Dana Incorporated (DAN) Q3 2016 Earnings Report, Transcript and Summary

Good morning and welcome to Dana Incorporated’s Third Quarter 2016 Financial Webcast and Conference Call. My name is Brent, and I will be your conference facilitator. Please be advised that our meeting today, both the speakers' remarks and Q&A session will be recorded for replay purposes. There will be a question-and-answer period after the speakers' remarks, and we will take questions from the telephone only. [Operator Instructions] At this time, I would like to begin the presentation by turning the call over to Dana's Director of Investor Relations, Craig Barber. Please go ahead, Mr. Barber.

Thanks Brent. And thank you to everyone on the call for joining us today for Dana’s third quarter 2016 earnings call. Copies of our press release and presentation have been posted on Dana's Investor website. Today's call is being recorded, and the supporting materials are the property of Dana Holding Corporation. They may not be recorded, copied or rebroadcast without our written consent. Today's call will include a Q&A. In order to allow as many questions as possible, please keep your questions brief. Today's presentation includes forward-looking statements about our expectations for Dana's future performance. Actual results could differ from those suggested by our comments today. Additional information about the factors that could affect future results are summarized in our Safe Harbor statement. These risk factors are also detailed in our public filings, including our reports with the SEC. Presenting this morning is Jim Kamsickas, President and Chief Executive Officer; Jonathan Collins, Senior Vice President and Chief Financial Officer. With that I'd like to turn the call over to Jim.

