini Fluid Power S.p.A. (BFP) and Brevini Power Transmission S.p.A. (BPT) from Brevini Group S.p.A. (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. During the first three quarters of 2017 there was a $3 adjustment to reflect a redemption value in excess of carrying value. See Note 8.
Reconciliation of changes in redeemable noncontrolling interests —
|
| | | | | | | | |
September 30, 2017 | | Three Months Ended | | Nine Months Ended |
Balance, beginning of period | | $ | 46 |
| | $ | — |
|
Initial fair value of redeemable noncontrolling interests of acquired business | |
| | 45 |
|
Purchase accounting adjustments | | (1 | ) | | (1 | ) |
Comprehensive income (loss) adjustments: | | | | |
Net income (loss) attributable to redeemable noncontrolling interests | | 1 |
| | (2 | ) |
Other comprehensive income (loss) attributable to redeemable noncontrolling interests | |
| | 2 |
|
Retained earnings adjustments: | | | | |
Adjustment to redemption value | | 1 |
| | 3 |
|
Balance, September 30 | | $ | 47 |
| | $ | 47 |
|
Note 8. Earnings per Share
Reconciliation of the numerators and denominators of the earnings per share calculations —
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income attributable to the parent company | $ | 69 |
| | $ | 57 |
| | $ | 215 |
| | $ | 155 |
|
Less: Redeemable noncontrolling interests adjustment to redemption value | (1 | ) | |
|
| | (3 | ) | |
|
|
Net income available to common stockholders - Numerator basic and diluted | $ | 68 |
| | $ | 57 |
| | $ | 212 |
| | $ | 155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: | | | | | | | |
Weighted-average shares outstanding - Basic | 145.0 |
|
| 144.0 |
|
| 144.8 |
|
| 146.7 |
|
Employee compensation-related shares, including stock options | 1.9 |
|
| 0.6 |
|
| 1.7 |
|
| 0.4 |
|
Weighted-average shares outstanding - Diluted | 146.9 |
|
| 144.6 |
|
| 146.5 |
|
| 147.1 |
|
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 2.1 million CSEs from the calculations of diluted earnings per share for the third quarters of 2017 and 2016 and excluded 0.1 million and 2.1 million CSEs for the year-to-date periods of 2017 and 2016 as the effect of including them would have been anti-dilutive.
Note 9. 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 2017.
|
| | | | | | |
| Granted (In millions) | | Grant Date Fair Value* |
RSUs | 0.8 |
| | $ | 19.92 |
|
PSUs | 0.3 |
| | $ | 18.63 |
|
* 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 $8 of cash from the exercise of stock options related to 0.5 million shares. We paid $2 of cash to settle SARs and RSUs and issued 0.6 million shares of common stock based on the vesting of RSUs during 2017. We recognized stock
compensation expense of $7 and $4 during the third quarters of 2017 and 2016 and $17 and $11 during the respective nine-month periods. At September 30, 2017, the total unrecognized compensation cost related to the nonvested awards granted and expected to vest was $26. This cost is expected to be recognized over a weighted-average period of 1.8 years.
Note 10. 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 | | |
| | 2017 | | 2016 | | OPEB - Non-U.S. |
Three Months Ended September 30, | | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | 2017 | | 2016 |
Interest cost | | $ | 13 |
| | $ | 2 |
| | $ | 13 |
| | $ | 2 |
| | $ | 1 |
| | $ | 1 |
|
Expected return on plan assets | | (20 | ) | | (1 | ) | | (23 | ) | | (1 | ) | |
|
| |
|
|
Service cost | |
|
| | 1 |
| |
|
| | 2 |
| |
|
| |
|
|
Amortization of net actuarial loss | | 5 |
| | 2 |
| | 6 |
| | 1 |
| |
|
| |
|
|
Net periodic benefit cost (credit) | | $ | (2 | ) | | $ | 4 |
| | $ | (4 | ) | | $ | 4 |
| | $ | 1 |
| | $ | 1 |
|
| | | | | | | | | | | | |
Nine Months Ended September 30, | | |
| | |
| | |
| | |
| | |
| | |
|
Interest cost | | $ | 39 |
| | $ | 6 |
| | $ | 39 |
| | $ | 6 |
| | $ | 3 |
| | $ | 3 |
|
Expected return on plan assets | | (62 | ) | | (3 | ) | | (69 | ) | | (2 | ) | |
|
| |
|
|
Service cost | |
|
| | 4 |
| |
|
| | 4 |
| |
|
| |
|
|
Other | | | |
|
| | | | 1 |
| | | | |
Amortization of net actuarial loss | | 17 |
| | 5 |
| | 16 |
| | 4 |
| |
|
| |
|
|
Net periodic benefit cost (credit) | | $ | (6 | ) | | $ | 12 |
| | $ | (14 | ) | | $ | 13 |
| | $ | 3 |
| | $ | 3 |
|
Pension expense for 2017 increased versus the same period in 2016 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.
