Dana Holding Corporation — Q2 2015 Form 10-Q
Business and period: Dana supplies driveline, sealing and thermal-management products to global vehicle manufacturers. This filing covers the quarter and six months ended June 30, 2015; amounts are in millions except per-share data. The company reported four operating segments: Light Vehicle, Commercial Vehicle, Off-Highway and Power Technologies.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,609 | $1,710 | $3,217 | $3,398 |
| Gross margin | $236; 14.7% | $248; 14.5% | $464; 14.4% | $482; 14.2% |
| Net income | $63 | $90 | $137 | $127 |
| Net income attributable to parent | $59 | $86 | $122 | $120 |
| Diluted EPS | $0.36 | $0.49 | $0.74 | $0.68 |
| Operating cash flow | — | — | $128 | $223 |
| Free cash flow | — | — | $6 | $97 |
Q2 operating income before interest and taxes was $124, versus $148; interest expense was $27, versus $29. For the first half, those figures were $256 versus $249 and $55 versus $59, respectively. Q2 segment EBITDA was $182 versus $208; first-half segment EBITDA was $358 versus $368. Adjusted EBITDA, a non-GAAP measure, was $180 in Q2 and $356 for the first half, compared with $205 and $370, respectively.
Balance sheet, liquidity and cash flows
At June 30, cash and cash equivalents were $894, marketable securities $169, total assets $4,790 and total equity $1,109. Reported notes payable, including current long-term debt, were $51; long-term debt was $1,570. The company had no revolving-facility borrowings, $39 of letters of credit outstanding and $392 of remaining facility availability. Reported global liquidity was $1,437, including available cash of $876 and marketable securities of $169. Access to $150 of cash and securities held by a subsidiary was uncertain, and some non-U.S. cash faced repatriation restrictions.
First-half investing cash use was $123, including $122 of capital expenditures; financing cash use was $189, including $126 of share repurchases and $18 of common dividends. Cash declined $184, including a $43 adverse foreign-exchange effect. Working capital used $108, compared with $66 in the prior-year period. Dana said liquidity and operating cash flow should cover anticipated needs for the next 12 months.
Material changes and segment trends
- Sales declined 6% in Q2 and 5% for the first half. Currency translation reduced first-half sales by $277, and the Venezuela divestiture reduced them by $47; organic sales increased $143.
- Q2 gross margin increased 20 basis points year over year, reflecting volume and cost performance, including material savings. These gains were partly offset by Commercial Vehicle supply-chain disruption, higher engineering and development expense, and other cost increases.
- Q2 segment EBITDA declined in Light Vehicle ($66 versus $76), Commercial Vehicle ($36 versus $47) and Off-Highway ($41 versus $46); Power Technologies was unchanged at $39. Commercial Vehicle results were pressured by supplier-transition inefficiencies and weak Brazilian demand. First-half EBITDA increased in Light Vehicle but declined in the other three segments.
- Regional weakness was most pronounced in South America: first-half organic sales fell 16%, with medium/heavy truck production down about 46%. North American and Asia-Pacific organic sales increased.
Outlook, commentary and risks
Management’s 2015 outlook was sales of $6.2–$6.3 billion, adjusted EBITDA of $720–$730, an adjusted EBITDA margin around 11.7%, and free cash flow of $190–$220. Adjusted EBITDA guidance was reduced from the April outlook of $740–$750; free-cash-flow guidance was unchanged. Expected capital spending was $290–$300, net interest about $90, cash taxes about $90, restructuring payments about $25 and pension contributions about $15. The outlook assumed euro/U.S. dollar and U.S. dollar/Brazil real rates of 1.05 and 3.00, respectively. Management cited currency pressure, weaker Brazilian demand, new-program launches and continued cost-reduction efforts.
- Management expected challenging South American conditions to persist; the full-year South America medium/heavy truck production outlook was reduced to 40–46% below 2014. The Asia-Pacific medium/heavy outlook was also lowered slightly.
- U.S. deferred-tax-asset valuation allowances remained in place. Dana said up to $500 could be released in the next 12 months if sustained profitability and forecasts support it; release is not assured.
- SIFCO, a key supplier, was in Brazilian reorganization proceedings. Dana reported no expected significant supply disruption but identified potential impairment of up to $46 of related net long-lived assets if supply continuity were affected.
- Dana disclosed about 25,000 pending asbestos claims, an $80 accrued liability and a $52 insurance-recovery asset. It also guaranteed certain divested-business leases, with approximately $6 of annual payments through June 2025. Management said other pending legal matters were not expected to have a material adverse effect.
- The Venezuela operations were divested in January 2015 for no consideration, following an $80 impairment in 2014; Dana recognized a $5 gain on derecognition of a noncontrolling interest in 2015.
- A prior-period noncontrolling-interest calculation error was corrected in Q1 2015 by increasing noncontrolling-interest income by $9; management judged prior-period effects immaterial. Prior cash-flow presentation was also revised to reclassify unpaid capital expenditures between operating and investing activities, without changing total cash flow.
- At quarter-end Dana was compliant with financing covenants. The Sypris arbitration concluded with immaterial damages; Sypris’s separate contract claim had been rejected on summary judgment and was under appeal.
Investor verification points
- Track whether currency and Brazilian market assumptions support the $6.2–$6.3 billion sales and $720–$730 adjusted EBITDA outlook.
- Assess cash conversion, working-capital use, higher planned capital spending and the gap between first-half free cash flow of $6 and full-year guidance of $190–$220.
- Monitor Commercial Vehicle supplier-transition costs, Brazilian restructuring and the SIFCO supply and asset-impairment exposure.
- Verify whether Dana achieves sustained U.S. profitability sufficient to support any release of up to $500 in valuation allowances.
- Review access to subsidiary-held and non-U.S. cash, debt and revolving-facility availability, and continued share repurchases under the program expiring December 31, 2015.