Thank you, Craig. Good morning everyone, and thank you for joining us. Dana continued our positive momentum in the quarter. Our sales for the quarter were $1.38 billion, which was down from the third quarter of last year largely a result of currency headwinds and weaker commercial and off-highway vehicle markets. That said, while vehicle markets continue to remain strong as we realized 8% organic growth in our light vehicle driveline business. Despite this overall slight revenue degradation, we are very satisfied with the conversion and sales with an $0.08 per share increase in diluted adjusted EPS over the last year and adjusted EBITDA margin of 12.1% largely driven by our focus on cost and operational efficiencies. Notably, we were able to achieve this positive performance during the same timeframe that were launching one of Dana’s largest customer programs the Ford Super Duty Truck driveline. As noted and on the presentation, we have also benefited from continued strength in the light vehicle truck market. I will provide additional color on our specific end-markets in just a moment. I will also highlight our most recent Automotive News PACE Award recognitions resulting from Dana’s relentless passion and tenacity to provide differentiating technology and innovation to the mobility industries yet again this year. And finally, I am excited to having the opportunity to inform you that Dana has reached the definitive agreement to acquire SIFCO S.A., a supplier of significantly important forged products located in Brazil. Please turn to Slide 4 for an update on global market conditions. Global market conditions continue to be mixed starting in North America, our outlook for the rest of the year continues to be positive as the economy remains stable. And the light truck market remains strong. We are off to a good start with the ramp up of the Ford Super Duty program and we expect to stay on track with our production in the fourth quarter for this key program. For the commercial vehicle market in North America, we are seeing slightly reduced production for the Class- A trucks. Our expectation is for production this year to be around 220,000 to 230,000 units. Medium-duty, while seasonally weaker later in the year, remains within our expected range. Moving to Europe, the markets continued to be stable with stronger light-vehicle markets offsetting a weaker market in South Africa. We are expecting some continuing headwinds from the construction vehicle market, but still within our expected range. Looking at South America, we remain cautious and while the political situation in Brazil is stabilizing, we don’t see the economy improving near-term. Commercial vehicle demand has stabilized but remains at a low level and will likely need government incentive us before we see meaningful improvement. Political stability should provide an important first step. We remain committed to Brazil in the Brazilian market which has long been one of the top-10 economies in the world. In fact, we believe it is an appropriate time to selectively invest and enhance our product offerings and support our customers in advance of a market rebound. Elsewhere in the region, our light vehicle operations in Argentina continue to do well in the tough market driven by the successful launch of a new program with Toyota that we talked about last quarter. Our light vehicle business in Argentina will also benefit from improved conditions in Brazil as a portion of the vehicles produced in Argentina are exported. And finally, in Asia-Pacific, we are seeing stable to moderately improving conditions with light and commercial vehicle markets faring better than the off-highway markets. Demand is picking up in China for light trucks and commercial vehicles and we will certainly benefit from a stronger light truck markets here as we begin launching several new programs over the next few years. The same is true in India, while after several years of weak demand for light vehicles, we are seeing improvement in some of our key programs in the country. We see both China and India as growth markets where we can leverage our existing footprint and our ability to design product in country meeting local customer needs while utilizing our core technologies. As we turn to Slide 6, I appreciate having the opportunity to communicate how and where Dana’s technology leadership continues to be recognized in our industry for providing innovative solutions to the marketplace. As you see on Slide 6, not one, not two, but three of Dana’s technologies were named as finalist for the 2017 Automotive News PACE Awards. We are one of only three suppliers with more than one technology to be recognized as a finalist and the only supplier with three technologies named this year. It marked the sixth consecutive year that we have been named the finalist. To put this into perspective, only six automotive suppliers have achieved this distinction. This reaffirms that our technology strategy is effectively impacting the industry. We continue to build our innovation pipeline and solution providers for our customers. The three technologies Dana is being recognized for include, our adaptive air/oil separation system, the maintenance free solution optimizes engine horsepower and performance, reduces oil consumption and improves vehicle emissions. Also, Dana’s Spicer Optimized Tire Pressure Management System. This is a first of its kind technology helps fleets extend their tire life and reduce preventable tire blowouts by monitoring and adjusting tire pressure and lastly, Dana’s Victor Reinz Multi-layer Steel Transmission Pump Gasket, which improves performance and fuel economy on vehicles with high speed transmissions. We are very proud to have three outstanding technologies up for the distinctive award. Our entire team is extremely committed to the ongoing development of innovative products and helping our customers efficiently commercialize these advanced technologies. We believe it is the philosophy truly serves as a differentiating value proposition for us. We are also adding value in other ways. Moving to Slide 7, we recently announced a definitive agreement to purchase assets of SIFCO S.A., a leading producer of forged machine components located in Brazil as a long-term supplier to Dana’s commercial vehicle business. We agree upon purchase price is approximately $85 million, the assets we are acquiring will not only support our commercial vehicle business, but will generate incremental revenue and open additional commercial channels with current and new customers. We expect incremental revenue to be about $50 million on a normalized basis. Operationally, this acquisition will enable us to leverage SIFCO’s extensive experience and knowledge of sophisticated forge components further enhancing our vertically integrated supply chain capabilities and improve our cost structure. It also enables us to further assist our customers to accommodate local content requirements which reduced regional-specific costs. Additionally, it further strengthens our position as a central source for products that use forged and machine components, importantly, across all three of our key end-markets in the region. For nearly seven years, Dana has designed, manufactured, and distributed products in Brazil for virtually every major global producer of passenger vehicles, commercial trucks and off-highway equipment. We feel this is an appropriate time to invest in strategic and selective assets that will further strengthen our position as one of the most trusted top-tier suppliers to the mobility industry thus positioning us for future profitable growth throughout the region as well align Dana as the supplier of choice for both global vehicle platforms. Finally, on Slide 8, I would like to remind everyone that we’ll be hosting an Investor Day on November 9th. At this event, we will be detailing our strategic priorities over the next several years and providing an outlook of where we can take the business. I hope you’ll be able to join us. Now, I’d like to turn the call over to Jonathan to review the financials.

