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EX-32 - EXHIBIT 32 - DANA INCdan-20171231xex32.htm
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EX-21 - EXHIBIT 21 - DANA INCdan-20171231xex21.htm
EX-12 - EXHIBIT 12 - DANA INCdan-20171231xex12.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Fiscal Year Ended:  December 31, 2017
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
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  þ  No  o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  o  No  þ
 
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) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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):
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 Act).  Yes  o      No  þ
 
The aggregate market value of the common stock held by non-affiliates of the registrant computed by reference to the closing price of the common stock on June 30, 2017 was $3,218,263,263.
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 145,056,206 shares of the registrant's common stock outstanding at January 31, 2018.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Shareholders to be held on April 26, 2018 are incorporated by reference into Part III.




DANA INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2017
 
Table of Contents 
       
 
 
Pages
PART I
 
 
Item 1
Business
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Properties
Item 3
Legal Proceedings
 
 
 
PART II
 
 
Item 5
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6
Selected Financial Data
Item 7
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
 
 
 
PART III
 
 
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13
Certain Relationships and Related Transactions, and Director Independence
Item 14
Principal Accountant Fees and Services
 
 
 
PART IV
 
 
Item 15
Exhibits and Financial Statement Schedules
 
 
 
Signatures
 


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Forward-Looking Information

Statements in this report (or otherwise made by us or on our behalf) that are not entirely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can often be identified by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “predicts,” “seeks,” “estimates,” “projects,” “outlook,” “may," “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing” and similar expressions, variations or negatives of these words. These statements represent the present expectations of Dana Incorporated and its consolidated subsidiaries (Dana) based on our current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our plans, actions and actual results could differ materially from our present expectations due to a number of factors, including those discussed below and elsewhere in this report and in our other filings with the Securities and Exchange Commission (SEC). All forward-looking statements speak only as of the date made and we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances that may arise after the date of this report.



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PART I
 
(Dollars in millions, except per share amounts)
 
Item 1. Business
 
General
 
Dana Incorporated (Dana) is headquartered in Maumee, Ohio and was incorporated in Delaware in 2007. We are a global provider of high technology drive and motion products, sealing solutions, thermal-management technologies and fluid-power products and our customer base includes virtually every major vehicle and engine manufacturer in the global light vehicle, medium/heavy vehicle and off-highway markets. As of December 31, 2017 we employed approximately 30,100 people, operated in 33 countries and had 139 major facilities around the world.

The terms “Dana,” “we,” “our” and “us” are references to Dana. These references include the subsidiaries of Dana unless otherwise indicated or the context requires otherwise.

Overview of our Business

We have aligned our organization around four operating segments: Light Vehicle Driveline Technologies (Light Vehicle), Commercial Vehicle Driveline Technologies (Commercial Vehicle), Off-Highway Drive and Motion Technologies (Off-Highway) and Power Technologies. These operating segments have global responsibility and accountability for business commercial activities and financial performance.

External sales by operating segment for the years ended December 31, 2017, 2016 and 2015 are as follows:

 
 
2017
 
2016
 
2015
 
 
Dollars
 
% of Total
 
Dollars
 
% of Total
 
Dollars
 
% of Total
Light Vehicle
 
$
3,172

 
44.0
%
 
$
2,607

 
44.8
%
 
$
2,482

 
40.9
%
Commercial Vehicle
 
1,412

 
19.6
%
 
1,254

 
21.5
%
 
1,533

 
25.3
%
Off-Highway
 
1,521

 
21.1
%
 
909

 
15.6
%
 
1,040

 
17.2
%
Power Technologies
 
1,104

 
15.3
%
 
1,056

 
18.1
%
 
1,005

 
16.6
%
Total
 
$
7,209

 
 
 
$
5,826

 
 
 
$
6,060

 
 

Refer to Segment Results of Operations in Item 7 and Note 20 to our consolidated financial statements in Item 8 for further financial information about our operating segments.




















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Our business is diversified across end-markets, products and customers. The following table summarizes the markets, products and largest customers of each of our operating segments as of December 31, 2017.

Segment
Markets
Products
Largest
Customers
Light Vehicle
Light vehicle market:
Front axles
Ford Motor Company
 
    Light trucks (full frame)
Rear axles
Fiat Chrysler Automobiles*
 
    Sport utility vehicles
Driveshafts/Propshafts
Renault-Nissan Alliance
 
    Crossover utility vehicles
Differentials
General Motors Company
 
    Vans
Torque couplings
Toyota Motor Company
 
    Passenger cars
Modular assemblies
Tata Motors
 
 
Rear drive units
 
 
 
Power transfer units
 
 
 
Axle tube assemblies
 
 
 
Axle shafts
 
 
 
EV gearboxes
 
Commercial Vehicle
Medium/heavy vehicle market:
Steer axles
PACCAR Inc
 
    Medium duty trucks
Drive axles
Volkswagen AG**
 
    Heavy duty trucks
Driveshafts
AB Volvo
 
    Buses
Tire inflation systems
Daimler AG
 
    Specialty vehicles

Ford Motor Company
Off-Highway
Off-Highway market:
Front axles
Deere & Company
 
    Construction
Rear axles
AGCO Corporation
 
    Earth moving
Driveshafts
Manitou Group
 
    Agricultural
Transmissions
Oshkosh Corporation
 
    Mining
Torque converters
Sandvik AB
 
    Forestry
Wheel, track and winch
Linamar Corporation
 
    Material handling
    planetary drives
 
 
    Industrial stationary
Industrial gear boxes
 
 
 
Tire inflation systems
 
 
 
Electronic controls
 
 
 
Hydraulic valves, pumps
 
 
 
    and motors
 
Power Technologies
Light vehicle market
Gaskets
Ford Motor Company
 
Medium/heavy vehicle market
Cover modules
General Motors Company
 
Off-Highway market
Heat shields
Cummins Inc.
 
 
Engine sealing systems
Volkswagen AG
 
 
Cooling
Caterpillar Inc.
 
 
Heat transfer products
 
* Via a directed supply relationship with Hyundai Mobis.
** Includes MAN AG, a majority-owned subsidiary of Volkswagen AG















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Geographic Operations

We maintain administrative and operational organizations in North America, Europe, South America and Asia Pacific to support our operating segments, assist with the management of affiliate relations and facilitate financial and statutory reporting and tax compliance on a worldwide basis. Our operations are located in the following countries:
North America
Europe
South America
Asia Pacific
Canada
Belgium
Norway
Argentina
Australia
Mexico
Denmark
Russia
Brazil
China
United States
Finland
South Africa
Colombia
India
 
France
Spain
Ecuador
Japan
 
Germany
Sweden
 
New Zealand
 
Hungary
Switzerland
 
Singapore
 
Ireland
Turkey
 
South Korea
 
Italy
United Kingdom
 
Taiwan
 
Netherlands
 
 
Thailand

Our non-U.S. subsidiaries and affiliates manufacture and sell products similar to those we produce in the United States. Operations outside the U.S. may be subject to a greater risk of changing political, economic and social environments, changing governmental laws and regulations, currency revaluations and market fluctuations than our domestic operations. See the discussion of risk factors in Item 1A.

Sales reported by our non-U.S. subsidiaries comprised $4,000 of our 2017 consolidated sales of $7,209. A summary of sales and long-lived assets by geographic region can be found in Note 20 to our consolidated financial statements in Item 8.

Customer Dependence

We are largely dependent on light vehicle, medium- and heavy-duty vehicle and off-highway original equipment manufacturer (OEM) customers. Ford Motor Company (Ford) was the only individual customer accounting for 10% or more of our consolidated sales in 2017. As a percentage of total sales from operations, our sales to Ford were approximately 22% in 2017, 22% in 2016 and 20% in 2015 and our sales to Fiat Chrysler Automobiles (via a directed supply relationship with Hyundai Mobis), our second largest customer, were approximately 8% in 2017, 9% in 2016 and 9% in 2015. PACCAR Inc, Renault-Nissan Alliance and General Motors Company were our third, fourth and fifth largest customers in 2017. Our 10 largest customers collectively accounted for approximately 58% of our sales in 2017.

Loss of all or a substantial portion of our sales to Ford or other large volume customers would have a significant adverse effect on our financial results until such lost sales volume could be replaced and there is no assurance that any such lost volume would be replaced.

Sources and Availability of Raw Materials

We use a variety of raw materials in the production of our products, including steel and products containing steel, stainless steel, forgings, castings and bearings. Other commodity purchases include aluminum, brass, copper and plastics. These materials are typically available from multiple qualified sources in quantities sufficient for our needs. However, some of our operations remain dependent on single sources for certain raw materials.

While our suppliers have generally been able to support our needs, our operations may experience shortages and delays in the supply of raw material from time to time due to strong demand, capacity limitations, short lead times, production schedule increases from our customers and other problems experienced by the suppliers. A significant or prolonged shortage of critical components from any of our suppliers could adversely impact our ability to meet our production schedules and to deliver our products to our customers in a timely manner.

Seasonality

Our businesses are generally not seasonal. However, in the light vehicle market, our sales are closely related to the production schedules of our OEM customers and those schedules have historically been weakest in the third quarter of the year due to a large number of model year change-overs that occur during this period. Additionally, third-quarter production

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schedules in Europe are typically impacted by the summer vacation schedules and fourth-quarter production is affected globally by year-end holidays.

Backlog

A substantial amount of the new business we are awarded by OEMs is granted well in advance of a program launch. These awards typically extend through the life of the given program. This backlog of new business does not represent firm orders. We estimate future sales from new business using the projected volume under these programs.

Competition

Within each of our markets, we compete with a variety of independent suppliers and distributors, as well as with the in-house operations of certain OEMs. With a renewed focus on product innovation, we differentiate ourselves through efficiency and performance, reliability, materials and processes, sustainability and product extension.

The following table summarizes our principal competitors by operating segment as of December 31, 2017.

Segment
Principal Competitors
Light Vehicle
ZF Friedrichshafen AG
 
GKN plc
 
American Axle & Manufacturing Holdings, Inc.
 
Magna International Inc.
 
Wanxiang Group Corporation
 
Hitachi Automotive Systems, Ltd.
 
IFA ROTORION Holding GmbH
 
Tiryakiler Group
 
Vertically integrated OEM operations
Commercial Vehicle
Meritor, Inc.
 
American Axle & Manufacturing Holdings, Inc.
 
Hendrickson (a subsidiary of the Boler Company)
 
Klein Products Inc.
 
Tirsan Kardan
 
Vertically integrated OEM operations
Off-Highway
Carraro Group
 
ZF Friedrichshafen AG
 
Kessler + Co.
 
Comer Industries
 
Bonfiglioli
 
Oerlikon Fairfield
 
Reggiana Riduttori
 
Sew-Eurodrive
 
Siemens
 
Vertically integrated OEM operations
Power Technologies
ElringKlinger AG
 
Federal-Mogul Corporation
 
Freudenberg NOK Group
 
MAHLE GmbH
 
Modine Manufacturing Company
 
Valeo Group
 
YinLun Co., LTD
 
Denso Corporation





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Intellectual Property

Our proprietary driveline and power technologies product lines have strong identities in the markets we serve. Throughout these product lines, we manufacture and sell our products under a number of patents that have been obtained over a period of years and expire at various times. We consider each of these patents to be of value and aggressively protect our rights throughout the world against infringement. We are involved with many product lines and the loss or expiration of any particular patent would not materially affect our sales and profits.

We own or have licensed numerous trademarks that are registered in many countries, enabling us to market our products worldwide. For example, our Spicer®, Victor Reinz® and Long® trademarks are widely recognized in their market segments.

Engineering and Research and Development

Since our introduction of the automotive universal joint in 1904, we have been focused on technological innovation. Our objective is to be an essential partner to our customers and we remain highly focused on offering superior product quality, technologically advanced products, world-class service and competitive prices. To enhance quality and reduce costs, we use statistical process control, cellular manufacturing, flexible regional production and assembly, global sourcing and extensive employee training.

We engage in ongoing engineering and research and development activities to improve the reliability, performance and cost-effectiveness of our existing products and to design and develop innovative products that meet customer requirements for new applications. We are integrating related operations to create a more innovative environment, speed product development, maximize efficiency and improve communication and information sharing among our research and development operations. At December 31, 2017, we had eight stand-alone technical and engineering centers and eight additional sites at which we conduct research and development activities. Our research and development costs were $102 in 2017, $81 in 2016 and $75 in 2015. Total engineering expenses including research and development were $220 in 2017, $196 in 2016 and $183 in 2015.
 
Our research and development activities continue to improve customer value. For all of our markets, this means drivelines with higher torque capacity, reduced weight and improved efficiency. End-use customers benefit by having vehicles with better fuel economy and reduced cost of ownership. We are also developing a number of power technologies products for vehicular and other applications that will assist fuel cell, battery and hybrid vehicle manufacturers in making their technologies commercially viable in mass production.

Employees

The following table summarizes our employees by operating segment as of December 31, 2017.

