Dana Holding Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and reporting period
Dana supplies driveline, sealing and thermal-management products to global light-vehicle, commercial-vehicle and off-highway markets. Its reporting segments are Light Vehicle, Commercial Vehicle, Off-Highway and Power Technologies. The filing reports about 23,500 employees and operations in 26 countries.
Financial results and material changes
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,710 | $1,800 | $3,398 | $3,476 |
| Gross margin | $248; 14.5% | $259; 14.4% | $482; 14.2% | $473; 13.6% |
| Income from continuing operations | $92 | $97 | $130 | $145 |
| Net income | $90 | $96 | $127 | $146 |
| Net income available to common stockholders | $84 | $85 | $115 | $119 |
| Adjusted EBITDA (non-GAAP) | $205 | $215 | $370 | $373 |
| Operating cash flow | Not separately stated in this comparison | Not separately stated in this comparison | $193 | $187 |
| Free cash flow (non-GAAP) | Not separately stated in this comparison | Not separately stated in this comparison | $97 | $116 |
Q2 sales declined $90 million (5%) year over year, with currency effects reducing sales by $28 million and weaker organic sales by $62 million. Lower South American and off-highway demand were prominent factors. H1 sales decreased $78 million, mostly from currency effects; currency-adjusted sales were down $6 million.
Q2 gross margin rate edged up to 14.5% from 14.4%; H1 improved to 14.2% from 13.6%. Cost reductions and pricing/material recovery helped, but higher warranty and commodity costs, weaker volumes and foreign-exchange impacts remained pressures. Q2 interest expense increased to $29 million from $21 million; H1 rose to $59 million from $42 million, reflecting higher average debt following the 2013 notes issuance.
Q2 diluted net income per share was $0.49 versus $0.44; basic net income per share was $0.54 versus $0.58. H1 diluted EPS was $0.68 versus $0.63, while basic EPS was $0.75 versus $0.81. Preferred conversions changed the diluted share count materially, so per-share comparisons are affected by capital structure.
At June 30, cash and cash equivalents were $1,172 million, marketable securities $168 million, and total assets $5,212 million. Current liabilities were $1,360 million. Debt was approximately $1,605 million, based on balance-sheet current notes payable and long-term debt. Dana reported global liquidity of $1,626 million, including $1,149 million available cash after deposits, $309 million of revolver availability and $168 million of marketable securities. No revolver borrowings were outstanding; $48 million was used for letters of credit. Some cash is restricted or difficult to access, including $164 million held by a subsidiary subject to independent-board approval and cash subject to foreign-exchange or repatriation restrictions.
Six-month cash flow from operations was $193 million; capital expenditures were $96 million, yielding reported free cash flow of $97 million, down from $116 million. Working capital used $96 million of cash. Financing activities used $152 million, including $113 million of common-share repurchases and $20 million of net long-term debt repayments. Cash declined by $62 million during the half.
Outlook, management commentary and risks
- 2014 outlook: sales of approximately $6.8 billion; adjusted EBITDA of approximately $760 million; free cash flow of $275–$295 million. Management expected adjusted EBITDA margin to be comparable to or slightly above 2013. Free cash flow outlook included approximately $230 million of capital spending, $130 million of cash taxes, $30 million of restructuring expenditures and $70 million of net interest cash use.
- Management raised its 2014 North American full-frame truck and Class 8 production outlook. It lowered South American vehicle production expectations and agricultural-equipment outlook, citing economic weakness; it also described off-highway demand as weaker.
- Venezuela is a significant uncertainty: customer production suspensions and foreign-exchange controls curtailed operations and restricted imports and cash access. Dana changed its translation rate from the official 6.3 bolivars per U.S. dollar to SICAD at 10.7 at March 31, recognizing a $17 million Q1 charge. Q2 included $7 million of gains from official-rate settlements and a $6 million gain from SICAD 2 transactions. Management said future performance and recoverability of its $58 million net investment were highly uncertain.
- Commodity inflation increased costs by approximately $16 million in Q2 and $26 million in H1 versus the prior-year periods. Pricing and material recovery added about $14 million to Q2 sales and $13 million to H1 sales, but recoveries may lag cost increases.
- Potential tax item: Dana said it was reasonably possible it could release up to $675 million of U.S. deferred-tax valuation allowances within the next 12 months if sustained profitability and forecasts supported release. This was not assured; the company retained the allowance at June 30.
- Contingencies include approximately 25,000 active asbestos claims, with an $82 million accrued liability and a $52 million recorded insurance-recovery asset. Dana also disclosed a dispute with supplier Sypris over an alleged long-term supply agreement and SIFCO’s judicial reorganization filing; management did not anticipate significant supply disruption from SIFCO at that time. Dana stated that other pending legal matters were not expected to have a material adverse effect.
- Dana had $21 million of restructuring accruals at June 30 and estimated $22 million of future cost to complete pending initiatives. It expected approximately $8 million of restructuring cash expenditures in the remainder of 2014 and $13 million thereafter. The company was in compliance with debt covenants.
- The board’s $1 billion share-repurchase authorization had approximately $58 million remaining at June 30. Dana declared common dividends of $0.05 per share in each of the first two quarters.
Most important facts for investors to verify
- Whether 2014 sales, adjusted EBITDA and free-cash-flow guidance was achieved, noting these are management estimates and two measures are non-GAAP.
- How Venezuela’s operating conditions, exchange rates, pending official-rate requests and cash restrictions affected earnings and the recoverability of the company’s investment.
- Whether working-capital needs, capital spending and cash generation developed consistently with the $275–$295 million free-cash-flow outlook.
- Debt levels, revolver availability, covenant compliance, and the extent to which reported liquidity was practically accessible.
- Whether warranty and commodity costs, restructuring charges, asbestos exposures and other contingencies changed materially after June 30.
- Whether U.S. profitability supported any release of the deferred-tax valuation allowance; the potential $675 million release was conditional, not a committed benefit.