Thank you, Jim. Please turn with me to Slide 10 for an overview of the third quarter financial results. Third quarter sales of $1.38 billion were down $84 million from the third quarter last year due partly to foreign exchange as the US dollar continued to strengthen against foreign currencies. The remainder of the difference was due to lower end-market demand in our commercial vehicle and off-highway businesses which was partially offset by growth in our light vehicle driveline and power technologies segments. Adjusted EBITDA for the quarter was $168 million, up $1 million over last year yielding a 12.1% margin which is 70 basis points higher than last year. This quarter’s results include a gain in marketable securities. However, even removing that gain, we bettered our margin by 20 basis points over last year on lower volume. Net income was $57 million, down $62 million from the third quarter last year. The third quarter of last year included a $100 million tax benefit from the release of certain US deferred tax valuation allowances and the $24 million after-tax impairment charge. Adjusting for these items, net income for the third quarter of 2016 increased $14 million compared with last year, primarily due to lower expenses for interest and income taxes, partially offset by higher restructuring expense of $16 million as we reduced staffing levels in our off-highway segment to align with expected near-term demand levels. Capital expenditures were $68 million, in line with last year as we continue our investments to support our growth through program launches and delivering our backlog. Free cash flow for the quarter was a use of $26 million, $94 million lower than last year, primarily due to higher working capital requirements. Slide 11 provides more detail about the changes in sales and adjusted EBITDA compared to last year. Sales of $1.38 billion were down $84 million from last year with currency accounting for a third of the change or $29 million and lower market demand in commercial vehicles and off-highway equipment accounting for the remainder. Adjusted EBITDA of $168 million was essentially flat to last year on lower sales as pricing and commercial recoveries combined with strong cost performance to offset the impact of lower volumes and weaker foreign currencies. We posted a 12.1% margin, a 70 basis point improvement compared to last year. Again, if we factor out gain and marketable securities, margin would have been 11.6%, right in line with our expectations and a 20 basis point improvement over last year. The chart on the bottom half of the page highlights the four main drivers of the year-over-year adjusted EBITDA change and also notes the corresponding impact on sales. Foreign currency lowered our adjusted EBITDA by $7 million compared to last year, driven by a $29 million headwind to sales primarily due to the devaluation of the Argentine Peso and the South African Rand against the US dollar. Volume and mix lowered adjusted EBITDA by $18 million on $67 million in lower sales driven mostly by lower end-market demand for Class A trucks in North America compared to last year and lower demand in global off-highway end-markets. Pricing and commercial recoveries added $12 million to sales and adjusted EBITDA compared to last year. Net performance was a $14 million improvement over last year due to our continued cost management and improved supply chain performance which more than offset significant inflationary cost increases in countries such as Argentina. Note that the gain in marketable securities that I mentioned earlier is included in the consolidated performance and held at the corporate level. As such, it’s not reflected in our business segment results, that we’ll discuss on the next slide. Slide 12 provides a closer look at the year-over-year changes to segment sales and EBITDA. In the upper left-hand corner, you can see that the light vehicle driveline segment had another good quarter with sales of $631 million, up $26 million or 10% on a constant currency basis due to higher demand across all regions and new business. As we mentioned last quarter, we have transitioned a customer program from our commercial vehicle segment to our light vehicle segment in the third quarter which added $13 million of sales to light vehicle. Segment EBITDA was $73 million this quarter, $10 million higher than last year providing a margin of 11.6% higher than last year’s third quarter by 120 basis points. We expect light vehicle margins to improve in the fourth quarter of this year due to the commercial recoveries on our new business launches. As we look at the segment EBITDA drivers for light vehicle, currency lowered earnings by $6 million and sales by $33 million mainly due to the Argentine peso, South African Rand and the British pound. Volume and mix was very good this quarter increasing segment EBITDA by $8 million on an additional $43 million of sales, which represents 18.6% incremental margin, 20% higher than the second quarter incremental margin as new business ramps up in North America. Pricing and commercial recoveries were a $16 million benefit, principally offsetting inflationary commodity and other cost in Argentina that are included in the performance bucket. The net favorable price recovery and performance improvement in segment EBITDA of $8 million was driven primarily by material cost savings, which more than offset some start-up cost and higher warranty expense in this year’s third quarter. In the upper right, you can see the commercial vehicle driveline sales were down $73 million compared to last year, primarily due to lower market demand while margin is down from last year, this is in line with the end-market volume decline. A slightly stronger Brazil real contributed to a $3 million translation benefit to sales. Volume and mix lowered earnings by $11 million on $44 million in lower sales driven primarily by lower market demand for Class-A trucks in North America. Performance provided a benefit of $10 million compared to last year, driven mostly by material cost savings attributed to the supply chain improvements implemented last year and continued cost reduction efforts. In the lower left, you can see that off-highway driveline sales were lower by $47 million due to lower end-market demand. Once again, due to our focus on cost management, margin was held nearly flat compared to last year at 14.1% only a 10 basis point decline despite the lower sales. Volume and mix lowered earnings by $11 million on $44 million in lower sales. This higher than normal detrimental margin is the result of less favorable mix as demand was disproportionately lower in the construction equipment market. Pricing was a slight negative compared to last year due to the timing of changes in commodity cost. Overall cost performance was a $6 million benefit due to continued cost management and material cost improvements. And then finally in the lower right, you can see Power Technologies posted a 3% growth on a constant currency basis and a 20 basis point improvement in margin over the prior year yielding a 16.2% margin for the third quarter. Volume and mix benefitted segment EBITDA by $4 million on $12 million higher sales due to continued strength in the light vehicle markets. Lower pricing of $4 million was partially offset by a material savings of $2 million. Overall, all four of our segments performed well in the third quarter. Slide 13 highlights our free cash flow in the quarter as well as on a year-to-date basis. The third quarter was a use of cash of $26 million, a decrease of $94 million compared to last year. This change was primarily driven by higher working capital requirements, partially offset by lower interest and tax payments. Working capital was a use of $58 million in the quarter compared with a source of $40 million last year. This $98 million difference is primarily due to the timing of customer payments in our light vehicle segment in both 2016 and 2015. In connection with a customer program changeover this year, timing of customer receipts reduced this year’s cash flow. The use of cash related to working capital on a year-to-date basis is much more reflective of the normal cadence in customer receipts and as such more line with last year with a greater use attributable to higher inventory levels and timing of customer payments in the other three segments. Lower net interest of $5 million this quarter was primarily due to the debt refinancing we completed in June which shifted an interest payment to the fourth quarter from the third quarter. The higher cash interest year-to-date is due to the accelerated payment of accrued interest related to the debt refinancing I just mentioned. Cash taxes were lower in the quarter simply due to the timing of payments and are in line with last year on a year-to-date basis. On Slide 14, you can see that our liquidity remains strong with our cash and marketable securities balance at $845 million combined with our revolver capacity, this results in nearly $1.2 billion of operating liquidity. This slide also includes a snapshot of our US pension plans funding position. Although lower interest rates have increased pension obligations, our assets are heavily concentrated in fixed income which are portfolio immunizing investments designed to buffer interest rate movements and as a result our asset returns have essentially offset the increased liability resulting in a well-funded position that is unchanged from the end of last year. As a reminder, these are frozen plans with now new entrants. With our solid position, we do not expect there to be a funding requirement for our US plants this year or next. Slide 15 provides our refined outlook for the full year, which remains essentially unchanged. We expect sales to be about $5.8 billion coming in near the low end of our range due primarily to the fact that commercial vehicle and off-highway end-market demand appears to be near the lower end of our expectations. In spite of these lower sales, we remain sanguine on our profitability. So adjusted EBITDA is expected to be at the midpoint of our range of approximately $655 million yielding a full year margin at the high end of our range of about 11.2%. We are essentially expecting margins to remain consistent from the second and third quarter levels, adjusted for the marketable securities gain in the third quarter. Free cash flow is expected to be about $120 million, as we continued to invest $320 million this year in capital to support our current and future customer programs. As a reminder, the fourth quarter is traditionally our highest cash flow generating quarter with working capital being a source of cash as production levels taper off at year end. Diluted adjusted EPS is expected to be $1.75 at the high end of our range and in line with our adjusted EBITDA targets benefiting from the share repurchases in the first half and lower income taxes. While we did not repurchase shares in the third quarter under the existing authorization, we do expect to return essentially all of the free cash flow we generate this year to shareholders in the form o f our quarterly dividends and the share repurchases that were made in the first half of the year. Overall, we are on track to achieve our targets this year and look forward to providing some insight on our long-term outlook when we host our Investor Day in a few weeks. Now I’d like to turn the call back over to Brent to take your questions. Thank you for listening in today.