Segment
 
Employees
Light Vehicle
 
12,100

Commercial Vehicle
 
5,800

Off-Highway
 
5,500

Power Technologies
 
5,300

Technical and administrative
 
1,400

Total
 
30,100


Environmental Compliance

We make capital expenditures in the normal course of business as necessary to ensure that our facilities are in compliance with applicable environmental laws and regulations. The cost of environmental compliance has not been a material part of capital expenditures and did not have a material adverse effect on our earnings or competitive position in 2017.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 as amended (Exchange Act) are available, free of charge, on or through our Internet website at http://www.dana.com/investors as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. Copies of any materials we file with the SEC can also be

5



obtained free of charge through the SEC’s website at http://www.sec.gov or by calling the SEC’s Office of Investor Education and Advocacy at 1-800-732-0330. We also post our Corporate Governance Guidelines, Standards of Business Conduct for Members of the Board of Directors, Board Committee membership lists and charters, Standards of Business Conduct and other corporate governance materials on our Internet website. Copies of these posted materials are also available in print, free of charge, to any stockholder upon request from: Dana Incorporated, Investor Relations, P.O. Box 1000, Maumee, Ohio 43537, or via telephone in the U.S. at 800-537-8823 or e-mail at InvestorRelations@dana.com. The inclusion of our website address in this report is an inactive textual reference only and is not intended to include or incorporate by reference the information on our website into this report.

Item 1A. Risk Factors

We are impacted by events and conditions that affect the light vehicle, medium/heavy vehicle and off-highway markets that we serve, as well as by factors specific to Dana. Among the risks that could materially adversely affect our business, financial condition or results of operations are the following, many of which are interrelated.

Risk Factors Related to the Markets We Serve

Failure to sustain a continuing economic recovery in the United States and elsewhere could have a substantial adverse effect on our business.

Our business is tied to general economic and industry conditions as demand for vehicles depends largely on the strength of the economy, employment levels, consumer confidence levels, the availability and cost of credit and the cost of fuel. These factors have had and could continue to have a substantial impact on our business.

We expect global market conditions to result in overall comparable to slightly higher sales in 2018. We expect the North America economic climate will continue to be modestly strong to stable. The medium/heavy truck market in North America is expected to be stronger in 2018, with demand levels in the off-highway market being stable to slightly stronger. In the light vehicle market, light truck demand is expected to be comparable to slightly weaker than 2017. The economy in Europe is expected to improve modestly, with off-highway market demand continuing to improve and on-highway market demand being relatively comparable to this past year. Continued economic improvement in Brazil is expected to provide stable to improving production levels in our key South America market segments in 2018. We expect the rate of growth in Asia Pacific to be more modest in 2018, with the off-highway and light truck markets being comparable to up slightly compared to 2017, while the 2018 medium/heavy truck market is expected to be somewhat weaker. Adverse developments in the economic conditions of any of these markets could reduce demand for new vehicles, causing our customers to reduce their vehicle production and, as a result, demand for our products would be adversely affected.

Certain political developments occurring the past two years have provided increased economic uncertainty. The United Kingdom's decision in 2016 to exit the European Union has not had significant economic ramifications to date; however, transition details continue to develop and could have potential economic implications in the United Kingdom and elsewhere. Effects of the 2016 presidential election in the U.S., including recent tax reform legislation, easing of regulatory requirements and potential trade policy actions, are likely to impact economic conditions in the U.S. and various countries, the cost of importing into the U.S. and the competitive landscape of our customers, suppliers and competitors.

Adverse global economic conditions could also cause our customers and suppliers to experience severe economic constraints in the future, including bankruptcy, which could have a material adverse impact on our financial position and results of operations.

We could be adversely impacted by the loss of any of our significant customers, changes in their requirements for our products or changes in their financial condition.

We are reliant upon sales to several significant customers. Sales to our ten largest customers accounted for 58% of our overall sales in 2017. Changes in our business relationships with any of our large customers or in the timing, size and continuation of their various programs could have a material adverse impact on us.

The loss of any of these customers, the loss of business with respect to one or more of their vehicle models on which we have high component content, or a significant decline in the production levels of such vehicles would negatively impact our business, results of operations and financial condition. Pricing pressure from our customers also poses certain risks. Inability on our part to offset pricing concessions with cost reductions would adversely affect our profitability. We are continually bidding on new business with these customers, as well as seeking to diversify our customer base, but there is no assurance that our

6



efforts will be successful. Further, to the extent that the financial condition of our largest customers deteriorates, including possible bankruptcies, mergers or liquidations, or their sales otherwise decline, our financial position and results of operations could be adversely affected.

We may be adversely impacted by changes in international legislative and political conditions.

We operate in 33 countries around the world and we depend on significant foreign suppliers and customers. Further, we have several growth initiatives that are targeting emerging markets like China and India. Legislative and political activities within the countries where we conduct business, particularly in emerging markets and less developed countries, could adversely impact our ability to operate in those countries. The political situation in a number of countries in which we operate could create instability in our contractual relationships with no effective legal safeguards for resolution of these issues, or potentially result in the seizure of our assets. We operate in Argentina, where trade-related initiatives and other government restrictions limit our ability to optimize operating effectiveness. At December 31, 2017, our net asset exposure related to Argentina was approximately $19, including $9 of net fixed assets.

We may be adversely impacted by the strength of the U.S. dollar relative to the currencies in the other countries in which we do business.

Approximately 55% of our sales in 2017 were from operations located in countries other than the U.S. Currency variations can have an impact on our results (expressed in U.S. dollars). Currency variations can also adversely affect margins on sales of our products in countries outside of the U.S. and margins on sales of products that include components obtained from affiliates or other suppliers located outside of the U.S. Strengthening of the U.S. dollar against the euro and currencies of other countries in which we have operations has had and could continue to have an adverse effect on our results reported in U.S. dollars. We use a combination of natural hedging techniques and financial derivatives to mitigate foreign currency exchange rate risks. Such hedging activities may be ineffective or may not offset more than a portion of the adverse financial impact resulting from currency variations.

We may be adversely impacted by new laws, regulations or policies of governmental organizations related to increased fuel economy standards and reduced greenhouse gas emissions, or changes in existing ones.

The markets and customers we serve are subject to substantial government regulation, which often differs by state, region and country. These regulations, and proposals for additional regulation, are advanced primarily out of concern for the environment (including concerns about global climate change and its impact) and energy independence. We anticipate that the number and extent of these regulations, and the costs to comply with them, will increase significantly in the future.

In the U.S., vehicle fuel economy and greenhouse gas emissions are regulated under a harmonized national program administered by the National Highway Traffic Safety Administration and the Environmental Protection Agency (EPA). Other governments in the markets we serve are also creating new policies to address these same issues, including the European Union, Brazil, China and India. These government regulatory requirements could significantly affect our customers by altering their global product development plans and substantially increasing their costs, which could result in limitations on the types of vehicles they sell and the geographical markets they serve. Any of these outcomes could adversely affect our financial position and results of operations.

Company-Specific Risk Factors

We have taken, and continue to take, cost-reduction actions. Although our process includes planning for potential negative consequences, the cost-reduction actions may expose us to additional production risk and could adversely affect our sales, profitability and ability to attract and retain employees.

We have been reducing costs in all of our businesses and have discontinued product lines, exited businesses, consolidated manufacturing operations and positioned operations in lower cost locations. The impact of these cost-reduction actions on our sales and profitability may be influenced by many factors including our ability to successfully complete these ongoing efforts, our ability to generate the level of cost savings we expect or that are necessary to enable us to effectively compete, delays in implementation of anticipated workforce reductions, decline in employee morale and the potential inability to meet operational targets due to our inability to retain or recruit key employees.





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We depend on our subsidiaries for cash to satisfy the obligations of the company.

Our subsidiaries conduct all of our operations and own substantially all of our assets. Our cash flow and our ability to meet our obligations depend on the cash flow of our subsidiaries. In addition, the payment of funds in the form of dividends, intercompany payments, tax sharing payments and otherwise may be subject to restrictions under the laws of the countries of incorporation of our subsidiaries or the by-laws of the subsidiary.

Labor stoppages or work slowdowns at Dana, key suppliers or our customers could result in a disruption in our operations and have a material adverse effect on our businesses.

We and our customers rely on our respective suppliers to provide parts needed to maintain production levels. We all rely on workforces represented by labor unions. Workforce disputes that result in work stoppages or slowdowns could disrupt operations of all of these businesses, which in turn could have a material adverse effect on the supply of, or demand for, the products we supply our customers.

We could be adversely affected if we are unable to recover portions of commodity costs (including costs of steel, other raw materials and energy) from our customers.

We continue to work with our customers to recover a portion of our material cost increases. While we have been successful in the past recovering a significant portion of such cost increases, there is no assurance that increases in commodity costs, which can be impacted by a variety of factors, including changes in trade laws and tariffs, will not adversely impact our profitability in the future.

We could be adversely affected if we experience shortages of components from our suppliers or if disruptions in the supply chain lead to parts shortages for our customers.

A substantial portion of our annual cost of sales is driven by the purchase of goods and services. To manage and minimize these costs, we have been consolidating our supplier base. As a result, we are dependent on single sources of supply for some components of our products. We select our suppliers based on total value (including price, delivery and quality), taking into consideration their production capacities and financial condition, and we expect that they will be able to support our needs. However, there is no assurance that adverse financial conditions, including bankruptcies of our suppliers, reduced levels of production, natural disasters or other problems experienced by our suppliers will not result in shortages or delays in their supply of components to us or even in the financial collapse of one or more such suppliers. If we were to experience a significant or prolonged shortage of critical components from any of our suppliers, particularly those who are sole sources, and were unable to procure the components from other sources, we would be unable to meet our production schedules for some of our key products and to ship such products to our customers in a timely fashion, which would adversely affect our sales, profitability and customer relations.

Adverse economic conditions, natural disasters and other factors can similarly lead to financial distress or production problems for other suppliers to our customers which can create disruptions to our production levels. Any such supply-chain induced disruptions to our production are likely to create operating inefficiencies that will adversely affect our sales, profitability and customer relations.

Our profitability and results of operations may be adversely affected by program launch difficulties.

The launch of new business is a complex process, the success of which depends on a wide range of factors, including the production readiness of our manufacturing facilities and manufacturing processes and those of our suppliers, as well as factors related to tooling, equipment, employees, initial product quality and other factors. Our failure to successfully launch material new or takeover business could have an adverse effect on our profitability and results of operations.

We use important intellectual property in our business. If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers relating to intellectual property rights, our business could be adversely affected.

We own important intellectual property, including patents, trademarks, copyrights and trade secrets, and are involved in numerous licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design around the patents we own or license. Further, as we expand our operations in jurisdictions where the protection of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases,

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despite efforts we undertake to protect them. Developments or assertions by or against us relating to intellectual property rights, and any inability to protect these rights, could have a material adverse impact on our business and our competitive position.

We could encounter unexpected difficulties integrating acquisitions and joint ventures.

We acquired businesses in 2017, and we expect to complete additional acquisitions and investments in the future that complement or expand our businesses. The success of this strategy will depend on our ability to successfully complete these transactions or arrangements, to integrate the businesses acquired in these transactions and to develop satisfactory working arrangements with our strategic partners in the joint ventures. We could encounter unexpected difficulties in completing these transactions and integrating the acquisitions with our existing operations. We also may not realize the degree or timing of benefits anticipated when we entered into a transaction.

Several of our joint ventures operate pursuant to established agreements and, as such, we do not unilaterally control the joint venture. There is a risk that the partners’ objectives for the joint venture may not be aligned with ours, leading to potential differences over management of the joint venture that could adversely impact its financial performance and consequent contribution to our earnings. Additionally, inability on the part of our partners to satisfy their contractual obligations under the agreements could adversely impact our results of operations and financial position.

We could be adversely impacted by the costs of environmental, health, safety and product liability compliance.

Our operations are subject to environmental laws and regulations in the U.S. and other countries that govern emissions to the air; discharges to water; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the cleanup of contaminated properties. Historically, other than an EPA settlement as part of our bankruptcy proceedings, environmental costs related to our former and existing operations have not been material. However, there is no assurance that the costs of complying with current environmental laws and regulations, or those that may be adopted in the future, will not increase and adversely impact us.

There is also no assurance that the costs of complying with current laws and regulations, or those that may be adopted in the future, that relate to health, safety and product liability matters will not adversely impact us. There is also a risk of warranty and product liability claims, as well as product recalls, if our products fail to perform to specifications or cause property damage, injury or death. (See Notes 16 and 17 to our consolidated financial statements in Item 8 for additional information on product liabilities and warranties.)

A failure of our information technology infrastructure could adversely impact our business and operations.

We recognize the increasing volume of cyber attacks and employ commercially practical efforts to provide reasonable assurance that the risks of such attacks are appropriately mitigated. Each year, we evaluate the threat profile of our industry to stay abreast of trends and to provide reasonable assurance our existing countermeasures will address any new threats identified. Despite our implementation of security measures, our IT systems and those of our service providers are vulnerable to circumstances beyond our reasonable control including acts of terror, acts of government, natural disasters, civil unrest and denial of service attacks which may lead to the theft of our intellectual property, trade secrets or business disruption. To the extent that any disruption or security breach results in a loss or damage to our data or an inappropriate disclosure of confidential information, it could cause significant damage to our reputation, affect our relationships with our customers, suppliers and employees, lead to claims against the company and ultimately harm our business. Additionally, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

We participate in certain multi-employer pension plans which are not fully funded.

We contribute to certain multi-employer defined benefit pension plans for our union-represented employees in the U.S. in accordance with our collective bargaining agreements. Contributions are based on hours worked except in cases of layoff or leave where we generally contribute based on 40 hours per week for a maximum of one year. The plans are not fully funded as of December 31, 2017. We could be held liable to the plans for our obligation, as well as those of other employers, due to our participation in the plans. Contribution rates could increase if the plans are required to adopt a funding improvement plan, if the performance of plan assets does not meet expectations or as a result of future collectively bargained wage and benefit agreements. (See Note 12 to our consolidated financial statements in Item 8 for additional information on multi-employer pension plans.)




