Dana Holding Corporation (Dana) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited consolidated results; dollar amounts are in millions except per-share data. Dana supplies driveline, sealing, thermal-management and service-part products to vehicle manufacturers. It reported five operating segments and operations in 26 countries.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $1,977 | $1,800 |
| Gross margin | $268; 13.6% of sales | $215; 11.9% of sales |
| Income before interest and taxes | $127 | $21 |
| Net income (loss) | $73 | ($25) |
| Net income (loss) attributable to parent | $70 | ($30) |
| Net income (loss) available to common stockholders | $62; basic EPS $0.42, diluted EPS $0.33 | ($38); basic and diluted EPS ($0.26) |
| Adjusted EBITDA | $212 | $181 |
| Net cash used in operating activities | ($153) | ($2) |
Organic sales grew 11%; reported sales rose approximately 10%, despite $39 of adverse currency effects, while acquisitions added $21. Gross margin improved as increased volumes, fixed-cost absorption, customer material-cost recoveries and savings outweighed higher commodity costs. SG&A increased to $113 from $99, partly reflecting equity compensation and growth initiatives.
- Segment EBITDA: Light Vehicle Driveline $63 (down $3); Power Technologies $40 (flat); Commercial Vehicle $61 (up $18); Off-Highway $49 (up $8); Structures $2. Commercial Vehicle and Off-Highway benefited from stronger volumes and, for Commercial Vehicle, material recovery and pricing actions. Light Vehicle Driveline faced cost and pricing pressure.
- Cash and liquidity: Cash and equivalents were $773 at March 31, down from $931 at year-end; marketable securities were $58. Dana reported total global liquidity of $1,300, including $745 available cash and $497 of additional borrowing availability. Some non-U.S. cash is subject to repatriation restrictions or tax costs.
- Debt: Balance-sheet debt comprised $88 of notes payable/current debt and $847 of long-term debt. Dana had $750 principal amount of senior notes outstanding, with fixed rates of 6.50% and 6.75%, maturing in 2019 and 2021. No borrowings were outstanding under the $500 revolving facility or the European receivables facility; Dana reported compliance with debt covenants.
- Other balance-sheet measures: Total assets were $5,422; total liabilities $3,464; and total equity $1,958. Pension and postretirement obligations were $600, down from $762 at December 31, 2011.
Changes versus the prior-year quarter
Sales increased $177, led by North America and higher Commercial Vehicle and Off-Highway sales. Income before interest and taxes rose to $127 from $21, and the company moved from a $25 consolidated net loss to $73 net income. Comparability benefited from lower restructuring charges ($6 versus $30) and the absence of the prior-year $53 debt-extinguishment loss. Interest expense increased to $21 from $19. Operating cash use worsened to $153 from $2, mainly reflecting a $150 voluntary, incremental U.S. pension contribution and $137 of working-capital use; working capital use was $120 in Q1 2011. Capital spending was $34, versus $33.
Outlook, risks and notable items
- 2012 outlook: Sales of at least $7,800; adjusted EBITDA of $845–$865; and free cash flow above $200, excluding the one-time $150 U.S. pension contribution. The sales outlook was reduced from more than 5% growth to more than 3% growth, principally due to weaker foreign exchange rates. The free-cash-flow outlook includes capital spending of $225–$250.
- Management expected stronger volumes and ongoing restructuring, cost reduction and pricing actions to support margins, offsetting currency pressure, commodity costs and growth-investment expenses. Vehicle-market expectations varied by region: Europe remained weak, Asia-Pacific was expected to recover, and South American commercial-vehicle production outlook was reduced.
- Market, foreign-exchange and commodity-price uncertainty, regional economic conditions, and customer vehicle production levels may affect results. Dana cited high fuel prices, soft housing conditions and mixed employment indicators as risks to North American demand. Management said liquidity and operating cash flow should cover anticipated needs for the next 12 months.
- Restructuring charges were $6 in the quarter; estimated remaining cost to complete pending initiatives was $40. Approximately 1,200 employee reductions were expected to be completed over two years. Dana also recorded a $2 impairment while negotiating a potential divestiture of its leisure, all-terrain-vehicle and utility-vehicle axle, differential and brake systems business.
- Dana reported approximately 26,000 active pending asbestos claims and accrued $85 for asbestos indemnity and defense costs, with a $52 insurance-recovery asset. Environmental liabilities were $12. Management did not expect other pending legal matters, beyond recorded amounts, to have a material adverse effect; outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control during the quarter. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether sales and adjusted EBITDA meet the 2012 outlook, particularly given the reduced sales-growth forecast and currency exposure.
- How working-capital needs, the pension contribution and planned capital spending affect cash generation and year-end liquidity.
- Debt levels, facility availability and covenant compliance, including any limits on dividends, investments or additional borrowing.
- Whether margin improvement continues across segments, especially given Light Vehicle Driveline cost and pricing pressure and regional market variation.
- Developments in asbestos and other legal exposures, the disputed Structural Products sale escrow, and the proposed business divestiture.
- The effect of preferred-stock dividends and potential conversion dilution on common-stockholder earnings; Q1 diluted weighted-average shares were 214.7 million versus 147.5 million basic shares.