[Operator Instructions] Your first question comes from the line of Brian Johnson with Barclays. Please go ahead.

Yes, good morning. I have a few questions. First, maybe, the $12 million pricing recoveries overall, is that primarily in Ford Super Duty? I mean, excuse me, it’s not Ford – is that primarily in light vehicle?

There was a meaningful portion there, Brian, but it’s really a combination of inflationary recovery in commodity cost. I just want to make sure you are not conciliating that with the recoveries we have in the fourth quarter that are related to program-specific engineering and testing.

Okay, so this is commodity and other inflation passes, does that mean a fair chunk of them are coming from South America?

Yes, I think I mentioned Argentina was one of the areas in which it was concentrated.

Okay, okay. So we can think of these, I asked the question that just reminds as to what extend are these one-timers versus things that go along with running a business?

Yes, they are really the latter, but just keep in mind there is that lag that we have in our recoveries. So you get a little bit of dislocation as the recovery comes on. But on a normalized level, they essentially stay with us.

Okay, and then two more strategic questions, and I have lots of others for the Investor Day. In terms of buying SIFCO, are you buying assets that were dedicated to serving Dana before – so as we think about revenue impact, there isn’t any here just moving it from bill of materials, cost of goods sold to own, is this the vertically integrated and is this or would you be serving other customers and would you still be having other forging casting suppliers down there?