9



Changes in interest rates and asset returns could increase our pension funding obligations and reduce our profitability.

We have unfunded obligations under certain of our defined benefit pension and other postretirement benefit plans. The valuation of our future payment obligations under the plans and the related plan assets are subject to significant adverse changes if the credit and capital markets cause interest rates and projected rates of return to decline.  Such declines could also require us to make significant additional contributions to our pension plans in the future.  A material increase in the unfunded obligations of these plans could also result in a significant increase in our pension expense in the future.
We may incur additional tax expense or become subject to additional tax exposure.

Our provision for income taxes and the cash outlays required to satisfy our income tax obligations in the future could be adversely affected by numerous factors. These factors include changes in the level of earnings in the tax jurisdictions in which we operate, changes in the valuation of deferred tax assets, changes in our plans to repatriate the earnings of our non-U.S. operations to the U.S. and changes in tax laws and regulations. Enactment of the Tax Cuts and Jobs Act in the U.S. on December 22, 2017 introduced broad and complex tax reforms. With this legislation having only recently been enacted, we have had limited time to fully evaluate the impacts of these tax reforms on our business. Additionally, certain of the provisions lack clarity and will likely be subject to further interpretation by the Internal Revenue Service. As we further analyze the recent tax reform provisions and subsequent guidance, the provisional estimates of certain elements of the legislation recognized in 2017 could be impacted, and there are likely to be significant future impacts that these tax reforms will have on our future financial results and our business strategies.

Our income tax returns are subject to examination by federal, state and local tax authorities in the U.S. and tax authorities outside the U.S. The results of these examinations and the ongoing assessments of our tax exposures could also have an adverse effect on our provision for income taxes and the cash outlays required to satisfy our income tax obligations.

Our ability to utilize our net operating loss carryforwards may be limited.

Net operating loss carryforwards (NOLs) approximating $643 were available at December 31, 2017 to reduce future U.S. income tax liabilities. Our ability to utilize these NOLs may be limited as a result of certain change of control provisions of the U.S. Internal Revenue Code of 1986, as amended (Code). Of this amount, NOLs of approximately $458 are treated as losses incurred before the change of control upon emergence from Chapter 11 and are limited to annual utilization of $84. The balance of our NOLs, treated as incurred subsequent to the change in control, is not subject to limitation as of December 31, 2017. However, there can be no assurance that trading in our shares will not effect another change in control under the Code, which would further limit our ability to utilize our available NOLs. Such limitations may cause us to pay income taxes earlier and in greater amounts than would be the case if the NOLs were not subject to limitation.

An inability to provide products with the technology required to satisfy customer requirements would adversely impact our ability to successfully compete in our markets.

The vehicular markets in which we operate are undergoing significant technological change, with increasing focus on electrified and autonomous vehicles. These and other technological advances could render certain of our products obsolete. Maintaining our competitive position is dependent on our ability to develop commercially-viable products and services that support the future technologies embraced by our customers.

Failure to appropriately anticipate and react to the cyclical and volatile nature of production rates and customer demands in our business can adversely impact our results of operations.

Our financial performance is directly related to production levels of our customers. In several of our markets, customer production levels are prone to significant cyclicality, influenced by general economic conditions, changing consumer preferences, regulatory changes, and other factors. Oftentimes the rapidity of the downcycles and upcycles can be severe. Successfully executing operationally during periods of extreme downward and upward demand pressures can be challenging. Our inability to recognize and react appropriately to the production cycles inherent in our markets can adversely impact our operating results.

Our continued success is dependent on being able to attract and retain requisite talent.

Sustaining and growing our business requires that we continue to attract, develop and retain people with the requisite skills. With the vehicles of the future expected to undergo significant technological change, having qualified people savvy in the right technologies will be a key factor in our ability to develop the products necessary to successfully compete in the future.

10



As a global organization, we are also dependent on our ability to attract and maintain a diverse work force that is fully engaged supporting our company’s objectives and initiatives.

Failure to maintain effective internal controls could adversely impact our business, financial condition and results of operations.

Regulatory provisions governing the financial reporting of U.S. public companies require that we maintain effective disclosure controls and internal controls over financial reporting across our operations in 33 countries. Effective internal controls are designed to provide reasonable assurance of compliance, and, as such, they can be susceptible to human error, circumvention or override, and fraud. Failure to maintain adequate, effective internal controls could result in potential financial misstatements or other forms of noncompliance that have an adverse impact on our results of operations, financial condition or organizational reputation. Our 2017 acquisitions were exempt from certain regulatory internal control compliance requirements this past year, but are required to be compliant in 2018.

Developments in the financial markets or downgrades to Dana's credit rating could restrict our access to capital and increase financing costs.

At December 31, 2017, Dana had consolidated debt obligations of $1,821, with cash and marketable securities of $643 and unused revolving credit capacity of $578. Our ability to grow the business and satisfy debt service obligations is dependent, in part, on our ability to gain access to capital at competitive costs. External factors beyond our control can adversely affect capital markets – either tightening availability of capital or increasing the cost of available capital. Failure on our part to maintain adequate financial performance and appropriate credit metrics can also affect our ability to access capital at competitive prices.

Risk Factors Related to our Securities

Provisions in our Restated Certificate of Incorporation and Bylaws may discourage a takeover attempt.

Certain provisions of our Restated Certificate of Incorporation and Bylaws, as well as the General Corporation Law of the State of Delaware, may have the effect of delaying, deferring or preventing a change in control of Dana. Such provisions, including those governing the nomination of directors, limiting who may call special stockholders’ meetings and eliminating stockholder action by written consent, may make it more difficult for other persons, without the approval of our board of directors, to make a tender offer or otherwise acquire substantial amounts of common stock or to launch other takeover attempts that a stockholder might consider to be in such stockholder’s best interest.

Item 1B. Unresolved Staff Comments

None.

11




Item 2. Properties

Type of Facility
 
North
America
 
Europe
 
South
America
 
Asia
Pacific
 
Total
Light Vehicle
 
 
 
 
 
 
 
 
 
 
    Manufacturing/Distribution
 
12
 
4
 
4
 
10
 
30
    Service/Assembly
 
2
 
 
 
1
 
1
 
4
    Technical and Engineering Centers
 
1
 
 
 
 
 
 
 
1
Commercial Vehicle
 
 
 
 
 
 
 
 
 
 
    Manufacturing/Distribution
 
7
 
5
 
4
 
7
 
23
    Service/Assembly
 
1
 
 
 
 
 
 
 
1
Off-Highway
 
 
 
 
 
 
 
 
 
 
    Manufacturing/Distribution
 
5
 
32
 
1
 
9
 
47
    Service/Assembly
 
 
 
1
 
 
 
 
 
1
    Administrative Offices
 
 
 
 
 
 
 
2
 
2
    Technical and Engineering Centers
 
 
 
1
 
 
 
 
 
1
Power Technologies
 
 
 
 
 
 
 
 
 
 
    Manufacturing/Distribution
 
10
 
4
 
 
 
2
 
16
    Technical and Engineering Centers
 
2
 
 
 
 
 
 
 
2
Corporate and other
 
 
 
 
 
 
 
 
 
 
    Administrative Offices
 
2
 
1
 
1
 
3
 
7
    Technical and Engineering Centers - Multiple Segments
 
1
 
 
 
 
 
3
 
4
 
 
43
 
48
 
11
 
37
 
139

As of December 31, 2017, we operated in 33 countries and had 139 major facilities housing manufacturing and distribution operations, service and assembly operations, technical and engineering centers and administrative offices. In addition to the eight stand-alone technical and engineering centers in the table above, we have fourteen technical and engineering centers housed within manufacturing sites. We lease 67 of these facilities and own the remainder. We believe that all of our property and equipment is properly maintained.

Our world headquarters is located in Maumee, Ohio. This facility and other facilities in the greater Detroit, Michigan and Maumee, Ohio areas house functions that have global or North American regional responsibility for finance and accounting, treasury, risk management, legal, human resources, procurement and supply chain management, communications and information technology.

Item 3. Legal Proceedings

We are a party to various pending judicial and administrative proceedings that arose in the ordinary course of business. After reviewing the currently pending lawsuits and proceedings (including the probable outcomes, reasonably anticipated costs and expenses and our established reserves for uninsured liabilities), we do not believe that any liabilities that may result from these proceedings are reasonably likely to have a material adverse effect on our liquidity, financial condition or results of operations. Legal proceedings are also discussed in Notes 3 and 16 to our consolidated financial statements in Item 8.
 


PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market information — Our common stock trades on the New York Stock Exchange (NYSE) under the symbol "DAN." The following table shows the high and low prices of our common stock as reported by the NYSE for each of our fiscal quarters during 2017 and 2016.

12



 
2017
 
2016
 
High
 
Low
 
High
 
Low
Fourth quarter
$
33.45

 
$
28.01

 
$
19.81

 
$
13.93

Third quarter
28.25

 
22.27

 
15.70

 
9.80

Second quarter
22.51

 
17.53

 
14.55

 
10.21

First quarter
20.62

 
17.67

 
14.32

 
10.62


Holders of common stock — Based on reports by our transfer agent, there were approximately 3,151 registered holders of our common stock on January 31, 2018.

Reference is made to the Equity Compensation Plan Information section of Item 12 for certain information regarding our equity compensation plans.

Stockholder return — The following graph shows the cumulative total shareholder return for our common stock since December 31, 2012. The graph compares our performance to that of the Standard & Poor’s 500 Stock Index (S&P 500) and the Dow Jones US Auto Parts Index. The comparison assumes $100 was invested at the closing price on December 31, 2012. Each of the returns shown assumes that all dividends paid were reinvested.

Performance chart
dan-2017123_chartx58599a02.jpg
Index
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
Dana Incorporated
$
100.00

 
$
125.26

 
$
139.18

 
$
92.92

 
$
134.07

 
$
226.96

S&P 500
100.00

 
132.39

 
150.51

 
152.59

 
170.84

 
208.14

Dow Jones US Auto Parts Index
100.00

 
156.05

 
172.65

 
166.24

 
175.24

 
227.44

 
Dividends — We declared and paid quarterly common stock dividends of six cents per share in 2017 and 2016.

Issuer's purchases of equity securities — In December 2017, our Board of Directors approved a new $100 common stock share repurchase program, which expires on December 31, 2019. Our prior $1,700 common stock share repurchase program expired on December 31, 2017 with approximately $219 of the program remaining unused. No shares of our common stock were repurchased under the program during 2017.
 
 
 
 
 
 
 
 
 
 
 
Annual meeting — We will hold an annual meeting of shareholders on April 26, 2018.

13



Item 6. Selected Financial Data
 
 
 
Year Ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
Operating Results
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
7,209

 
$
5,826

 
$
6,060

 
$
6,617

 
$
6,769

Earnings from continuing operations before income taxes
 
380

 
215

 
292

 
260

 
368

Income from continuing operations
 
116

 
653

 
176

 
343

 
261

Income (loss) from discontinued operations
 

 

 
4

 
(15
)
 
(1
)
Net income
 
116

 
653

 
180

 
328

 
260

 
 
 
 
 
 
 
 
 
 
 
Net income attributable to the parent company
 
$
111

 
$
640

 
$
159

 
$
319

 
$
244

Redeemable noncontrolling interests adjustment to redemption value
 
6

 

 

 

 

Preferred stock dividend requirements
 

 

 

 
7

 
25

Preferred stock redemption premium
 

 

 

 

 
232

Net income (loss) available to common stockholders
 
$
105

 
$
640

 
$
159

 
$
312

 
$
(13
)
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share available to common stockholders
 
 
 
 
 
 
 
 
 
 
    Basic
 
 
 
 
 
 
 
 
 
 
        Income (loss) from continuing operations
 
$
0.72

 
$
4.38

 
$
0.98

 
$
2.07

 
$
(0.08
)
        Income (loss) from discontinued operations
 

 

 
0.02

 
(0.10
)
 
(0.01
)
        Net income (loss)
 
0.72

 
4.38

 
1.00

 
1.97

 
(0.09
)
    Diluted
 
 
 
 
 
 
 
 
 
 
        Income (loss) from continuing operations
 
$
0.71

 
$
4.36

 
$
0.97

 
$
1.93

 
$
(0.08
)
        Income (loss) from discontinued operations
 

 

 
0.02

 
(0.09
)
 
(0.01
)
        Net income (loss)
 
0.71

 
4.36

 
0.99

 
1.84

 
(0.09
)
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
 
$
233

 
$
182

 
$
174

 
$
213

 
$
262

Net cash provided by operating activities
 
554

 
384

 
406

 
510

 
577

Purchases of property, plant and equipment
 
393

 
322

 
260

 
234

 
209

 
 
 
 
 
 
 
 
 
 
 
Financial Position
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents and marketable securities
 
$
643

 
$
737

 
$
953

 
$
1,290

 
$
1,366

Total assets
 
5,644

 
4,860

 
4,301

 
4,893

 
5,068

Long-term debt, less debt issuance costs
 
1,759

 
1,595

 
1,553

 
1,588

 
1,541

Total debt
 
1,799

 
1,664

 
1,575

 
1,653

 
1,598

Preferred stock
 

 

 

 

 
372

Common stock and additional paid-in capital
 
2,356

 
2,329

 
2,313

 
2,642

 
2,842

Treasury stock
 
(87
)
 
(83
)
 
(1
)
 
(33
)
 
(366
)
Total parent company stockholders' equity
 
1,013

 
1,157

 
728

 
1,080

 
1,309

Book value per share
 
$
6.98

 
$
7.92

 
$
4.58

 
$
6.83

 
$
8.94

 
 
 
 
 
 
 
 
 
 
 
Common Share Information
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.24

 
$
0.24

 
$
0.23

 
$
0.20

 
$
0.20

Weighted-average common shares outstanding
 
 
 
 
 
 
 
 
 
 
    Basic
 
145.1

 
146.0

 
159.0

 
158.0

 
146.4

    Diluted
 
146.9

 
146.8

 
160.0

 
173.5

 
146.4

Market prices
 
 
 
 
 
 
 
 
 
 
    High
 
$
33.45

 
$
19.81

 
$
23.48

 
$
24.82

 
$
23.46

    Low
 
17.53

 
9.80

 
13.01

 
16.81

 
15.17


    


14



Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)

Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes in Item 8.

