Dana Holding Corporation — Q3 2014 Form 10-Q
Business and period: Global supplier of driveline, sealing and thermal-management products. This filing covers the quarter and nine months ended September 30, 2014; amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1.637 billion | $1.669 billion | $5.035 billion | $5.145 billion |
| Gross margin | $240 million; 14.7% | $235 million; 14.1% | $722 million; 14.3% | $708 million; 13.8% |
| Income from continuing operations | $94 million | $72 million | $224 million | $217 million |
| Net income | $93 million | $71 million | $220 million | $217 million |
| Net income attributable to parent | $90 million | $68 million | $210 million | $202 million |
| Adjusted EBITDA (non-GAAP) | $198 million | $198 million | $568 million | $571 million |
| Operating cash flow | Not separately stated in the comparative cash flow statement | $302 million | $293 million | |
| Free cash flow (non-GAAP) | $61 million | $54 million | $158 million | $170 million |
Q3 diluted EPS was $0.52, compared with a loss of $1.16 in Q3 2013. The prior-year common-stockholder result included a $232 million preferred-stock redemption premium; nine-month 2013 diluted EPS was a loss of $0.35, versus $1.20 in 2014. Q3 segment EBITDA was $194 million, down from $198 million; nine-month segment EBITDA was $562 million, down from $574 million.
At September 30, cash and cash equivalents were $1.103 billion and marketable securities were $169 million. Total reported global liquidity was $1.576 billion, including $326 million of revolver availability. Debt was approximately $1.609 billion, comprising $29 million of current notes payable/current debt and $1.580 billion of long-term debt. The company reported compliance with its debt covenants. Nine-month capital expenditures were $144 million, compared with $123 million a year earlier.
Material changes and drivers
- Sales fell 1.9% in Q3 and 2.1% for the nine-month period. Currency reduced sales by $35 million in Q3 and $107 million year to date; organic sales were roughly flat in Q3 and down $3 million year to date.
- Gross margin improved despite lower sales, supported by supplier and other cost savings. Nine-month cost savings from supplier rationalization and related initiatives were $46 million; higher commodities and warranty costs partly offset the savings.
- Commercial Vehicle EBITDA declined to $47 million in Q3 from $52 million and to $138 million for nine months from $154 million, reflecting warranty, commodity and supplier-disruption costs. Off-Highway sales weakened, while its EBITDA was broadly stable.
- Cash declined $153 million from year-end 2013. Nine-month operating cash flow was partly absorbed by $120 million of working-capital use, $144 million of capital spending and $219 million of financing cash outflow.
- All remaining Series B preferred stock was converted into common shares during Q3. Dana repurchased 8.3 million common shares for $181 million during the first nine months and had $390 million remaining under its repurchase authorization at quarter-end.
Outlook, commentary and risks
- Management’s 2014 outlook was sales of approximately $6.65 billion, adjusted EBITDA of approximately $745 million, and free cash flow of $285–$295 million. The EBITDA outlook was reduced from $760 million; management expected EBITDA margin to be comparable to or slightly above 2013. Capital spending was expected to be about $230 million.
- Management raised its North American Class 8 production forecast to 290,000–300,000 units, but lowered South American light-engine and medium/heavy-truck expectations and global agriculture and construction/mining outlooks. European conditions had weakened in the second half.
- Venezuela remained highly uncertain: foreign-exchange controls constrained imports and operations, and the SICAD rate was used to remeasure bolivar-denominated balances. Dana recorded a $17 million first-quarter remeasurement charge and a further $3 million third-quarter charge. Management estimated a further pre-tax charge of about $12 million if the exchange rate moved to 20 bolivars per U.S. dollar. Venezuela and Argentina net asset exposures were approximately $65 million and $33 million, respectively.
- Management expected a fourth-quarter pension settlement charge from a voluntary lump-sum program. At an assumed 60% acceptance rate and specified actuarial assumptions, the estimated noncash charge was approximately $30 million; the actual amount depended on year-end assumptions and participant elections.
- The company corrected a nonmaterial error related to 2008 fresh-start accounting. The correction reduced pension and postretirement obligations by $17 million, reduced goodwill by $3 million, reduced cost of sales by $5 million and credited other income by $6 million.
- Contingencies include approximately 25,000 pending asbestos claims, a disputed Sypris supply-agreement arbitration, and guarantees of certain former Structural Products business leases. Dana stated that it did not expect pending proceedings, beyond accrued amounts, to have a material adverse effect. Its supplier SIFCO entered judicial reorganization; Dana reported no expected significant supply disruption at the time.
Important facts for investors to verify
- Whether the $6.65 billion sales, $745 million adjusted EBITDA and $285–$295 million free-cash-flow outlooks were achieved; these are management estimates and include non-GAAP measures.
- How much of reported liquidity was practically accessible: $160 million held by a subsidiary required independent-board approval for transfer, and some non-U.S. cash faced repatriation restrictions.
- Subsequent Venezuelan exchange-rate, operating and cash-repatriation developments, including the outstanding $30 million of requests for official-rate settlement.
- The final pension settlement charge and funded status after participant elections and year-end valuation.
- Developments in the Sypris dispute, SIFCO reorganization, asbestos claims and other legal contingencies.