Good morning, Brian, it’s Jim. Nice to hear your voice and I’ve talked to you. Two questions, cut right to it, SIFCO was certainly, we were the largest customer of SIFCO but we are not the only customer of SIFCO, so it’s certainly a vertical integration play it’s one of the pillars of the page suggested. But it’s also a new customer entry point as well. They have some customers we don’t have and they do some products for the same customers we have that we don’t do. So for example, I’ll speak to the off-highway side of the business, some of the things that they supply, we don’t. So it helps us in that regard as well.

Okay, and then another one and then, I’ve got more product questions for a couple weeks. One of your customers PACCAR announced a branded in-house absolutely so I am thinking that a competitor is private labeling that for them. Has this – how does this affects your market share assumptions at that customer we are assuming there is an impact, but want to know how you guys are thinking about it?

Yes, it’s a great question. No impact, it is cutting to the chase on it. It’s – as you can appreciate and you hear from your other people you cover, you are quite regular – we are quite regular in different conversations with our customers on branding and strategies associated with that that’s what that is. That’s not a – that’s cut into the chase on that’s not an insourcing player anything like that. It’s a branding play. So it’s not an impact item for us.

Okay, thanks.

Your next question comes from the line of Joe Spak with RBC Capital Markets. Please go ahead.

Thanks, good morning everyone.

Good morning, Joe.

I guess, just the first question just on wanted to better understand the free cash flow, which I guess is now at the lower end to prior guidance, but EBITDA still up at mid – of CapEx change. So, is there something else what I am missing there, just want to understand that, that sort of pushed towards the lower end of the guidance there?

Yes, the only other element they didn’t need there – Joe, it’s just working capital, so based on where we see timing of payments and you can kind of see us running a little bit behind on a year-to-date basis, we think that, working capital is going to be less of a source of cash than we had originally anticipated. That’s the only other element.

Okay, and is that a timing – so, as we think about 2017, is there more of a recovery on working capital there?

Yes, we see it is largely a timing issue.

Okay, and then, on the commercial vehicle business, as we look at the fourth quarter, can you just help remind us on a year-over-year basis, obviously a challenged fourth quarter last year, I think there was – there is like a $16 million warranty adjustment, so that doesn’t repeat clearly, but, anything else we should be thinking about in terms of the margin profile in the fourth quarter on commercial vehicles?

No, I think that’s the most significant one on a year-over-year basis, Joe. The only other comment, third quarter relative to fourth quarter, just the normal build schedule, particularly in North America is going to be softer in the fourth quarter. So while you will have the improvement on a year-over-year basis from the performance issues, while a little bit of margin pressure in the fourth quarter compared to the last couple.

Okay, and then, just a clarification on LVD, the negative for launch in this third quarter, you said that should dissipate in the fourth quarter?

Yes, the biggest driver in the performance in light vehicle was the launch which we been expecting, but on a year-over-year basis, Super Duty is a very big launch for us. So we have some inefficiencies built in. We get passed those moving into the fourth quarter, but the other thing I would remind you is we still have some pretty significant commercial recoveries for engineering and testing that are going to be coming into the fourth quarter that will also put some wind in the sales for light vehicle margins in the fourth quarter.

Perfect. Very helpful. Thank you.

Sure, thanks, Joe.

Your next question comes from the line of Ryan Brinkman with J.P. Morgan. Please go ahead.

Thank you for taking my question. Maybe, couple on M&A. So first, is there anything you can say about the relative profitability or attractiveness of SIFCO just based upon what you have disclosed so far, purchase pricing and revenue it looks like, the transaction value of SIFCO at maybe 1.6 times price to sales versus parent Dana more like 0.4. So, is there some attractive technology that you are getting or maybe our revenues really not the way to look at it because it should rebound a lot with the industry down there?

Hey, Ryan, this is Jonathan. Yes, I think your latter comment is more how we are thinking about it. I guess, just a couple of elements quantitatively may help. The commercial sales that Jim mentioned to had a normalized production level or approximately $50 million US dollars. So we will have some top-line increment here. But that’s really as you highlighted on a normalized production level and which we think will probably happen in about 2018 is how we are thinking about it. Relative to the valuation, I think we think about more from a profitability perspective, keeping in mind, their operation is similar to our operation in Brazil right now. They are hovering at or near breakeven. But we think at a normalized production level which I think we will get to by 2018, we think we paid about 5 to 6 times adjusted EBITDA for the assets. So, from a valuation perspective, that’s how we think of it and if we look at with comps in the commercial vehicle space, which this will largely support. It’s generally in line with what we’d expect.