Management Overview

We are a global provider of high-technology products to virtually every major vehicle and engine manufacturer in the world. We also serve the stationary industrial market. Our technologies include drive and motion products (axles, driveshafts, planetary hub drives, power-transmission products, tire-management products and transmissions); sealing solutions (gaskets, seals, heat shields and fuel-cell plates); thermal-management technologies (transmission and engine oil cooling, battery and electronics cooling and exhaust-gas heat recovery); and fluid-power products (pumps, valves, motors and controls). We serve our global light vehicle, medium/heavy vehicle and off-highway markets through four business units – Light Vehicle Driveline Technologies (Light Vehicle), Commercial Vehicle Driveline Technologies (Commercial Vehicle), Off-Highway Drive and Motion Technologies (Off-Highway) and Power Technologies, which is the center of excellence for sealing and thermal-management technologies that span all customers in our on-highway and off-highway markets. We have a diverse customer base and geographic footprint which minimizes our exposure to individual market and segment declines. In 2017, 51% of our sales came from North American operations and 49% from operations throughout the rest of the world. Our sales by operating segment were Light Vehicle – 44%, Commercial Vehicle – 20%, Off-Highway – 21% and Power Technologies – 15%.

Operational and Strategic Initiatives

Our enterprise strategy builds on our strong technology foundation and leverages our resources across the organization while maintaining a customer centric focus, expanding our global markets, and accelerating the commercialization of new technology as we evolve into the era of vehicle electrification.
 
Central to our strategy is leveraging our core operations by sharing our capabilities, technology, assets and knowledge across the enterprise, leading to improved execution and increased customer satisfaction. Through streamlining and rationalizing our manufacturing activities we have significantly improved our profitability and margins, and we believe additional opportunities remain to further optimize our manufacturing footprint and improve our cost performance. Leveraging investments across multiple end markets and making disciplined, value enhancing acquisitions will allow us to bring product to market faster, grow our top-line sales and enhance financial returns.

Strengthening customer centricity and expanding global markets are key elements of our strategy that focus on market penetration. Foundational to growing the business is directing the entire organization to putting the customer at the center of our value system and shifting from transactional to relationship-based interactions. These relationships are built on a foundation of providing unparalleled technology with exceptional quality, delivery and value. With even stronger relationships we will be better positioned to support our customers’ most important global and flagship programs and capitalize on future growth opportunities.

We continue to enhance and expand our global footprint, optimizing it to capture growth across all of our end markets. Specifically, our manufacturing and technology center footprint positions us to support customers globally – an important factor as many of our customers are increasingly focused on common solutions for global platforms. Our acquisition of the Brevini operations in 2017 (see Acquisitions section below) provided us with operational presence in eight additional countries, while also providing us with additional opportunities to leverage our global footprint to support the needs across all our businesses. Shortly following the acquisition, we were able to consolidate certain Brevini activities in China, allowing us to utilize an acquired facility to support our Power Technologies business in China.

While growth opportunities are present in each region of the world, we have a primary focus on building our presence and local capability in the Asia Pacific region. Over the last few years, we have opened two new engineering facilities in the region, gear manufacturing facilities in India and Thailand, and are currently developing a new light vehicle assembly facility in China that is scheduled to commence operations in 2018.

In addition to Asia, we see further growth opportunity in Eastern Europe. A new gear manufacturing facility in Hungary is under construction and scheduled to commence operations in the first half of 2018. This will be our third facility in the country and will give us the capability to cost effectively manufacture gears, one of our core technologies, and efficiently service our customers within the region.
  

15



The final two elements of our enterprise strategy, commercializing new technology and accelerating hybridization and electrification, focus on opportunities for product expansion. Bringing new innovations to market as industry leading products will drive growth as our new products and technology provide our customers with cutting-edge solutions, address end user needs and capitalize on key market trends. An example is our industry leading electronically disconnecting all-wheel drive technology, which we believe is the most fuel efficient rapidly disconnecting system in the market, will be utilized on a Ford Motor Company global vehicle platform – opening up new commercial channels for us in the passenger car, crossover and sport utility vehicle markets. The above-referenced new assembly facility under construction in China will support this new program.

Initiatives to capitalize on evolving hybridization and electrification vehicle trends are a core ingredient of our current strategy. In addition to our current technologies in battery cooling and fuel cells, this element of our strategy is leveraging our electronics controls expertise across all our business units and applications such as advanced vehicle hybridization and electrification initiatives. We are working with customers to develop new solutions for those markets where electrification will be adopted first such as hybrids, buses and urban delivery vehicles. These new solutions, which include advanced electric propulsion systems with fully integrated motors and controls, are included in our recently launched Spicer Electrified portfolio of products. Working with our joint venture partner, our latest integrated e-axle is scheduled to launch in the first quarter of 2018 in a bus application in China.

The development and implementation of our enterprise strategy is positioning Dana to grow profitably due to increased customer focus as we leverage our core capabilities, expand into new markets, develop and commercialize new technologies including for hybrid and electric vehicles.  

Capital Structure Initiatives

In addition to investing in our business, we plan to continue prioritizing the allocation of capital to reduce debt and maintain a strong financial position. In January 2018, we announced our intention to drive toward investment grade metrics as part of a balanced approach to our capital allocation priorities and our goal of further strengthening our balance sheet.

Shareholder return actions — When evaluating capital structure initiatives, we balance our growth opportunities and shareholder value initiatives with maintaining a strong balance sheet and access to capital. Our strong financial position has enabled us to simplify our capital structure while providing returns to our shareholders in the form of cash dividends and a reduction in the number of shares outstanding. Over the past five years, we returned $1,481 of cash to shareholders by redeeming all of our preferred stock and repurchasing common shares. From program inception in 2012 through December 31, 2017, we repurchased approximately 74 million shares, inclusive of the common share equivalent reduction resulting from redemption of preferred shares. With the availability under the previous authorization having expired, our Board of Directors authorized a new $100 share repurchase program which was effective January 2018 and expires at the end of 2019. We declared and paid quarterly common stock dividends over the past five years, raising the dividend from five cents to six cents per share in the second quarter of 2015. In recognition of our strong financial performance and confidence in our financial outlook, our Board approved an additional four cents per share increase in the quarterly dividend to ten cents per share in 2018.

Financing actions — We have taken advantage of the lower interest rate environment to complete refinancing transactions in each of the past four years that resulted in lower effective interest rates while extending maturities. In 2017, we completed a $400 2025 note offering and entered into a $275 floating rate term loan. The proceeds of these issuances were used to repay higher cost international debt and to repay $450 of 2021 notes. In connection with amending our credit agreement to effectuate the term loan, we also increased our revolving credit facility by $100, providing us with $600 of back-up liquidity through 2022. Additionally, in 2017 we commenced the process of terminating one of our U.S. pension plans. This action allows us to effectively eliminate pension obligations and the associated future funding risk associated with interest rate and other market developments. We expect the termination action to be completed in 2019.

Other Initiatives

Aftermarket opportunities — We have a global group dedicated to identifying and developing aftermarket growth opportunities that leverage the capabilities within our existing businesses – targeting increased future aftermarket sales. In January 2016, we completed the acquisition of Magnum® Gaskets' (Magnum) aftermarket distribution business, providing us access to new customers for sealing products and an additional aftermarket channel for other products. Powered by recognized brands such as Dana®, Spicer®, Victor Reinz®, Glaser®, GWB®, Thompson®, Tru-Cool®, SVL®, and Transejes™, Dana delivers a broad range of aftermarket solutions – including genuine, all makes, and value lines – servicing passenger, commercial and off-highway vehicles across the globe.


16



Selective acquisitions — Our acquisition focus is principally directed at “bolt-on” or adjacent acquisition opportunities that have a strategic fit with our existing core businesses, particularly opportunities that support our enterprise strategy and enhance the value proposition of our product offerings. Any potential acquisition will be evaluated in the same manner we currently consider customer program opportunities and other uses of capital – with a disciplined financial approach designed to ensure profitable growth and increased shareholder value.

Acquisitions

USM Warren — On March 1, 2017, we completed the purchase of Warren Manufacturing LLC (USM – Warren), which holds certain assets and liabilities of the former Warren, Michigan production unit of U.S. Manufacturing Corporation (USM). With this transaction, we acquired proprietary tube-manufacturing processes and light-weighting intellectual property for axle tubes and shafts. Significant content was previously purchased from USM. Vertically integrating this content strengthens the supply chain for several of our most strategic customers. The new product and process technologies for light-weighting will assist our customers in achieving their sustainability and fuel efficiency goals. The USM – Warren acquisition added $96 of sales and $12 of adjusted EBITDA in 2017. The results of operations of the USM – Warren business are reported within our Light Vehicle operating segment.

We paid $104 for this business at closing, including $25 to effectively settle trade payable obligations originating from product purchases Dana made from USM prior to the acquisition. No debt was assumed with this transaction which was funded using cash on hand. Post-closing purchase price adjustments for working capital and other items, which totaled less than $1, were received in this year's third quarter. Reference is made to Note 2 of the consolidated financial statements in Item 8 for the allocation of purchase consideration to assets acquired and liabilities assumed.

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. The BFP and BPT acquisitions added $401 of sales and $40 of adjusted EBITDA in 2017. The results of operations of these businesses are reported within our Off-Highway operating segment.

We paid $181 at closing using cash on hand and assumed debt of $181 as part of the transaction. 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. 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. Purchase at this date did not occur due to document transfer requirements not having been fully satisfied. Receipt of the purchase price adjustment will occur concurrent with the completion of the real estate purchase during the first quarter of 2018. Reference is made to Note 2 of the consolidated financial statements in Item 8 for the allocation of purchase consideration to assets acquired and liabilities assumed. 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.

SIFCO On December 23, 2016, we acquired strategic assets of the commercial vehicle steer axle systems and related forged components businesses of SIFCO. 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.

As part of the acquisition, we added two manufacturing facilities and approximately 1,400 employees. The strategic assets were acquired by Dana free and clear of any liens, claims or encumbrances and without assumption of any legacy liabilities of SIFCO. We had sales of $86 in 2016 resulting from business conducted under the previous supply agreement with SIFCO. The additional business relationships obtained as a result of the acquisition generated incremental sales of $44 in 2017. The results of operations of the SIFCO related business are reported within our Commercial Vehicle operating segment.

The SIFCO purchase price was $70, with the payment of $10 of the purchase price deferred until December 2017 pending any claims under indemnification provisions of the purchase agreement. In December 2017, the parties to the SIFCO transaction entered into a settlement agreement. Under this agreement, $3 was paid to the seller with the remaining deferred

17



purchase price of $7 being retained by Dana to settle indemnification claims. After the settlement of all indemnification claims, any remaining deferred purchase price will be paid to the seller. Reference is made to Note 2 of the consolidated financial statements in Item 8 for the allocation of purchase consideration to assets acquired and liabilities assumed.

Magnum — On January 29, 2016, we acquired the aftermarket distribution business of Magnum, a U.S.-based supplier of gaskets and sealing products for automotive and commercial vehicle applications, for a cash payment of $18. 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.

Divestitures

Brazil Suspension Components Operations — In December 2017, we entered into an agreement to divest our Brazil suspension components business (the disposal group). This business is non-core to our enterprise strategy and under-performing financially. As such, we agreed to divest the business for no consideration and contribute $10 of additional cash to the business prior to closing. Completion of the sale is expected in the first quarter of 2018 upon receipt of Brazilian antitrust approval. The disposal group was classified as held for sale at December 31, 2017. We recognized a pre-tax loss of $27 in the fourth quarter of 2017 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. Reference is made to Note 3 of our consolidated financial statements in Item 8 for additional information, including the carrying amounts of the major classes of assets and liabilities of the disposal group held for sale at December 31, 2017. Sales of the business being divested approximated $23 in 2017. In connection with the divestiture of this business, we entered into a supply agreement whereby Dana will purchase specified components to satisfy customer requirements from the purchaser of the divested business at market prices.

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 derecognition of the related noncontrolling interest. Nippon Reinz had sales of $42 in 2016 through the transaction date.

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 assets of DCLLC at time of sale included cash and marketable securities along with the rights to insurance coverage in place to satisfy a significant portion of its liabilities. We received net cash proceeds of $29 at closing on December 30, 2016, 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. We received payment of the retained $3 in the second quarter of 2017 and recognized such amount as income. Following completion of the sale, Dana has no obligation with respect to current or future asbestos claims. The sale of this business also enhanced our available liquidity since the net proceeds from the sale are available for use in our core businesses.