Plan termination — On October 25, 2017, the Dana Board of Directors authorized the company to pursue termination of one of its U.S. defined benefit pension plans. Ultimate plan termination is subject to prevailing market conditions and other considerations, including interest rates and annuity pricing. In the event the company proceeds with effectuating termination, subject to regulatory approval, settlement of the plan obligations is expected to occur in the first half of 2019. An increased liability to settle the plan obligations is expected based on participant settlement options and the cost to purchase annuities. Additionally, the deferred actuarial losses in accumulated other comprehensive income relating to the terminated plan will be recognized as expense. Based on the company's current assumptions, a pre-tax charge estimated in the range of $330 to $415 is expected at the time of settlement.
Note 11. Marketable Securities
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Cost | | Unrealized Gain (Loss) | | Fair Value | | Cost | | Unrealized Gain (Loss) | | Fair Value |
U.S. government securities | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Corporate securities | 5 |
| |
|
| | 5 |
| | 2 |
| |
|
| | 2 |
|
Certificates of deposit | 25 |
| |
|
| | 25 |
| | 22 |
| |
|
| | 22 |
|
Other | 5 |
| |
|
| | 5 |
| | 4 |
| |
|
| | 4 |
|
Total marketable securities | $ | 38 |
| | $ | — |
| | $ | 38 |
| | $ | 30 |
| | $ | — |
| | $ | 30 |
|
U.S. government securities include bonds issued by government-sponsored agencies and Treasury notes. Corporate securities are primarily debt securities. Other consists of investments in mutual and index funds. U.S. government securities,
corporate debt and certificates of deposit maturing in one year or less, after one year through five years and after five years through ten years total $25, $5 and $3 at September 30, 2017.
Note 12. Financing Agreements
Long-term debt at —
|
| | | | | | | | | | | | | | | | | | |
| | | | September 30, 2017 | | December 31, 2016 |
| | Interest Rate | | Principal | | Unamortized Debt Issue Costs | | Principal | | Unamortized Debt Issue Costs |
Senior Notes due September 15, 2021 | | 5.375% | | $ | — |
| | $ | — |
| | $ | 450 |
| | $ | (5 | ) |
Senior Notes due September 15, 2023 | | 6.000% | | 300 |
| | (4 | ) | | 300 |
| | (4 | ) |
Senior Notes due December 15, 2024 | | 5.500% | | 425 |
| | (5 | ) | | 425 |
| | (6 | ) |
Senior Notes due April 15, 2025 | | 5.750% | * | 400 |
| | (6 | ) | | | | |
Senior Notes due June 1, 2026 | | 6.500% | * | 375 |
| | (6 | ) | | 375 |
| | (6 | ) |
Term Facility | | | | 275 |
| | (1 | ) | | | | |
Other indebtedness | | | | 28 |
| |
| | 120 |
| |
|
Total | | | | $ | 1,803 |
| | $ | (22 | ) | | $ | 1,670 |
| | $ | (21 | ) |
| |
* | In conjunction with the issuance of the April 2025 Notes we entered into 8-year fixed-to-fixed cross-currency swaps which have the effect of economically converting the April 2025 Notes to euro-denominated debt at a fixed rate of 3.850%. See Note 13 for additional information. In conjunction with the issuance of the June 2026 Notes we entered into 10-year fixed-to-fixed cross-currency swaps which have the effect of economically converting the June 2026 Notes to euro-denominated debt at a fixed rate of 5.140%. |
Interest on the senior notes is payable semi-annually and interest on the Term Facility is payable quarterly. Other indebtedness includes borrowings from various financial institutions, capital lease obligations, the unamortized fair value adjustment related to a terminated interest rate swap and the financial liability related to build-to-suit leases. See Note 13 for additional information on the terminated interest rate swap.
Senior notes — On September 18, 2017, we redeemed the remaining $350 of our September 2021 Notes at a price equal to 102.688% plus accrued and unpaid interest. The $13 loss on extinguishment of debt includes the $10 redemption premium and the $3 write-off of previously deferred financing costs associated with the September 2021 Notes.
