Dana Holding Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparative periods ended September 30, 2010. Amounts are in millions of dollars except per-share data. Dana supplies driveline, power technology, and service-part products to vehicle and off-highway manufacturers.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,952 | $1,516 | $5,685 | $4,550 |
| Gross margin | $233; 11.9% | $178; 11.7% | $681; 12.0% | $487; 10.7% |
| Income before income taxes | $135 | $42 | $231 | $30 |
| Net income attributable to Dana | $110 | $46 | $148 | $24 |
| Net income available to common stockholders | $102 | $38 | $125 | $0 |
| Diluted EPS | $0.51 | $0.22 | $0.69 | Not reported as a positive amount |
| Segment EBITDA | $208 | $160 | $602 | $445 |
| Adjusted EBITDA | $200 | $148 | $582 | $410 |
Operating cash flow was $186 for the first nine months, versus $217 in 2010. Capital expenditures were $127, versus $62. Working capital used $183 of cash, chiefly as higher sales increased receivables and inventory. Cash and cash equivalents fell to $851 from $1,090 at year-end 2010; marketable securities were $50.
At September 30, current debt and notes payable were $65 and long-term debt was $839. Dana reported $750 principal amount of senior notes outstanding. Global liquidity was $1,317, comprising available cash of $820, marketable securities of $50, and $447 of additional borrowing availability. The company reported compliance with debt covenants and no revolver borrowings, with $85 used for letters of credit.
Material changes and key drivers
- Sales increased 29% year over year in Q3 and 25% for the nine-month period. Management attributed the nine-month increase to $775 of organic growth, $207 of favorable currency effects, and $153 from net acquisitions and divestitures.
- Nine-month gross margin rose to 12.0% from 10.7%, reflecting higher production and fixed-cost absorption, restructuring and cost-reduction benefits, and pricing; higher commodity costs partly offset the gains.
- Nine-month net income attributable to Dana rose to $148 from $24. Results included a $60 gain from selling the GETRAG interests and a $53 debt-extinguishment loss. The Q3 tax provision was $29, compared with a $4 benefit in Q3 2010; the prior-year period included a $16 Brazil valuation-allowance reversal.
- Commercial Vehicle sales benefited from SIFCO and the Axles India acquisition; Off-Highway sales and EBITDA also grew strongly. Power Technologies Q3 EBITDA declined to $31 from $33, principally due to higher material costs.
- In January, Dana refinanced its term debt with $750 of senior notes: $400 at 6.50% due 2019 and $350 at 6.75% due 2021. The company also extended and reduced its revolving facility to $500.
Outlook, commentary, and risks
- Management maintained its 2011 outlook for sales above $7.6 billion, adjusted EBITDA of approximately $780, free cash flow above $200, and capital spending of $185–$225. Free cash flow was expected to benefit from a significant working-capital release in Q4.
- Management cited improving vehicle and off-highway demand, while noting risks from uncertain economic conditions, commodity-cost recovery lags, foreign exchange, and uneven regional production. The filing’s 2011 market outlook included weaker Asia-Pacific truck production and expected stable North American production for the rest of the year.
- Restructuring charges were $65 for the first nine months. Q3 plans included workforce reductions; approximately 1,200 employee reductions were expected to be completed over two years. Estimated remaining restructuring costs were $44.
- U.S. pension obligations are sensitive to interest rates and asset performance. Dana estimated 2012 minimum U.S. pension contributions of $62, versus $30 for 2011; actual year-end valuations could change the impact.
- Dana had approximately 26,000 active pending asbestos claims and accrued $93 for related indemnity and defense costs, with a $50 insurance-recovery asset. The company also disclosed environmental liabilities of $12 and ongoing ordinary-course legal matters; management did not expect unaccrued liabilities to have a material adverse effect.
- Approximately $11 held in escrow from the prior Structural Products sale remained disputed; Dana said it did not currently expect any indemnification obligation to be material. Dana also recorded a $5 impairment related to a business it was negotiating to sell.
Important facts for investors to verify
- Whether the expected Q4 working-capital release supports the full-year free-cash-flow outlook, given $183 of working-capital cash use year to date.
- How much of reported earnings and EBITDA improvement is recurring versus attributable to the $60 GETRAG gain and other unusual items.
- Whether commodity-cost recovery, pricing, and production trends sustain gross margins and the $780 adjusted EBITDA outlook.
- The final purchase accounting and ongoing contribution from SIFCO, DDAC, and Axles India, including DDAC’s contingent consideration exposure.
- Potential pension funding changes, asbestos claim developments and insurance recoveries, and resolution of the Structural Products escrow dispute.
- Accessibility of cash held outside the U.S. and at less-than-wholly-owned subsidiaries, and continued availability under borrowing facilities.