DAN

Dana Corporation 10-Q Summary: Period Ended September 30, 2002

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, and the nine months ended on that date. Dana Corporation is a global manufacturer of automotive and heavy vehicle components. The reporting period is significantly impacted by the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, which discontinued goodwill amortization and required an immediate impairment test, resulting in a substantial non-cash write-down.

Key Financial Metrics

Material Changes vs. Prior Period

• Accounting Change Impact: The adoption of SFAS No. 142 resulted in a $289 million goodwill impairment charge (net of $69 million tax benefit) recorded as a change in accounting. This caused a reported net loss of $173 million for the nine-month period, masking an underlying operating profit of $47 million.
• Revenue Trends: Net sales increased 7% in the third quarter compared to the prior year ($2,566 million vs. $2,399 million) but were flat for the nine-month period ($7,876 million vs. $7,898 million). Organic growth was offset by divestitures and adverse currency fluctuations (notably the Argentine peso and Brazilian real).
• Restructuring: Restructuring expenses increased significantly to $130 million for the nine months ended September 30, 2002, compared to $38 million in the prior year. This included charges for closing 13 additional facilities and reducing the workforce.
• Liquidity: Cash and cash equivalents increased from $199 million at year-end 2001 to $447 million at September 30, 2002, driven by strong operating cash flows and proceeds from divestitures ($258 million).

Guidance, Outlook, and Risks

• Capital Spending: Management expects full-year 2002 capital spending to approximate $350 million, an increase from the original estimate but lower than the $425 million spent in 2001.
• Divestitures: The company plans to sell a substantial majority of Dana Credit Corporation (DCC) businesses. Recent sales include DCC subsidiaries and the Real Estate Services Group. Additional divestitures announced in October 2002 include Boston Weatherhead and Tekonsha Engineering.
• Market Outlook: North American light vehicle production is estimated to exceed 16 million units in 2002. Heavy truck demand is expected to soften in the fourth quarter following pre-buying activity for new emission standards. The automotive aftermarket is expected to remain flat.
• Risks and Contingencies:
  • Asbestos Litigation: Approximately 116,000 asbestos-related claims were outstanding as of September 30, 2002. The company has accrued $121 million for these liabilities, with $106 million expected to be recoverable from insurers.
  • Debt Covenants: The company is subject to financial covenants regarding debt-to-equity and EBITDA ratios. While compliant as of September 30, 2002, future non-compliance could trigger defaults.
  • Pension Obligations: Declining interest rates and lower asset returns are expected to increase pension obligations and expenses in 2003, potentially resulting in a charge to equity of $180-$220 million.

Investor Verification Checklist

• Verify the sustainability of operating cash flows ($360 million YTD) given the significant restructuring charges and future pension funding requirements.
• Confirm the progress and closing conditions of the planned divestitures of DCC and other non-core assets (Boston Weatherhead, Tekonsha) to assess debt reduction capabilities.
• Monitor the resolution of the 116,000 outstanding asbestos claims and the adequacy of insurance recoveries.
• Assess the impact of steel price increases on future cost of sales and the ability to pass these costs to customers.
• Review the company's compliance with debt covenants, particularly the net senior debt to tangible net worth ratio, in light of potential future earnings volatility.