On April 4, 2017, Dana Financing Luxembourg S.à r.l., a wholly-owned subsidiary of Dana, issued $400 in senior notes (April 2025 Notes) at 5.750%, which are guaranteed by Dana. The April 2025 Notes were issued through a private placement and will not be registered under the U.S. Securities Act of 1933, as amended (the Securities Act). The April 2025 Notes were offered only to qualified institutional buyers in reliance on Rule 144A under the Securities Act and, outside the United States, only to non-U.S. investors in reliance on Regulation S under the Securities Act. The April 2025 Notes rank equally with Dana's other unsecured senior notes. Interest on the notes is payable on April 15 and October 15 of each year, beginning on October 15, 2017. The April 2025 Notes will mature on April 15, 2025. Net proceeds of the offering totaled $394. Financing costs of $6 were recorded as deferred costs and are being amortized to interest expense over the life of the April 2025 Notes. The proceeds from the offering were used to repay indebtedness of our BPT and BFP subsidiaries, repay indebtedness of a wholly-owned subsidiary in Brazil, redeem $100 of our September 2021 Notes and for general corporate purposes. The September 2021 Notes were redeemed on April 4, 2017 at a price equal to 104.031% plus accrued and unpaid interest. The $6 loss on extinguishment of debt includes the $4 redemption premium and the $1 write-off of previously deferred financing costs associated with the September 2021 Notes and the $1 redemption premium associated with the repayment of indebtedness of a wholly-owned subsidiary in Brazil. In conjunction with the issuance of the April 2025 Notes, we entered into eight-year fixed-to-fixed cross-currency swaps which have the effect of economically converting the April 2025 Notes to euro-denominated debt at a fixed rate of 3.850%. See Note 13 for additional information.
At any time prior to April 15, 2020, we may redeem up to 35% of the aggregate principal amount of the April 2025 Notes in an amount not to exceed the amount of proceeds of one or more equity offerings, at a price equal to 105.750% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, provided that at least 50% of the original aggregate principal amount of the April 2025 Notes remains outstanding after the redemption.
Prior to April 15, 2020, we may redeem some or all of the April 2025 Notes at a redemption price of 100.000% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a “make-whole” premium. We have not separated the make-whole premium from the underlying debt instrument to account for it as a derivative
instrument as the economic characteristics and the risks of this embedded derivative are clearly and closely related to the economic characteristics and risks of the underlying debt.
We may redeem some or all of the April 2025 Notes at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period commencing on April 15 in the years set forth below:
|
| | |
Year | | Redemption Price |
2020 | | 104.313% |
2021 | | 102.875% |
2022 | | 101.438% |
2023 | | 100.000% |
2024 | | 100.000% |
On June 23, 2016, we redeemed all of our February 2021 Notes at a price equal to 103.375% plus accrued and unpaid interest. The $16 loss on extinguishment of debt includes the $12 redemption premium and the $4 write-off of previously deferred financing costs associated with the February 2021 Notes.
Credit agreement — On August 17, 2017, we entered into an amended credit and guaranty agreement comprised of a $275 term facility (the Term Facility) and a $600 revolving credit facility (the Revolving Facility) both of which mature on August 17, 2022. On September 14, 2017, we drew the entire amount available under the Term Facility. Net proceeds from the Term Facility draw totaled $274. Financing costs of $1 were recorded as deferred cost and are being amortized to interest expense over the life of the Term Facility. We are required to make equal quarterly installments on the last day of each fiscal quarter of 1.5625% of the initial aggregate principal amount of the Term Facility commencing on September 30, 2018. We may prepay some or all of Term Facility without penalty. Any prepayments made on the Term Facility would be applied against the required quarterly installments. The proceeds from the Term Facility were used to repay our September 2021 Notes and for general corporate purposes. The Revolving Facility amended our previous revolving credit facility. In connection with the Revolving Facility, we paid $2 in deferred financing costs to be amortized to interest expense over the life of the facility. Deferred financing costs on our Revolving Facility are included in Other noncurrent assets.
The Term Facility and the Revolving Facility are guaranteed by all of our wholly-owned domestic subsidiaries subject to certain exceptions (the guarantors) and grants a first-priority lien on substantially all of the assets of Dana and the guarantors, subject to certain exceptions.
Advances under the Term Facility and the Revolving Facility bear interest at a floating rate based on, at our option, the base rate or Eurodollar rate (each as described in the revolving credit agreement) plus a margin as set forth below:
|
| | | | | | |
| | Margin |
Total Net Leverage Ratio | | Base Rate | | Eurodollar Rate |
Less than or equal to 1.00:1.00 | | 0.50 | % | | 1.50 | % |
Greater than 1.00:1.00 but less than or equal to 2.00:1.00 | | 0.75 | % | | 1.75 | % |
Greater than 2.00:1.00 | | 1.00 | % | |