Dana Holding Corporation (NYSE: DAN) — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; dollars in millions except per-share amounts. The filing also reports fourth-quarter results. Dana is a global supplier of driveline, sealing and thermal-management products, operating through Light Vehicle Driveline, Commercial Vehicle, Off-Highway and Power Technologies.
Financial performance
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $7,224 | $7,544 |
| Gross margin | $974; 13.5% of sales | $897; 11.9% of sales |
| Income from continuing operations before interest and taxes | $448 | $385 |
| Income from continuing operations | $315 | $240 |
| Net income attributable to Dana’s parent company | $300 | $219 |
| Net income available to common stockholders | $269 | $188 |
| Diluted EPS | $1.40 | $1.02 |
| Adjusted EBITDA (non-GAAP) | $781 | $765 |
| Net cash from operating activities | $339 | $370 |
| Capital expenditures | $164 | $196 |
| Free cash flow (non-GAAP) | $175 | $174 |
Sales fell about 4%, largely because currency movements reduced reported revenue by $322; organic sales declined $12. Material recovery and pricing actions added about $108 to sales. Higher gross margin reflected cost reductions, favorable program roll-offs and pricing/material recovery. SG&A rose to $424 (5.9% of sales), while restructuring charges declined to $47 from $82. Interest expense was $84 versus $79.
Fourth-quarter sales were $1,609, gross margin was $197 and net income was $93, compared with sales of $1,895, gross margin of $215 and net income of $75 in fourth-quarter 2011. Fourth-quarter 2012 net income included $54 of income-tax valuation allowance releases.
Segment EBITDA was $263 for Light Vehicle Driveline, $137 for Power Technologies, $199 for Commercial Vehicle and $189 for Off-Highway. Off-Highway improved by $23; Commercial Vehicle declined by $19, principally due to lower volumes in South America.
Balance sheet, debt and liquidity
At year-end, cash and cash equivalents were $1,059 and marketable securities were $60. Dana reported global liquidity of $1,435, including $1,035 of available cash and $340 of additional credit availability. No borrowings were outstanding under its revolving or European receivables facilities, although letters of credit used $71 of the revolving facility.
The debt schedule reported $859 of total debt principal, including $400 of 6.50% Senior Notes due 2019 and $350 of 6.75% Senior Notes due 2021. The balance sheet separately shows $101 of notes payable, including current debt, and $803 of long-term debt. Total assets were $5,144; total liabilities were $3,196. Current assets were $2,953 and current liabilities $1,310. Dana said it was in compliance with debt covenants.
Cash flow from operations decreased to $339, partly reflecting $212 of U.S. pension contributions and higher income-tax payments. The company made a voluntary $150 U.S. pension contribution in 2012. Its $175 of free cash flow is a company-defined non-GAAP measure.
Material changes and unusual items
- Sales declined from 2011 despite stronger demand in some markets; foreign exchange was the main reported-revenue headwind. South America was notably weak, while Asia Pacific sales increased.
- Income-tax expense fell to $51 from $87. The 2012 result included $54 in valuation allowance releases, principally from Canada and the U.K.
- Structural Products operations ceased in August 2012 and were reported as discontinued operations; 2012 discontinued-operations loss was nil, versus $8 in 2011.
- Dana entered a Fallbrook Technologies alliance and exclusive technology license, with $12 paid in 2012 and $8 remaining to be paid in the first half of 2013. It also divested its leisure/all-terrain vehicle business for $8.
- Dana began a two-year, up-to-$250 share repurchase program in October 2012 and repurchased $15 of shares in the fourth quarter. It declared common dividends of $0.05 per share each quarter in 2012.
- A $7 fourth-quarter adjustment to cumulative translation adjustments corrected a prior cash overstatement; a $3 income credit corrected a deferred-compensation accrual. Management said these corrections were not material to current or prior-period results.
Outlook, risks and contingencies
For 2013, management forecast sales of approximately $7,100, adjusted EBITDA of $800–$820 and free cash flow of $240–$260. It expected cost-reduction, restructuring and pricing actions to support EBITDA growth despite program roll-offs and currency pressure. Planned 2013 capital expenditures were $180–$200; cash taxes, $125–$135; restructuring costs, $45–$55; and interest requirements, about $70. Pension contributions were expected to be around $60, including a planned $40 voluntary U.S. contribution.
Management’s market outlook was mixed: North American light-vehicle production was forecast at 15.9–16.1 million units; European light-vehicle production was expected flat to down 6%; and Asia Pacific light-vehicle production flat to up 3%. It cited economic uncertainty, particularly in Europe and commercial-vehicle markets.
- Customer and market concentration: Ford accounted for about 17% of 2012 sales; the ten largest customers accounted for about 54%. A loss of major programs or customers could materially affect results.
- Currency and country exposure: Foreign operations generated a substantial share of sales. Currency restrictions in Venezuela and Argentina, and exchange-rate movements, may constrain cash access or reduce reported results. Following a February 2013 Venezuelan currency devaluation, Dana expected an approximately $7 charge in first-quarter 2013, subject to further assessment.
- Pensions: U.S. defined-benefit plans had a $327 funded-status deficit, and Dana reported $560 of unrecognized U.S. pension actuarial losses. The filing notes sensitivity to discount-rate and asset-return assumptions; a 25-basis-point decrease in the U.S. discount rate would increase the pension liability by about $56. A multiemployer plan was not fully funded, creating possible contribution or withdrawal-liability exposure.
- Claims and contingencies: Dana had about 25,000 active pending asbestos claims, with an $83 accrued liability and a $50 recorded insurance recovery asset. Environmental liabilities were $11. Management did not expect pending litigation to have a material adverse effect, but outcomes remain uncertain.
- Other operating risks: Commodity-price recovery may lag cost increases; certain components depend on single-source suppliers. Risks also include labor disruptions, product warranty/liability claims, regulatory changes, cyber incidents and execution of cost reductions and joint ventures.
- Tax and asset estimates: Dana maintained significant deferred-tax valuation allowances and said more than $800 could potentially be released in the next twelve months, subject to sufficient evidence. It also identified possible impairment exposure for approximately $10 of Argentina business net assets depending on strategic decisions and government acceptance.
PricewaterhouseCoopers issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2012.
Important facts for investors to verify
- Whether 2013 sales, adjusted EBITDA and free-cash-flow guidance was achieved, and how much depended on non-GAAP adjustments and assumed market conditions.
- How much of the 2012 earnings improvement was recurring operational progress versus the $54 tax valuation release and other unusual items.
- The cash accessibility and potential tax cost of Dana’s substantial non-U.S. cash, alongside the company’s debt maturities and planned capital, pension and restructuring spending.
- Developments in asbestos claims, pension funding and multiemployer-plan exposure, including changes to reserves, recoveries or required contributions.
- The outcome and financial impact of the Venezuelan devaluation, Argentina asset review, and the escrow dispute over approximately $12 from the Structural Products sale.