Venezuela Operations — In December 2014, we entered into an agreement to divest our operations in Venezuela (the disposal group) to an unaffiliated company for no consideration. We completed the divestiture in January 2015. In connection with the divestiture, we entered into a supply and technology agreement whereby Dana will supply product and technology to the operations at competitive market prices. Dana has no obligations to otherwise provide support to the operations. The disposal group was classified as held for sale at December 31, 2014, and we recognized a net charge of $77 – an $80 loss to adjust the carrying value of the net assets to fair value less cost to sell, with a reduction of $3 for the noncontrolling interest share of the loss. These assets and liabilities were presented as held for sale on our December 31, 2014 balance sheet. Upon completion of the divestiture of the disposal group in January 2015, we recognized a gain of $5 on the derecognition of the noncontrolling interest in a former Venezuelan subsidiary in other income (expense), net. We also credited other comprehensive income (loss) (OCI) attributable to the parent for $10 and OCI attributable to noncontrolling interests for $1 to eliminate the unrecognized pension expense recorded in accumulated other comprehensive income (loss) (AOCI). See Note 3 to our consolidated financial statements in Item 8 for additional information. With the completion of the sale in January 2015, Dana has no remaining investment in Venezuela.

Structural Products Business — In 2010, we completed the sale of substantially all of the assets of our Structural Products business to Metalsa S.A. de C.V. (Metalsa) and reached a final agreement with the buyer on disputed issues in May 2014. Prior to the third quarter of 2012, Structural Products was reported as an operating segment of continuing operations. With the cessation of the retained operations in the third quarter of 2012, we began reporting the activities relating to the Structural Products business as discontinued operations. Legal and other costs incurred in 2014 to settle a customer complaint and the

18



remaining disputes with Metalsa and insurance recoveries in 2015 related to previously outstanding claims have extended the reporting of discontinued operations.

Segments

We manage our operations globally through four operating segments. Our Light Vehicle and Power Technologies segments primarily support light vehicle original equipment manufacturers (OEMs) with products for light trucks, SUVs, CUVs, vans and passenger cars. The Commercial Vehicle segment supports the OEMs of on-highway commercial vehicles (primarily trucks and buses), while our Off-Highway segment supports OEMs of off-highway vehicles (primarily wheeled vehicles used in construction, mining and agricultural applications).

Trends in Our Markets

Global Vehicle Production
 
 
 
 
 
Actual
(Units in thousands)
Dana 2018 Outlook
 
2017
 
2016
 
2015
North America
 

 
 
 
 

 
 

 
 

Light Truck (Full Frame)
4,000

to
4,300
 
4,331

 
4,220

 
3,937

Light Vehicle Engines
14,800

to
15,100
 
14,828

 
15,913

 
15,474

Medium Truck (Classes 5-7)
245

to
255
 
246

 
233

 
237

Heavy Truck (Class 8)
290

to
310
 
255

 
228

 
323

Agricultural Equipment
50

to
60
 
54

 
53

 
58

Construction/Mining Equipment
160

to
170
 
157

 
150

 
158

Europe (including Eastern Europe)
 

 
 
 
 

 
 

 
 

Light Truck
10,600

to
10,900
 
10,276

 
9,306

 
8,546

Light Vehicle Engines
24,700

to
25,200
 
24,096

 
23,287

 
22,570

Medium/Heavy Truck
480

to
495
 
486

 
463

 
434

Agricultural Equipment
200

to
215
 
202

 
193

 
202

Construction/Mining Equipment
310

to
330
 
309

 
290

 
299

South America
 

 
 
 
 

 
 

 
 

Light Truck
1,300

to
1,500
 
1,235

 
980

 
940

Light Vehicle Engines
2,650

to
2,750
 
2,412

 
2,112

 
2,439

Medium/Heavy Truck
90

to
100
 
89

 
70

 
88

Agricultural Equipment
30

to
35
 
33

 
29

 
32

Construction/Mining Equipment
8

to
12
 
9

 
10

 
13

Asia-Pacific
 

 
 
 
 

 
 

 
 

Light Truck
29,800

to
31,000
 
29,495

 
27,465

 
24,160

Light Vehicle Engines
52,500

to
53,500
 
52,543

 
50,533

 
47,209

Medium/Heavy Truck
1,850

to
2,050
 
2,039

 
1,661

 
1,383

Agricultural Equipment
650

to
680
 
653

 
648

 
676

Construction/Mining Equipment
445

to
465
 
441

 
396

 
405


North America

Light vehicle markets — Improving economic conditions during the past few years have contributed to increased light vehicle sales and production levels in North America. Overall economic conditions in North America continue to be relatively favorable with improving employment levels and upward trending consumer confidence. After increasing by about 1% in 2016 from 2015, the North America light vehicle market begun to show signs of weakening demand levels this past year as strong sales levels the past few years have significantly reduced the built-up demand to replace older vehicles. As such, 2017 light vehicle sales declined about 2% from 2016. Within the light vehicle segment, passenger car sales declined around 5% in 2016, and another 9% in 2017. In part due to comparatively low fuel prices when compared with recent years, demand for light trucks and SUVs continued to be strong, increasing about 7% in 2016 and 4% in 2017. Many of our customer programs are focused in the full frame light truck segment. Sales in this segment increased 6% in 2016 and another 3% in 2017. Production levels were generally reflective of light vehicle sales. Production of 17.8 million light vehicles in 2016 was 2% higher than 2015, with 2017 light vehicle production coming in at approximately 17.1 million units – down 4% from 2016. Light vehicle engine production was impacted more by the developments in the passenger car segment, with production in 2017 declining about 7% versus

19



2016 after increasing 3% year-over-year in 2016. In the key full frame light truck segment, production levels in 2017 increased about 3% compared to 2016 following an increase of 7% in 2016 from the preceding year. Days’ supply of total light vehicles in the U.S. at the end of December the past three years has been around 61 to 62 days. In the full frame light truck segment, days supply in inventory at December 31, 2017 approximated 64 days, down slightly from 65 days at December 31, 2016 and up from 62 days at the end of December 2015.

Light truck markets are expected to remain relatively strong given the positive North America economic environment that is expected to drive continued growth in manufacturing and construction activities in 2018. Rising interest rates, less pent-up demand, higher levels of consumer debt and declining used car prices may constrict demand. We expect Dana sales will continue to benefit from strong market demand for key vehicles that we supply which launched within the past two years. Our current outlook for 2018 has full frame light truck production at 4.0 to 4.3 million vehicles, comparable to down 8% with 2017 production of about 4.3 million vehicles. We expect light vehicle engine production in 2018 to be 14.8 to 15.1 million units, comparable to up slightly compared to this past year.

Medium/heavy vehicle markets — The commercial vehicle market is similarly impacted by many of the same macroeconomic developments impacting the light vehicle market. Strong production levels in the heavy truck segment in 2014 and first half of 2015 led to more trucks than required to meet freight demand. As a consequence, production levels in 2016 were scaled back. Class 8 heavy truck production in 2016 declined 29% from 2015, while Classes 5-7 medium truck build was relatively comparable. The North American economy gaining strength in 2017 has led to increased freight-hauling demand and a strengthening order book for new Class 8 trucks. During 2017, heavy duty Class 8 truck production was up approximately 12% while medium duty Classes 5-7 truck production was up 6% compared with 2016.

Class 8 order levels increased significantly during the second half of 2017, positioning 2018 to be a strong production year. With the strong Class 8 order book and an expectation that the North America economic environment will continue to be strong in 2018, our outlook for 2018 Class 8 production in North America is 290,000 to 310,000 trucks, a level which is up about 14 to 22% compared with the 2017 build level. In the medium duty segment, we expect full year 2018 production to be in the range of 245,000 to 255,000 vehicles, comparable to up 4% from 2017.

Markets Outside of North America

Light vehicle markets — Signs of an improved overall European economy have been evident, albeit mixed at times, during the past few years. While improving modestly in 2015 and 2016, signs of a strengthening economic climate were evident in 2017. Reflective of an improved economic environment, light vehicle engine production was up about 3% in both 2016 and 2017 and light truck production was higher by 9 to 10% in each of the past two years. The United Kingdom's decision to withdraw from the European Union, along with political developments in other European countries, continues to cast an element of uncertainty around continued economic improvement in the region. At present, we expect overall stable to improving economic conditions across the entire region in 2018. Our full year 2018 outlook expects an increase in light truck and light vehicle engine production of around 3 to 6% from 2017. The economic climate in many South American markets the past few years has been weak, volatile and challenging. After significant production declines in 2014 and 2015, there were signs that demand levels had bottomed out in 2016. Production levels in 2017 were reflective of an improving market, with light vehicle engine production up 14% and light truck production up 26% compared to 2016. At present, we expect further economic recovery in the region in 2018. Our full year 2018 outlook has light truck production increasing 5 to 21% from 2017, with light vehicle engine production up 10 to 14% compared to this past year. The Asia Pacific markets have been relatively strong the past few years. Light truck production increased 8% in 2015 and was up another 14% in 2016, while light vehicle engine production increased 2% in 2015 and another 7% in 2016. Further production increases occurred this past year, with 2017 light truck production up 7% and light vehicle engine build up 4%. Our full year 2018 outlook for the Asia Pacific light vehicle markets is for continued strong production levels, with the light truck segment up 1 to 5% from 2017 and light engine production being comparable to up 2%.

Medium/heavy vehicle markets — Some of the same factors referenced above that affected light vehicle markets outside of North America similarly affected the medium/heavy markets. A strengthening European market the past three years contributed to medium/heavy truck production increasing 9% in 2015, 7% in 2016 and another 5% in 2017. Our 2018 full year outlook anticipates continued strong production at levels relatively comparable with 2017. A weakening South America economic climate beginning in 2014 led to medium/heavy truck production declining 47% in 2015 and another 20% in 2016. As with the light vehicle markets, improving economic conditions in the region led to medium/heavy truck production in 2017 being up about 28% from the preceding year. We expect that continued economic recovery in 2018 will contribute to comparable to higher medium/truck production in 2018. As such, our 2018 outlook currently anticipates comparable to higher production of around 12% when compared to 2017. A stronger than expected China market and an improving India market contributed to increases in medium/heavy truck production in the Asia Pacific region of about 20% in 2016 and another 23% in 2017 when

20



compared with the preceding year. This past year's strong demand was driven in part by impending regulations in China that limit axle load and weight which accelerated buying during the second half of 2016 and into 2017 prior to the new regulations becoming effective. With some pre-buy in China in 2017 likely reducing 2018 purchases, our 2018 production outlook expects aggregate production in the region to be comparable to down 9% from 2017.

Off-Highway Markets — Our off-highway business has a large presence outside of North America, with approximately 75% of its sales coming from Europe and 15% from South America and Asia Pacific combined. We serve several segments of the diverse off-highway market, including construction, agriculture, mining and material handling. Our largest markets are the construction/mining and agricultural equipment segments which have been relatively weak over the past few years. Global demand in the agriculture market was down about 11% in 2014, 7% in 2015 and 5% in 2016. The construction/mining segment weakened about 4% in 2014, 11% in 2015 and 3% in 2016. These markets began to rebound in 2017 along with general economic recovery in several global markets, and in particular the European markets where this segment has a significant presence. During 2017, global production levels in the construction/mining and agriculture segments increased by about 8% and 2%. Consistent with expectations for improving global economic conditions, we expect that off-highway market demand will increase in 2018. Our 2018 outlook has production in the construction/mining segment increasing about 1 to 7% and the agriculture segment being down 1% to up 5% from 2017.

Foreign Currency

With 55% of our sales coming from outside the U.S., international currency movements can have a significant effect on our sales and results of operations. The euro zone countries, Brazil, Thailand, Mexico and China accounted for approximately 44%, 8%, 8%, 7% and 7% of our non-U.S. sales in 2017. Although sales in Argentina and South Africa are each less than 5% of our non-U.S. sales, exchange rate movements of those countries have been volatile and significantly impacted sales from time to time. Translation of our international activities at average exchange rates in 2015 as compared to average rates in 2014 reduced sales by $516, with $268 attributable to a weaker euro and $91 to a weaker Brazilian real. In 2016, weaker international currencies reduced sales by another $173. A weaker Argentine peso, British pound, Mexican peso, South African rand and Brazilian real reduced sales by $70, $23, $19, $18 and $11, while the euro was relatively stable in 2016. International currencies strengthened against the U.S. dollar in 2017, increasing 2017 sales by $54. A stronger euro, Brazilian real, Thai baht and South African rand more than offset a weaker Argentine peso. Based on our current sales and exchange rate outlook for 2018, we expect overall stability in international currencies with a modest reduction to sales. At sales levels in our current outlook for 2018, a 5% movement on the euro would impact our annual sales by approximately $100. A 5% change on the Brazilian real, Thai baht, Mexican peso and Chinese yuan rates would impact our annual sales in each of those countries by approximately $10 to $20.

International Markets

The United Kingdom's decision to exit the European Union ("Brexit") has provided some uncertainty and potential volatility around European currencies, along with uncertain effects of future trade and other cross-border activities of the United Kingdom with the European Union and other countries. Similarly, with new government leadership in the U.S. assuming control in early 2017, there is added uncertainly around future economic and trade policy and its potential impact on the U.S. dollar relative to other currencies as well as its direct impact on trade with other countries.