Okay, that’s super helpful. Thank you. And then just a last question is, backing up little bit more broadly on M&A, given SIFCO and then the aftermarket gasket business a couple quarters ago, should we think about M&A being a little bit more regular course now than maybe it was a Dana prior?

Good question. Thanks, Ryan. I mean, prior, yes, it’s been as you know, you’ve been covering Dana for quite some time. There has been quite a pause there, numerous years of a pause of M&A. So certainly there would be – already you can see there is traction beyond where it’s been in the past. As I’d like to say, it’s certainly a lever in the playbook that you have to make sure that it’s something you are capable of doing. I said earlier in the year that we structured the company slightly different to make sure that we are cultivating opportunities. We are viewing opportunities and if it’s at the right, it’s at the right value, we are going to do that. Not really in the mindset of anything crazy transformational at this point, we are just doing kind of more of the bolt-on and so on and so forth. But if they are there we will and if they are not we won’t. But the SIFCO situation falls right into a sweet spot of kind of – I would almost put it into like Magna, Magna just a no brainer so we did it.

Okay, thanks. Great.

Your next question comes from the line of Brian Sponheimer with Gabelli. Please go ahead.

Hi, good morning everyone.

Hey, good morning, Brian.

Just a couple of things. As we start to think about 2017 and clearly you’ll go more into this on the 9th. Timing of launch cost for the $700 million or so in backlog that’s expected to come on. Should we be thinking about that as any sort of drag in maybe 4Q and 1Q that alleviate as we work through 2017?

Brian, just generally, the launch cycle next year will be somewhat comparable to what we have this year if anything maybe just a little bit later, but so generally speaking you can think of it is in line with this year?

Okay, and again, I guess, along with that, should CapEx be – do we be thinking about CapEx for 2016, 2017 is elevated relative to maybe something that we’ll see down the road or is there really a growth trajectory that’s going to require this elevated level of CapEx as we go forward?

Yes, I really think it’s the former. We’ve talked about this some, we think our CapEx is certainly elevated this year due to converting on the backlog. We see that continuing into next year, but we do see it dissipating beyond that and we will talk a little bit more about that in a few weeks when we give you a better sense of how we see the next few years shaping up.

All right. And then if I can ask just finally, the European construction market, is that a sense from your customer that there is just excess inventory in the channel or do you think that there is some demand degradation that we should be thinking about as we look ahead?

Yes, I think it’s probably a little bit of both. We see the market just being a little bit softer than we expected and as we’ve indicated longer-term, we do see demand picking up, but we definitely did run into a little bit of softness in demand here in the second half of the year.

Okay. Thank you very much.

Sure, thanks.

Your next question comes from the line of Matt Stover with SIG. Please go ahead.

Thanks very much. I just wanted to clarify two things. The first thing was on the recovery in light vehicle. If I have a clear, there was a $16 million pricing and recovery that sounds like it’s largely associated with inflation commodity and then there was a negative $8 million in performance, so it’s that like a net $8 million. Is that how we should think about that?

Hey, Matt, it’s Jonathan.

Yes.

No, I am sorry, go ahead.

So, to that, 20% of EBITDA, just – I know this seems it can be a bit lumpy.

Yes, so, you do have – we are showing the number separate, so there are some inflationary unfavorable cost impacts in cost performance. We are showing the $16 million of recovery that we’ve got from the customer for both inflation and commodities separate and distinct on that. So that’s part of it. The other piece is, just compared to last year, the Super Duty is a huge launch for us. We’ve performed very well, very happy with that, but there are some inefficiencies that we saw this year in the third quarter that we didn’t have last year and that becomes a pretty meaningful difference. You will note that we plan for it. It’s generally in line with a launch of this magnitude. But that’s really the primary driver of that, that fourth item over which is the performance.

Okay, and then on the working capital side, the delta here is on receivables and payables and nothing really on the inventory side.

Little bit on inventory, I think we mentioned in the comments that in some of the groups little bit higher inventory in the second, third quarter, but the primary driver is the timing of receipts from customers and payment to suppliers.

Okay, and then the last was, $15 million of incremental for SIFCO, if we were looking at this business on a standalone basis, because I assume they are selling into you, how would that business’s revenues look on a standalone basis right now?

