Dana Holding Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in U.S. dollars, millions, except per-share data. Comparisons are with 2011. Segment EBITDA, adjusted EBITDA and free cash flow are non-GAAP measures.
Business context
Dana supplies driveline, sealing and thermal-management products to vehicle manufacturers worldwide through Light Vehicle Driveline, Power Technologies, Commercial Vehicle and Off-Highway segments. The quarter reflected lower sales, particularly in South American and North American commercial vehicles, and unfavorable currency translation. The filing presents the former Structural Products operation as discontinued operations after its retained customer contract ended in August 2012.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,715 | $1,940 | $5,615 | $5,649 |
| Gross margin | $238 (13.9%) | $234 (12.1%) | $777 (13.8%) | $682 (12.1%) |
| Income from continuing operations before interest and taxes | $117 | $160 | $378 | $299 |
| Net income attributable to parent | $56 | $110 | $212 | $148 |
| Net income available to common stockholders | $48 | $102 | $189 | $125 |
| Diluted earnings per share | $0.26 | $0.51 | $0.99 | $0.69 |
| Segment EBITDA | $190 | $208 | $629 | $601 |
- Revenue and margins: Q3 sales fell 12%; currency reduced sales by $120 and organic change reduced them by $100. Cost savings, pricing and material-cost recovery lifted gross margin despite lower volumes. Nine-month sales were nearly flat, with organic growth of 4% offset by $281 of adverse currency effects.
- Profit drivers: Q3 parent-attributable earnings declined $54. A major comparator was the $60 GETRAG divestiture gain included in Q3 2011 other income. Nine-month earnings improved despite lower sales, supported by better gross margin and lower restructuring charges.
- Cash flow: Nine-month operating cash flow was $121, versus $186; capital expenditures were $113, versus $127. Working capital used $116. Dana contributed $198 to U.S. pension plans during the period, including a one-time $150 contribution. The filing’s full-year free-cash-flow outlook excludes that one-time contribution.
- Balance sheet and debt: At September 30, cash and equivalents were $940 and marketable securities were $64. Notes payable and current debt were $123; long-term debt was $813. Pension and postretirement obligations were $557, down from $762 at year-end 2011. Current assets were $3,169 and current liabilities $1,529.
- Liquidity: Reported global liquidity was $1,397, including $915 available cash, $418 of additional credit availability and $64 of marketable securities. The $418 comprised $327 under the U.S. revolver and $91 under the European receivables facility; neither facility had borrowings. Dana was in compliance with debt covenants.
Material changes, outlook and management commentary
- Q3 segment EBITDA fell to $190 from $208. Commercial Vehicle EBITDA declined $16 to $45, mainly due to lower volumes; Off-Highway increased $6 to $48. For nine months, segment EBITDA rose to $629 from $601.
- Management lowered 2012 sales guidance to $7.2–$7.3 billion from $7.475–$7.575 billion, citing weaker second-half commercial-vehicle demand and currency. Adjusted EBITDA guidance was $780–$800, with management expecting margins around 11% through cost, restructuring and pricing actions.
- Full-year free-cash-flow guidance remained above $200, excluding the $150 one-time U.S. pension contribution. Expected capital spending was reduced to $160–$170 from $196 in 2011.
- Market outlook was mixed: North American light-vehicle production guidance was raised to 14.8–15.1 million units; Class 8 truck guidance was reduced to 265,000–275,000. Europe remained weak, South American commercial-vehicle production was sharply lower, and management expected off-highway markets to be flat to up 5%.
- Dana entered a Fallbrook Technologies alliance and exclusive license arrangement for certain continuously variable planetary technology, for $15 in consideration. It also completed the sale of its leisure, all-terrain and utility-vehicle business in August.
- On October 25, 2012, after quarter-end, the board approved a share repurchase program of up to $250, subject to market conditions and other considerations.
Risks, contingencies and unusual items
- Management cited uncertain global economic conditions, currency movements, weaker vehicle demand and regional market volatility. Non-U.S. cash is subject in some countries to repatriation restrictions or tax costs.
- Asbestos liabilities were accrued at $80, with a separate $51 asset for expected insurance recoveries. Dana reported approximately 25,000 active pending claims and relies on estimates of future claims and insurer capacity.
- About $12 related to the Structural Products sale remained in escrow amid buyer indemnification claims. Dana stated it did not expect any indemnification obligation to be material. Dana also guaranteed certain Metalsa-assigned facility leases, including approximately $6 in annual payments through June 2025.
- Dana stated that alleged engine-cooler quality issues involving a foreign subsidiary and a Ford complaint concerning the former Structural Products business were not expected to result in material liabilities. It also stated that other pending legal matters were not expected to have a material adverse effect.
- Management noted that lower year-end pension discount rates could increase pension obligations and produce an actuarial loss in other comprehensive income; the ultimate effect depended on year-end valuations. The filing estimated a possible release of $52 in tax valuation allowances over the next 12 months.
Important facts for investors to verify
- Whether lower sales guidance and the roughly 11% adjusted EBITDA margin expectation were achieved, especially given commercial-vehicle weakness.
- How much of operating cash flow and liquidity is repeatable, considering pension contributions, working-capital demands and the location and availability of non-U.S. cash.
- The basis and potential changes in asbestos reserves and insurance recoveries, and the outcome of the approximately $12 escrow dispute and product-quality claims.
- The final cost, execution and expected commercial returns of the Fallbrook alliance, restructuring programs and proposed share repurchases.
- The effect of year-end pension assumptions and funding needs on obligations, comprehensive income and future cash requirements.