The Brazil market is an important market for our Commercial Vehicle segment, representing about 19% of this segment's 2017 sales. Our medium/heavy truck sales in Brazil account for approximately 77% of our total sales in the country. Reduced market demand resulting from the weak economic environment in Brazil in 2015 led to production levels in the light vehicle and medium/heavy duty truck markets that were lower by about 22% and 44% from 2014. Continued weakness in 2016 resulted in further reductions in medium/heavy truck production of about 20% and a light vehicle production decline of around 10%. As a consequence, sales by our operations in Brazil for 2016 approximated $200, down from about $500 in 2014. In response to the challenging economic conditions in this country, we implemented restructuring and other cost reduction actions and reduced costs to the extent practicable. As discussed in Note 2 to our consolidated financial statements in Item 8, we completed a transaction in December 2016 that provided us with the underlying assets and personnel supporting our pre-existing business with a supplier along with some incremental business. With this transaction, we have enhanced our competitive position in the market and should benefit significantly in future years as the Brazilian markets rebound. The Brazilian economy has rebounded in 2017, leading to increased medium/heavy truck and light truck production of more than 25% from 2016. Further economic improvement and increased production is expected in 2018.





21



Commodity Costs

The cost of our products may be significantly impacted by changes in raw material commodity prices, the most important to us being those of various grades of steel, aluminum, copper and brass. The effects of changes in commodity prices are reflected directly in our purchases of commodities and indirectly through our purchases of products such as castings, forgings, bearings and component parts that include commodities. Most of our major customer agreements provide for the sharing of significant commodity price changes with those customers. Where such formal agreements are not present, we have historically been successful implementing price adjustments that largely compensate for the inflationary impact of material costs. Material cost changes will customarily have some impact on our financial results as customer pricing adjustments typically lag commodity price changes.

Our costs in 2017 and 2016 increased on a year-over-year basis by approximately $70 and $8 due to higher commodity costs, while lower commodity prices reduced year-over-year costs in 2015 by $10. During 2017, material recovery actions increased sales by $57 while other pricing actions reduced sales by $46, yielding a net year-over-year sales increase of $11. Material cost recovery and pricing actions increased sales by $10 in 2016 and $1 in 2015.

U.S. Tax Reform

In December 2017, the U.S. introduced broad ranging tax reform with the passage of the Tax Cuts and Jobs Act ("Act") legislation. Among the tax reforms was a reduction of the corporate tax rate from 35% to 21%. Historically, we've recognized deferred tax assets for items providing future reductions of taxable income. These deferred tax assets are valued based on the corporate tax rate expected to be available when the deductions are taken. With enactment of the lower corporate tax rate in 2017, we've taken a charge to tax expense in the fourth quarter of 2017 to reduce the value of these assets. The effect of the rate reduction on deferred tax assets in combination with other provisions of the Act resulted in a net non-cash increase in 2017 income tax expense of $186. Among the tax reform provisions was a transitional U.S. tax, or toll charge, assessed on undistributed earnings of foreign operations. We were able to utilize existing tax attributes to offset this transitional tax liability. As such, adoption of the Act's provisions did not give rise to any cash taxes.

Beyond 2017, the lower corporate tax rate will benefit our results of operations in the form of reduced tax expense. Although the reduced tax rate will benefit earnings, there is not likely to be a corresponding reduction of cash taxes. We have net operating loss carryforwards that are utilized to offset U.S. cash tax obligations, likely over the next several years. With implementation of a territorial tax system and exclusion of foreign subsidiary dividends from taxation in the U.S., we believe the Act will provide some greater flexibility to repatriate future earnings of our foreign operations.

Sales, Earnings and Cash Flow Outlook

 
2018
Outlook
 
2017
 
2016
 
2015
Sales
$7,500 - $7,700
 
$
7,209

 
$
5,826

 
$
6,060

Adjusted EBITDA
$910 - $960
 
$
835

 
$
660

 
$
652

Net cash provided by operating activities
~7.5% of Sales
 
$
554

 
$
384

 
$
406

Purchases of property, plant and equipment
~4.0% of Sales
 
$
393

 
$
322

 
$
260

Free Cash Flow
~3.5% of Sales
 
$
161

 
$
62

 
$
146


Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures. See the Non-GAAP Financial Measures discussion below for definitions of our non-GAAP financial measures and reconciliations to the most directly comparable U.S. generally accepted accounting principles (GAAP) measures. We have not provided a reconciliation of our adjusted EBITDA outlook to the most comparable GAAP measure of net income. Providing net income guidance is potentially misleading and not practical given the difficulty of projecting event driven transactional and other non-core operating items that are included in net income, including restructuring actions, asset impairments and certain income tax adjustments. The accompanying reconciliations of these non-GAAP measures with the most comparable GAAP measures for the historical periods presented are indicative of the reconciliations that will be prepared upon completion of the periods covered by the non-GAAP guidance.

We experienced declines in total sales in 2015 and 2016 due to weaker international currencies relative to the U.S. dollar. For these two years combined, currency translation effects reduced sales by $689. Adjusted for currency and divestiture effects, sales in these years were relatively comparable, with new customer programs largely offsetting the impacts of overall weaker end user demand across our global businesses. We experienced uneven end user markets, with some being relatively strong and

22



others somewhat weak, and the conditions across the regions of the world differing quite dramatically. In 2017, international currencies were relatively stable, providing a $54 benefit to sales. The increase in 2017 sales of 24% was driven primarily by acquisitions and stronger market demand. Acquisitions, net of divestitures, added $500 of sales, while stronger market demand and contributions from new customer programs increased sales by $829 – an organic increase of 14%. Our 2018 sales outlook is $7,500 to $7,700, with the sales growth coming principally from our new business backlog that is expected to contribute about $300 to 2018 sales. A full year of sales from our 2017 acquisitions and net pick-up in overall market demand is expected to also contribute increased sales in 2018, while we expect currency effects to again be relatively stable with this past year.

Adjusted EBITDA margin as a percent of sales remained relatively constant at around 11% in 2016 and 2015 despite certain markets being weak and volatile. We continue to focus on margin improvement through right sizing and rationalizing our manufacturing operations, leveraging resources across the global organization, implementing other cost reduction initiatives and ensuring that customer programs are competitively priced. We achieved Adjusted EBITDA margin growth in 2017 as we benefited from the operating leverage attributable to increased sales volumes, while at the same time digesting and integrating several acquisitions. At our current sales outlook for 2018, we expect full year 2018 Adjusted EBITDA to approximate $910 to $960. Margin in 2018 is expected to exceed 12%, as we benefit from higher margin net new business, improve cost performance and realize synergies from the integration of our recent acquisitions, more than offsetting the increased investment we expect to make in 2018 to support our electrification strategy initiatives.

We have generated positive free cash flow in recent years while increasing capital spending to support organic business growth through launching new business with customers. Free cash flow in 2015 declined from the previous year due to lower earnings and increased capital spend to support new program launches, with lower cash taxes and restructuring payments providing a partial offset. Reduced free cash flow in 2016 was primarily attributable to our continued success in being awarded significant new customer programs. Although many of the recent program wins were not scheduled to begin production until 2018, certain of these programs required capital investment beginning in 2016. As such, cash used for capital investments in 2016 was $62 higher than in 2015. As planned, an elevated level of capital spending at around 5.5% of sales continued into 2017 to support new customer programs. Despite an increase in capital spending of $71 in 2017, free cash increased by $99, primarily from a stronger earnings performance which contributed to increased operating cash flows of $170. With the required capital to support new programs beginning to dissipate and return to more typical levels over the next couple years. We expect capital spend in 2018 will be around 4% of sales. Operating cash flows in 2018 are expected to again be around 7.5% of sales. A continued growth in earnings is expected to benefit 2018 operating cash flows along with a reduced amount of one-time transaction-related cash expenditures that were incurred in 2017 to facilitate acquisitions completed this past year. Partially offsetting the benefit from higher earnings and lower transaction expenditures is an expected higher level of cash taxes and working capital investment. With a comparable level of operating cash flows relative to sales in 2018, the reduction in capital spending is expected to provide free cash flow of about 3.5% of sales – an increase of about $100 from the 2.2% of sales generated in 2017.

Among our Operational and Strategic Initiatives are increased focus on and investment in product technology – delivering products and technology that are key to bringing solutions to issues of paramount importance to our customers. Our success on this front is measured, in part, by our sales backlog – net new business received that will be launching in the future and adding to our base annual sales. This backlog excludes replacement business and represents incremental sales associated with new programs for which we have received formal customer awards. At December 31, 2017, our sales backlog of net new business for the 2018 through 2020 period was $800, a 7% increase from the $750 three-year sales backlog that existed at the end of 2016. The increased three-year sales backlog at December 31, 2017 reflects continued new business wins, as the expected impact of revised market volumes and currency effects were minimal.


23



Consolidated Results of Operations
 
Summary Consolidated Results of Operations (2017 versus 2016) 
 
2017
 
2016
 
 
 
Dollars
 
% of
Net Sales
 
Dollars
 
% of
Net Sales
 
Increase/
(Decrease)
Net sales
$
7,209

 

 
$
5,826

 

 
$
1,383

Cost of sales
6,147

 
85.3
%
 
4,982

 
85.5
%
 
1,165

Gross margin
1,062

 
14.7
%
 
844

 
14.5
%
 
218

Selling, general and administrative expenses
511

 
7.1
%
 
406

 
7.0
%
 
105

Amortization of intangibles
11

 
 
 
8

 
 
 
3

Restructuring charges, net
14

 
 
 
36

 
 
 
(22
)
Loss on disposal group held for sale
(27
)
 
 
 


 
 
 
(27
)
Loss on sale of subsidiaries


 
 
 
(80
)
 
 
 
80

Other income (expense), net
(9
)
 
 
 
18

 
 
 
(27
)
Earnings before interest and income taxes
490

 
 
 
332

 
 
 
158

Loss on extinguishment of debt
(19
)
 
 
 
(17
)
 
 
 
(2
)
Interest income
11

 
 
 
13

 
 
 
(2
)
Interest expense
102

 
 
 
113

 
 
 
(11
)
Earnings before income taxes
380

 
 
 
215

 
 
 
165

Income tax expense (benefit)
283

 
 
 
(424
)
 
 
 
707

Equity in earnings of affiliates
19

 
 
 
14

 
 
 
5

Net income
116

 
 
 
653

 
 
 
(537
)
    Less: Noncontrolling interests net income
10

 
 
 
13

 
 
 
(3
)
    Less: Redeemable noncontrolling interests net loss
(5
)
 
 
 

 
 
 
(5
)
Net income attributable to the parent company
$
111

 
 
 
$
640

 
 
 
$
(529
)

Sales — The following table shows changes in our sales by geographic region.
 
 
 
 
 
 
 
Amount of Change Due To
 
2017
 
2016
 
Increase/
(Decrease)
 
Currency
Effects
 
Acquisitions
(Divestitures)
 
Organic
Change
North America
$
3,688

 
$
3,128

 
$
560

 
$
(1
)
 
$
127

 
$
434

Europe
2,154

 
1,616

 
538

 
35

 
294

 
209

South America
500

 
338

 
162

 
3

 
54

 
105

Asia Pacific
867

 
744

 
123

 
17

 
25

 
81

Total
$
7,209

 
$
5,826

 
$
1,383

 
$
54

 
$
500

 
$
829


Sales in 2017 were $1,383 higher than in 2016. Stronger international currencies increased sales by $54. The acquisitions of BFP, BPT, SIFCO, USM – Warren and Magnum in 2016 and 2017 generated a year-over-year increase in sales of $542, with the divestiture of Nippon Reinz resulting in a reduction of $42. The organic sales increase of $829 resulted primarily from stronger light truck markets, strengthening global off-highway demand, stronger medium/heavy truck markets in Europe and South America, and contributions from new business.

The North America sales increase from acquisitions in 2017 relates primarily to the USM – Warren purchase, with a lesser amount being added by the BFP, BPT and Magnum transactions. The organic sales increase of 14% was driven principally by stronger production levels on certain of our key light truck programs, with stronger medium/heavy truck production and off-highway demand levels also providing some contribution.

Excluding currency effects and the increase in sales of $294 attributable to the BFP and BPT acquisitions, 2017 sales in Europe were 13% higher than in 2016. Stronger off-highway market demands were a primary driver of the organic sales increase, although each of our operating segments experienced increased organic sales, primarily from higher production/demand levels.

In South America, 2017 sales benefited from a stronger Brazil real, however, that was largely offset by a weaker Argentina peso. The acquisition-related sales increase resulted from the SIFCO and BPT acquisitions. Excluding these effects, sales were

24



up 31% from 2016. The organic sales increase in the region was driven largely by stronger 2017 production levels, with light truck and medium/heavy truck production each up more than 25% from the preceding year.

Asia Pacific sales in 2017 were 17% higher than 2016. Sales increased by $67 from the BPT and BFP acquisitions, more than offsetting the $42 reduction attributable to the Nippon-Reinz divestiture. Sales in this region also benefited from a stronger India rupee and Thailand baht. The organic sales increase of 11% in this region was due primarily to stronger light vehicle production levels and off-highway market demand, along with contributions from new customer programs.

Cost of sales and gross margin — Cost of sales for 2017 increased $1,165, or 23%, when compared to 2016. Similar to the factors affecting sales, the increase was primarily due to higher overall sales volumes and the inclusion of acquired businesses. Cost of sales attributed to net acquisitions, which included $14 of incremental cost assigned to inventory as part of business combination accounting, amounted to $423, or 84.8% of the sales of those businesses. Excluding the effects of acquisitions and divestitures, cost of sales as a percent of sales declined from 85.5% of sales in 2016 to 85.3% of sales in 2017 – a reduction of 20 basis points. This reduction in cost of sales as a percent of sales was largely attributable to better fixed cost absorption on the higher production volume. Cost of sales also benefited from material cost savings of approximately $67 and a reduction in warranty expense of $8. The benefit from higher production levels and other items was partially offset by increased material commodity prices of $70, start-up/launch costs of $30 and engineering and development expense of $24.