It’s – as Jim had mentioned, they sell more to us than to others. We’ve not disclosed the full purchase to us. But I think that’s a general range you can look at on a normalized production levels, the internal consumption that we’ll have will be slightly higher than the commercial sales or the trade sales.

Okay. Okay, thanks guys.

Sure.

Your next question comes from the line of Colin Langan with UBS. Please go ahead.

Great, thanks for taking my questions. Just one clarification, in the release, it says there is a $7 million gain on the sale of marketable securities. Where does that end up? Does that in the corporate expense line and is there anything unusual on that item?

You got it. So from a segment standpoint, it’s not attributed to one of the four segments. So, it’s a benefit to the corporate cost that other income that we recognized.

And is that unusual, I think kind of large, just…

It’s similar to what you’d see on some the anti-recoveries. It’s somewhat lumpy. Little bit more than what we had expected in the third quarter, but we have had these over the years in the subsidiary and this is generally how we’ve treated them.

Got it. And any color, can you just remind us of your steel exposure, I know prices are going up. How much is on past year contracts and what is sort of the typical lag and is that rest as we go into the fourth quarter?

Colin, just to confirm, you did say steel, is that correct? Just wanted to share it’s right.

Yes, steel, yes, yes.

So the vast majority, little over three quarters of what we have on steel buy is recoverable in the contracts. So our exposure, it’s not something that you see driving much volatility for us. The only nuance to that is most of those recoveries are set up on a modest lag. So if there are quick movements in the price, you may see a period where we incur a benefit or a detriment until that recovery catches up with the cost change.

And any color on the impact this quarter and how we should think about it in the next quarter, because there has been a lot of – I am not sure about the specific steel?

Yes, it’s been relatively modest for us, because of the protections that we have in place. So we did not note a meaningful impact in the third quarter from commodities on a net basis and don’t expect a significant one in the fourth quarter either.

Last question, any color on tax payment, a little lighter than I was expecting, I mean, how should we think about that? I know you guys paid cash taxes, but any color on the GAAP tax rate?

Yes, the primary driver there, from a expense perspective is jurisdictional mix. We’ve had higher profits in the lower tax areas. If you remember, we are in a valuation allowance position in the US, so income there, it is not, isn’t that with any tax expense. So that’s certainly a driver of it. From a cash perspective, I think I just noted, it’s purely timing-related. If you look at us on a year-to-date basis, we are pretty much in line with last year.

All right, okay. Thank you very much.

Sure.

Your next question comes from the line of Christopher Van Horn with FBR & Company. Please go ahead.

Hi guys. This is Dan Drawbaugh on the line for Chris. Thanks for taking our questions.

Sure, hey Dan.

Hey, so just wanted to touch on two of your end-markets quickly, when you have a look at the commercial vehicle segment, it seems like the decline there is at least slowing. How close did you say we are to the bottom and in terms of your segment, what do you think the margin structure can do when we begin to sort of flatten and then eventually rebound?

Hey, Dan. This is Jim. I’ll take the front-end, I guess, so hand you on it on the back end of it. On the volumes and where they are going, I would tell you our feel obviously, we have a temperature check as we are talking and in conversation with the customers and then they are closer even to the fleets and the end-customers. Our sense is that, you never know where the bottom is for sure in any circumstance. But I would say that, I’d say it’s tampered, it feels like it’s going to run at where it’s been running here for a bit, but I would tell that’s reasonable and it should maintain some stability in the market would be how I would kind of characterize it.

Yes, and just quantitatively, Dan, I think as we think about next year, I am not sure we are calling a bottom. I think, the run rate we are exiting at, certainly implies lower Class-8 volumes for next year. So, while we have not given a specific guide year, we think we’ll be at a lower level next year. Medium duty is holding up well. We talked about the fact or Jim mentioned earlier that seasonally it’s going to be lower this part of the year. But that markets held up real well. It’s growing part of our business. So that bodes well for us. Relative to your point on the margin structure, the way that we think about commercial vehicle is, this certainly had a reasonable Class A production level in North America even in the low to mid 200s which is historically a pretty good market. The real issue for us, that business not being a double-digit margin is Brazil. So, as I mentioned earlier, Brazil is essentially a breakeven for us. We are at historical lows. As Jim mentioned earlier, when we talked about the SIFCO acquisition, we are very bullish on the Brazil market long-term the demand for moving products via commercial vehicles is very high with an underdeveloped rail system. So we feel good about that in the long run and that’s really the path to this being a double-digit margin business as Brazilian recovery.