Gross margin of $1,062 for 2017 increased $218 from 2016. Gross margin as a percent of sales was 14.7% in 2017, 20 basis points higher than in 2016. Acquisitions net of divestitures added $76 of gross margin. The margin improvement as a percent of sales was driven principally by the cost of sales factors referenced above.

Selling, general and administrative expenses (SG&A) — SG&A expenses in 2017 were $511 (7.1% of sales) as compared to $406 (7.0% of sales) in 2016. SG&A attributed to net acquisitions was $73. Excluding the increase associated with acquisitions and divestitures, SG&A expenses as a percent of sales were 6.5% of sales, 50 basis points lower than the same period of 2016. The $32 year-over-year increase exclusive of net acquisitions was principally due to an increase in salary and benefits expenses of $41 primarily relating to increased compensation expense resulting from better performance in relation to incentive targets in 2017. Selling costs and other discretionary spending were $9 lower than in 2016.

Amortization of intangibles — The increase of $3 in amortization expense was primarily attributable to amortization of the intangibles acquired in the acquisitions completed in late 2016 and the first quarter of 2017.

Restructuring charges, net — During 2017, we approved additional plans to implement certain headcount reduction initiatives in our Off-Highway business as part of the BPT and BFP acquisition integration, resulting in the recognition of $14, primarily for severance and benefits costs, during 2017. Including costs associated with the newly approved actions during 2017 and costs associated with previously announced initiatives, net of the reversal described below, restructuring expense during 2017 was $14. During the fourth quarter of 2017, in response to better-than-expected market recovery in our Off-Highway business in Europe, management re-evaluated the economic conditions of our global Off-Highway business and determined that a portion of the previously approved 2016 restructuring program is no longer economically prudent. This change in facts and circumstances led to the decision to reverse $8 of previously accrued liabilities. Restructuring charges of $36 in 2016 included $14 of costs attributable to headcount reductions in our Off-Highway segment and $10 for headcount reductions in our Brazil Commercial Vehicle business that were taken in connection with our acquisition of the SIFCO business. The remaining amount was attributable to the planned closure of our Commercial Vehicle manufacturing facility in Glasgow, Kentucky, headcount reduction actions at our corporate facilities in the U.S. and employee separation and exit costs associated with previously announced actions.

Loss on disposal group held for sale — Reference is made to Note 3 of the consolidated financial statements in Item 8 for a discussion of the pending divestiture of our Brazil suspension components business.

Loss on sale of subsidiaries — Reference is made to Note 3 of the consolidated financial statements in Item 8 for a discussion of the 2016 divestitures of DCLLC and Nippon Reinz.









25



Other income (expense), net — The following table shows the major components of other income (expense), net.
 
2017
 
2016
Government grants and incentives
$
7

 
$
8

Foreign exchange loss
(3
)
 
(3
)
Strategic transaction expenses
(25
)
 
(13
)
Insurance and other recoveries


 
10

Gain on sale of marketable securities


 
7

Amounts attributable to previously divested/closed operations
3

 


Other, net
9

 
9

Other income (expense), net
$
(9
)
 
$
18


The higher level of strategic transaction expenses in 2017 is primarily attributable to costs incurred in connection with acquiring and integrating the BFP, BPT and USM businesses beginning in the first quarter of 2017. Amounts attributable to previously divested/closed operations in 2017 includes the receipt of the remaining proceeds on our December 2016 divestiture of DCLLC. See Note 19 to our consolidated financial statements in Item 8 for additional information. In 2016, DCLLC received a recovery of $8 of costs previously incurred on behalf of other participants in a consortium that existed to administer certain legacy personal injury claims and realized gains of $7 from the sale of portfolio investments.

Loss on extinguishment of debt As discussed in Note 14 to our consolidated financial statements in Item 8, we redeemed $100 of our September 2021 Notes, repaid indebtedness of our BPT and BFP subsidiaries and repaid certain bank debt in Brazil during the second quarter of 2017, and we redeemed the remaining $350 of our September 2021 Notes in this year's third quarter. We incurred redemption premiums of $15 in connection with these repayments and wrote off $4 of previously deferred financing costs associated with the debt that was extinguished. In the second quarter of 2016, we redeemed our February 2021 Notes, incurring a redemption premium of $12, and also restructured our domestic revolving credit facility. In connection with these transactions, we wrote off $5 of previously deferred financing costs.

Interest income and interest expense — Interest income was $11 in 2017 and $13 in 2016. Interest expense was $102 in 2017 and $113 in 2016. A lower average interest rate on borrowings was partially offset by higher average debt levels in 2017. Average debt levels were higher in 2017 in part due to debt of $181 assumed in connection with the acquisition of BFP and BPT. As discussed in Note 14 to our consolidated financial statements in Item 8, we completed several financing transactions since May 2016 which in combination with cross-currency swaps effectively resulted in euro-denominated obligations at lower interest rates. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 5.5% and 6.5% in 2017 and 2016.

Income tax expense (benefit) — Income taxes were an expense of $283 in 2017 and a benefit of $424 in 2016. With the enactment of the Tax Cuts and Jobs Act occurring in December 2017 in the U.S., provisions of this tax reform legislation were required to be recognized in 2017. The most significant 2017 impact of this legislation was the reduction of net deferred tax assets to reflect expected realization at the lower U.S. corporate tax rate of 21% rather than the previous rate of 35%. The net impact of recognizing the required elements of the new tax reform legislation was an increase in tax expense of $186. During 2017, continued improvement in our profit outlook enabled us to release $27 of valuation allowances on state deferred tax assets. In 2016, we determined that most of the valuation allowances against U.S. deferred taxes were no longer required. Release of these valuation allowances resulted in a $501 income tax benefit. Additionally, developments in Brazil led to our assessment that an allowance against certain deferred taxes in that country was appropriate, and we recognized tax expense of $25 to establish this valuation allowance. See Note 18 to our consolidated financial statements in Item 8 of Part II for further disclosures around these items.

Excluding the effects of the items referenced in the preceding paragraph, our effective tax rates were 33% in 2017 and 24% in 2016. These rates vary from the applicable U.S. federal statutory rate of 35% in these periods primarily due to valuation allowances in several countries and lower statutory tax rates outside the U.S. In 2016, a benefit of $58 for a reduction of accrued taxes on earnings of foreign operations resulting from legal entity restructuring and a revised determination as to permanent reinvestment contributed to a lower effective tax rate. These benefits were offset by tax expense of $17 on dividends and other income attributable to foreign operations, $30 of expense recognized to establish provisions associated with uncertain tax positions and $11 of amortization of a prepaid tax asset that was written off to retained earnings on January 1, 2017 in connection with the adoption of new guidance relating to intra-entity transfers. See Note 1 to our consolidated financial statements in Item 8 of Part II for further disclosure around the adoption of the new intra-entity transfer guidance.

In countries where our history of operating losses does not allow us to satisfy the “more likely than not” criterion for

26



recognition of deferred tax assets, we have generally recognized no income tax on the pre-tax income or losses as valuation allowance adjustments offset the associated tax effects. Following the release of valuation allowances on our U.S. deferred tax assets in the fourth quarter of 2016, tax effects relating to U.S. income in 2017 are no longer being offset by adjustments to the valuation allowance. We believe that it is reasonably possible that a valuation allowance of up to $8 related to a subsidiary in Argentina will be released in the next twelve months.

Equity in earnings of affiliates — Net earnings from equity investments was $19 in 2017 compared with $14 in 2016. Equity in earnings from BSFB was $9 in 2017 and $7 in 2016. Equity in earnings from DDAC was $9 in 2017, inclusive of a $4 charge for asset transfer and conversion of certain assets, and $7 in 2016.

Noncontrolling interests net income — The reduced level of earnings attributable to noncontrolling interests is generally attributable to reduced earnings of the consolidated operations that are less than wholly-owned. The reduction in 2017 was due, in part, to increased tax expense in 2017 associated with planned legal entity restructuring. The redeemable noncontrolling interest relates to the acquisition of BFP and BPT in the first quarter of 2017 on which we have call options as described more fully in Note 2 of the consolidated financial statements in Item 8.

Segment Results of Operations (2017 versus 2016)
 
Light Vehicle
 
 
Sales
 
Segment
EBITDA
 
Segment
EBITDA
Margin
2016
 
$
2,607

 
$
279

 
10.7
%
    Volume and mix
 
452

 
92

 
 
    Acquisition
 
96

 
12

 
 
    Performance
 
14

 
(22
)
 
 
    Currency effects
 
3

 
(2
)
 
 
2017
 
$
3,172

 
$
359

 
11.3
%

Light Vehicle sales in 2017, exclusive of currency and the increased sales from the acquisition of USM – Warren on March 1 of this year, were 18% higher than 2016. The volume-related sales increase was driven primarily by stronger production levels, content increases and favorable model mix on certain of our significant full frame light truck programs in North America, resulting in sales growth that exceeded overall higher 2017 North America full frame light truck production of 3%. Sales in this segment also benefited from increased production levels in Europe, South America and Asia Pacific and new customer programs, including the transfer of a program previously supported by our Commercial Vehicle segment that moved to Light Vehicle in mid-2016 when the axle used to support the program was replaced with an axle produced by the Light Vehicle segment. This program increased Light Vehicle 2017 sales by approximately $50. Customer pricing and cost recovery impacts increased sales by $14.

Light Vehicle segment EBITDA increased by $80 in 2017. Higher sales volumes provided a benefit of $92, while the acquisition of USM – Warren contributed $12. The year-over-year performance-related earnings reduction in 2017 was driven by $37 of increased commodity costs and $30 of incremental new program start-up and launch-related costs. Partially offsetting these higher costs were pricing and material recovery actions that increased segment EBITDA by $14 and material cost initiatives that provided increased savings of $32. The remaining performance-related reduction of $1 was attributable to higher engineering investment and increased incentive compensation net of other earnings improvement actions.

Commercial Vehicle
 
 
Sales
 
Segment
EBITDA
 
Segment
EBITDA
Margin
2016
 
$
1,254

 
$
96

 
7.7
%
    Volume and mix
 
81

 
20

 
 
    Acquisition
 
44

 
1

 
 
    Performance
 
12

 
6

 
 
    Currency effects
 
21

 
(7
)
 
 
2017
 
$
1,412

 
$
116

 
8.2
%

27




Currency effects which increased sales in 2017 were primarily due to a stronger euro and Brazilian real. The increased sales from acquisition in 2017 relate to the purchase of SIFCO business late in 2016, as described above. After adjusting for the effects of currency and acquisitions, sales in our Commercial Vehicle segment increased 7% in 2017. The volume-related increase was primarily attributable to higher production levels in North America, where Class 8 production was up 12% and Classes 5-7 production was up 6%. Also contributing to the higher sales volume were production increases of 28% in South America and 5% in Europe. Partially offsetting the increased production levels was the transfer of a program having sales of about $50 to the Light Vehicle segment which began supplying the axle for the program in mid-2016.

Commercial Vehicle segment EBITDA increased by $20 in 2017. Although sales benefited from currency translation, segment EBITDA was negatively impacted by currency transaction losses. Higher sales volumes increased 2017 earnings by $20. The performance-related improvement in segment EBITDA resulted primarily from pricing and material recovery actions which provided a benefit of $12, a reduction in warranty expense of $8 and material cost savings actions of $12, more than offsetting increases in material commodity costs of $14 and in incentive compensation and other costs of $12.


Off-Highway
 
 
Sales
 
Segment
EBITDA
 
Segment
EBITDA
Margin
2016
 
$
909

 
$
129

 
14.2
%
    Volume and mix
 
202

 
41

 
 
    Acquisition
 
401

 
40

 
 
    Performance
 
(10
)
 
(1
)
 
 
    Currency effects
 
19

 
3

 
 
2017
 
$
1,521

 
$
212

 
13.9
%

The operations of the BFP and BPT businesses acquired on February 1, 2017 added $401 to this segment's sales in 2017. Currency effects provided higher sales of $19, principally due to a stronger euro compared to 2016. After adjusting for these two items, sales in 2017 were higher by 21%, reflecting significantly higher global end-market demand.

Off-Highway 2017 segment EBITDA increased by $83, with the BFP and BPT operations contributing $40 and higher sales volumes providing an increase of $41. Year-over-year performance-related earnings in 2017 were reduced by increased engineering and development expenses of $14, lower pricing, net of material recovery, of $10, and higher commodity costs of $6. Substantially offsetting these reductions to earnings were material cost savings of $13 and improved earnings from restructuring and other cost savings actions..

Power Technologies
 
 
Sales
 
Segment
EBITDA
 
Segment
EBITDA
Margin
2016
 
$
1,056

 
$
158

 
15.0
%
    Volume and mix
 
83

 
26

 
 
    Divestiture
 
(41
)
 
(5
)
 
 
    Performance
 
(5
)
 
(12
)
 
 
    Currency effects
 
11

 
1

 
 
2017
 
$
1,104

 
$
168

 
15.2
%

Power Technologies primarily serves the light vehicle market but also sells product to the medium/heavy truck and off-highway markets. Net of currency effects and the reduction in sales resulting from the Nippon Reinz divestiture in the fourth quarter of 2016, sales in 2017 increased 7%, primarily due to overall stronger market demand and new customer programs.

Segment EBITDA increased by $10 in 2017, with higher sales volumes providing an earnings benefit of $26 and the divestiture of Nippon Reinz reducing earnings by $5. A reduction of $12 in year-over-year third performance-related earnings was driven by higher commodity costs of $13, customer pricing reductions of $5 and other net cost increases of $4. Partially offsetting these reductions to earnings was savings from material cost reduction initiatives of $10.

28




Summary Consolidated Results of Operations (2016 versus 2015)
 
2016
 
2015
 
 
 
Dollars
 
% of
Net Sales
 
Dollars
 
% of
Net Sales
 
Increase/
(Decrease)
Net sales
$
5,826

 

 
$
6,060

 

 
$
(234
)
Cost of sales
4,982

 
85.5
%
 
5,211

 
86.0
%
 
(229
)
Gross margin
844

 
14.5
%
 
849

 
14.0
%
 
(5
)
Selling, general and administrative expenses
406

 
7.0
%
 
391

 
6.5
%
 
15

Amortization of intangibles
8

 
 
 
14

 
 
 
(6
)
Restructuring charges, net
36

 
 
 
15

 
 
 
21

Loss on sale of subsidiaries
(80
)
 
 
 


 
 
 
(80
)
Impairment of long-lived assets


 
 
 
(36
)
 
 
 
36

Other income, net
18

 
 
 
1

 
 
 
17

Earnings before interest and income taxes
332

 
 
 
394

 
 
 
(62
)
Loss on extinguishment of debt
(17
)
 
 
 
(2
)
 
 
 
(15
)
Interest income
13

 
 
 
13

 
 
 

Interest expense
113

 
 
 
113

 
 
 

Earnings from continuing operations before
income taxes
215

 
 
 
292

 
 
 
(77
)
Income tax expense (benefit)
(424
)
 
 
 
82

 
 
 
(506
)
Equity in earnings (losses) of affiliates
14

 
 
 
(34
)
 
 
 
48

Income from continuing operations
653

 
 
 
176

 
 
 
477

Income from discontinued operations


 
 
 
4

 
 
 
(4
)
Net income
653

 
 
 
180

 
 
 
473

    Less: Noncontrolling interests net income
13

 
 
 
21

 
 
 
(8
)
Net income attributable to the parent company
$
640

 
 
 
$
159

 
 
 
$
481

 
Sales — The following table shows changes in our sales by geographic region.
 
 
 
 
 
 
 
Amount of Change Due To
 
2016
 
2015
 
Increase/
(Decrease)
 
Currency
Effects
 
Acquisitions
(Divestitures)
 
Organic
Change
North America
$
3,128

 
$
3,210

 
$
(82
)
 
$
(24
)
 
$
7

 
$
(65
)
Europe
1,616

 
1,723

 
(107
)
 
(44
)
 

 
(63
)
South America
338

 
377

 
(39
)
 
(82
)
 

 
43

Asia Pacific
744

 
750

 
(6
)
 
(23
)
 
(3
)
 
20

Total
$
5,826

 
$
6,060

 
$
(234
)
 
$
(173
)
 
$
4

 
$
(65
)

Sales in 2016 were $234 lower than in 2015. Weaker international currencies decreased sales by $173. The acquisition of Magnum earlier this year added sales of $7, with the divestiture of Nippon Reinz at the end of November 2016 reducing sales by $3. A volume-related organic sales decrease of $75 resulted primarily from weaker global Off-Highway demand, lower commercial vehicle production in North America and Brazil and lower sales with a major North America commercial vehicle customer, partially offset by stronger overall light vehicle volume levels in North America, Europe and Asia Pacific and contributions from new customer programs. Cost recovery pricing actions increased sales by $10.

The North America organic sales reduction of 2% was driven principally by a decline in Class 8 production of about 30%, reduced sales levels with a major commercial vehicle customer and weaker Off-Highway demand. These effects were partially offset by growth in full frame light truck production of around 7%, an increase in light vehicle engine build of 4% and higher sales from new customer programs.

Excluding currency effects, principally from a weaker South African rand and British pound, our 2016 sales in Europe were 4% lower than in 2015. Weaker Off-Highway demand was the primary driver of this reduction in sales, with increased light vehicle engine and light truck production providing a partial offset.


29



South America sales in 2016 were impacted by weaker currencies in Argentina and Brazil. Excluding these effects, sales were up 11% from 2015. The organic sales increase in the region was driven largely by pricing actions, primarily recovery of inflationary cost increases in Argentina and contributions from new customer programs. These increases were partially offset by medium/heavy truck production levels being around 20% lower.

Asia Pacific sales in 2016 were relatively comparable to those in the preceding year. Weaker currencies in Thailand, India and China contributed to the currency-related sales reduction. The 3% organic sales increase resulted primarily from increased production levels in the region along with new customer programs.

Cost of sales and gross margin — Cost of sales declined $229, or 4%, in 2016 when compared to 2015. Similar to the factors affecting sales, the reduction was primarily due to currency effects and lower overall sales volumes. Cost of sales as a percent of 2016 sales was 50 basis points lower than in the previous year. Underabsorption of costs as a result of lower sales volumes increased cost of sales as a percent of sales. Cost of sales in 2016 was also higher due to increases in engineering and product development costs of $13 and material commodity prices of $8 and incremental start-up/launch costs of $8. More than offsetting the margin impact of these increases were savings from lower material costs of $67 and avoidance of supplier transition costs in our Commercial Vehicle segment of $14 in 2015, and a decline in environmental remediation expense of $6.

Gross margin of $844 for 2016 decreased $5 from 2015. Gross margin as a percent of sales was 14.5% in 2016, 50 basis points higher than in 2015. Margin improvement was driven principally by the cost of sales factors referenced above.

Selling, general and administrative expenses (SG&A) — SG&A expenses in 2016 were $406 (7.0% of sales) as compared to $391 (6.5% of sales) in 2015. Salary and benefits expenses in 2016 were $9 higher than in 2015, while selling and other discretionary spending increased $6, due in part to execution of certain strategic project initiatives.

Amortization of intangibles — The reduction of $6 in amortization of intangibles was primarily attributable to certain customer related intangibles becoming fully amortized.

Restructuring charges, net — Restructuring charges of $36 in 2016 included a fourth-quarter expense of $10 in conjunction with the SIFCO acquisition, as described above, to eliminate certain positions in our Brazil Commercial Vehicle business to align with expected market demand. Third-quarter 2016 expense included $14 for separation costs in connection with headcount reduction actions in our Off-Highway segment that were approved as a result of continuing weak demand levels in this business at that time. The remaining $12 of restructuring expense in 2016 relates to the closure of our Commercial Vehicle manufacturing facility in Glasgow, Kentucky, headcount reduction actions at our corporate facilities in the U.S., other headcount reductions in Brazil and employee separation and exit costs associated with previously announced headcount reduction and facility closure actions. Restructuring charges of $15 in 2015 were primarily attributable to headcount reductions in our Commercial Vehicle business in Brazil which were significantly impacted by lower demand levels, along with costs associated with previously announced restructuring actions.

Loss on sale of subsidiaries — Reference is made to Note 3 of the consolidated financial statements in Item 8 for a discussion of the fourth-quarter 2016 divestitures of DCLLC and Nippon Reinz.

Impairment of long-lived assets — Reference is made to Note 3 of the consolidated financial statements in Item 8 for discussion of charges recognized in connection with an impairment of long-lived assets attributable to an exclusive supply relationship with a South American supplier.

Other income, net — The following table shows the major components of other income, net.
 
2016
 
2015
Government grants and incentives
$
8

 
$
3

Foreign exchange loss
(3
)
 
(20
)
Gain on derecognition of noncontrolling interest


 
5

Strategic transaction expenses
(13
)
 
(4
)
Insurance and other recoveries
10

 
4

Gain on sale of marketable securities
7

 
1

Amounts attributable to previously divested/closed operations


 
1

Other, net
9

 
11

Other income (expense), net
$
18

 
$
1



30



During 2015, foreign exchange losses were primarily driven by the impact the strengthening U.S. dollar had on our Mexican peso and euro forward contracts. Upon completion of the divestiture of our operations in Venezuela in January 2015, we recognized a $5 gain on the derecognition of the noncontrolling interest in one of our former Venezuelan subsidiaries. See Note 3 to our consolidated financial statements in Item 8 of Part II for additional information. The increase in strategic transaction expenses in 2016 is primarily attributable to an increased level of inorganic growth opportunities that were being pursued, including the SIFCO acquisition that closed in December 2016 and the BFP and BPT acquisitions that closed in February 2017. Additionally, we incurred transactional costs in connection with the divestitures of DCLLC and Nippon Reinz. See Notes 2 and 3 for additional information. During 2016, we received a recovery of $8 of costs previously incurred on behalf of other participants in a consortium that existed to administer certain legacy personal injury claims. During 2015, we reached a settlement with an insurance carrier for the recovery of previously incurred legal costs.

Loss on extinguishment of debt During the second quarter of 2016, we redeemed our February 2021 Notes and incurred a redemption premium of $12. We also restructured our domestic revolving credit facility. In connection with these actions, we wrote off $5 of previously deferred financing costs. The prior year expense was attributable to the call premium and write-off of previously deferred financing costs associated with the redemption of $15 of our February 2019 Notes in the first quarter of 2015.

Interest income and interest expense — Interest income was $13 in both 2016 and 2015. Interest expense was $113 in both 2016 and 2015. A lower average interest rate on borrowings was offset by higher average debt levels in 2016. As discussed in Note 14 to our consolidated financial statements in Item 8 of Part II, Dana Financing Luxembourg S.à r.l. issued $375 of its June 2026 Notes on May 27, 2016 and we redeemed $350 of our February 2021 Notes on June 23, 2016. In conjunction with the issuance of the June 2026 Notes, we entered into two 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%. Average effective interest rates, inclusive of amortization of debt issuance costs, approximated 6.5% and 6.6% in 2016 and 2015.

Income tax expense (benefit) — Income taxes were a benefit of $424 in 2016, whereas we had a tax expense of $82 in 2015. In the fourth quarter of 2016, we determined that most of the valuation allowances against U.S. deferred taxes were no longer required. Release of these valuation allowances resulted in a $501 income tax benefit. Additionally, developments in Brazil led to our determination that an allowance against certain deferred taxes in that country was appropriate, and we recognized tax expense of $25 to establish this valuation allowance. During 2015, we completed an intercompany transfer of an affiliate's stock and certain operating assets. In connection with this transaction, we released $66 of valuation allowance on U.S. deferred tax assets and recognized $23 of tax expense related to the stock sale and $2 of amortization of a prepaid tax asset created as part of the transaction. Amortization of the prepaid tax asset in 2016 was $11. In 2015, we also established a valuation allowance of $15 against the deferred tax assets of a subsidiary in Brazil. See Note 18 to our consolidated financial statements in Item 8 of Part II for further disclosures around these valuation allowance adjustments.

The effective income tax rates vary from the U.S. federal statutory rate of 35% primarily due to valuation allowances in several countries, nondeductible expenses, different statutory rates outside the U.S. and withholding taxes. Contributing to the lower effective rate in 2016 were benefits of $58 for a reduction of accrued taxes on earnings of foreign operations resulting from legal entity restructuring and a revised determination as to permanent reinvestment. Partially offsetting this benefit was tax expense of $17 on dividends and other income attributable to foreign operations, and $30 of expense recognized to establish provisions associated with uncertain tax positions. Excluding the effects of the items described above, the effective tax rate was 24% in 2016 and 37% in 2015. In 2016, jurisdictions with effective tax rates less than the U.S. tax rate of 35% decreased the overall effective rate. In 2015, jurisdictions with valuation allowances had lower pre-tax income, which increased the effective rate.

In the U.S. and certain other countries, where our history of operating losses did not allow us to satisfy the “more likely than not” criterion for recognition of deferred tax assets, we have generally recognized no income tax on the pre-tax income or losses in these jurisdictions as valuation allowance adjustments offset the associated tax effects. With the release of valuation allowances on our U.S. deferred tax assets in 2016, the future impact of valuation allowance adjustments will be less significant, resulting in tax expense that will be more reflective of a customary global effective tax rate.

Equity in earnings (losses) of affiliates — Net earnings from equity investments was $14 in 2016 and a net loss of $34 in 2015. Equity in earnings from Bendix Spicer Foundation Brake, LLC (BSFB) were $7 in 2016 and $11 in 2015. Our share of Dongfeng Dana Axle Co., Ltd. (DDAC) operating results were $7 in 2016 and a loss of $7 in 2015. During the fourth quarter of 2015, we determined that we had an other-than-temporary decrease in the carrying value of our DDAC investment and recorded a $39 impairment charge. See Note 21 to our consolidated financial statements in Item 8.


31



Income from discontinued operations — Income (loss) from discontinued operations activity relates to our Structural Products business. See Note 3 to our consolidated financial statements in Item 8.

Noncontrolling interests net income As more fully discussed in Note 1 to our consolidated financial statements in Item 8, the first quarter of 2015 included $9 for correction of previously reported noncontrolling interests net income.

Segment Results of Operations (2016 versus 2015)
 
Light Vehicle
 
Sales
 
Segment
EBITDA
 
Segment
EBITDA
Margin
2015
$
2,482

 
$
262

 
10.6
%
    Volume and mix
235

 
37

 
 
    Performance
31

 
(4
)