Excellent. Thank you. That’s very helpful. And then turning to off-highway, I know, Europe was a bit of a headwind in the quarter, but can you comment at least a little bit on how sort of Asia-Pacific and North American off-highway markets are looking, or it’s about now taking 10% sort of your business there?

Yes, I would tell – as you know, a good question, Dan. As you know, they’ve been down, they are down, but it feels – feels it is, it’s kind of stable at that point. We are not seeing any major risk of a getting sizably worst not yet seeing any major upside or getting sizably better. It feels like it’s going to bounce around where it’s at here for a while.

All right. Great, thanks for the color. I want to come back in queue.

Thanks.

Thanks, Dan.

Your final question comes from the line of Justin Long with Stephens. Please go ahead.

This is actually Brian calling on for Justin. But congrats on the quarter – on the quarter you guys. I was wondering if you could provide some initial commentary on how you think light vehicle production could trend for your customers heading into next year? And then, when you look at that new business backlog for light vehicle is rolling on in 2017 what the market assumption is that you are factoring into that number?

Hey, Brian. Thanks, this is Jim again. Thanks for the question. We kind of – it’s appropriate for our business. You are probably aware of this. We differentiate a little bit more between truck SUV and past card so we don’t as much correlate particularly to the LV number across the board. So, that’s kind of comment one, comment two then we obviously look at the major platforms at which we are on and we are very bullish, very bullish on where the volumes are today and where we think they are going to be in the future. So, answering the question more specific for Dana on the major platforms, we are on we feel good about it despite a lot of the rhetoric and communication that’s going on in the broader light vehicle industry. So, that’s where I would go with that.

Okay.

And just relative to our assumptions on backlog, as Jim notes, it’s very platform-sensitive as we are focused on the key platforms, but generally we expect those volumes to be in line with where they are.

Okay. That’s helpful. And then, I know there is some changes going on in the manufacturing footprint including the announcement about Toledo recently. I was wondering if you could give us any goal post on the opportunity you have to rationalize and optimize the manufacturing footprint. Just any way to help us size that up on what it could mean financially?

I don’t know, how much I can give you in detail. I’ll leave that one to Jonathan a little bit if anything relative to the financial piece of it, but I will just give you some color, in case you didn’t have it on the – I’ll use the term restructuring piece, you may or may not be aware that we announced a major plant closure, very large plant closure in the United States correlated with volumes in a particular segment in commercial vehicle in particular. Even in the last quarter we’ve made some decisions to take out some capacity, probably more human capacity than physical capacity on the off-highway side of the business. We found ways to be more efficient and do kind of more with less – but again, I am not taking or we are not taking our capacity to be able to support the customers when the volume comes back. But, those are two significant restructuring actions that we have taken already in 2016. So we will continue to pull those levers on a go-forward basis if that’s the right lever to pull.

We haven’t dimensioned the specifics, this is Jonathan, on the plant closure, in terms of the dollars for next year anything. But generally, in that case we expect the payback to be about less than two years of taking out that capacity. So, that hopefully gives you some general sense.

That’s helpful. I appreciate the time.

Sure. Thank you.

Thank you.

Okay, this is Jim. Just to close real quick. Thanks again for joining the call. At least from our perspective we believe that we had a very solid quarter, but besides having a very solid quarter, we believe we are just living to our commitments and that’s what it’s all about. Besides that, we are pulling all the levers we believe good companies do, if that’s a combination of growing organically, driving operational excellence which is of course fletching your cost and leveraging on the sales you have, launching well and you hear much conversation despite major launches in the company, didn’t hear much conversation which is about launches which is a good thing. We are restructuring, we just answered a question there a few minutes ago relative to restructuring pulling levers and restructuring across the company if that’s the right thing to do and to give you another example, doing the tuck-in M&A when it’s appropriate thing. You got to have a whole toolbox to have a successful company and then you need to know how to execute the toolbox. We believe this team is doing it. The management team is in place. As you know, you’ve gotten to know Jonathan a little bit and you certainly gotten to know me and you know some of the other team members plus some additional members you’ll get to know the rest of them if you don’t know them personally, at the Investor Day, hopefully everybody will make it to the Investor Day. It will roll out our enterprise strategy. It’s the appropriate time to have known it earlier in this would have been inappropriate. We are ready to do so and we are looking forward to having the opportunity to speak to each one of you. Thank you very much for joining the call.

Thank you. This concludes today’s conference call. You may now disconnect.