Dana Holding Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Figures are in millions of dollars except per-share amounts. Dana supplies driveline, sealing and thermal-management products to global vehicle manufacturers.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,468 | $1,637 | $4,685 | $5,035 |
| Gross margin | $213 (14.5%) | $240 (14.7%) | $677 (14.5%) | $722 (14.3%) |
| Income before interest and taxes | $76 | $151 | $332 | $400 |
| Net income attributable to Dana | $119 | $90 | $241 | $210 |
| Diluted EPS | $0.75 | $0.52 | $1.48 | $1.20 |
| Adjusted EBITDA | $167 | $198 | $523 | $568 |
| Operating cash flow | $138 | $104 | $266 | $327 |
| Free cash flow | $68 | $61 | $74 | $158 |
Q3 revenue declined 10% year over year; nine-month revenue declined 7%. For the first nine months, foreign-currency translation reduced sales by $413 and the Venezuela divestiture by $69, partly offset by $132 of organic sales growth. Q3 adjusted EBITDA declined to $167 from $198. Nine-month capital expenditures were $192, compared with $169 a year earlier.
At September 30, cash and cash equivalents were $817 and marketable securities were $157. Reported long-term debt was $1,566; current notes payable, including current debt, were $40. Total global liquidity was $1,312, including $349 of revolving-facility availability. There were no revolver borrowings and $40 of letters of credit used the facility. The company reported compliance with debt covenants. Cash declined from $1,121 at year-end 2014; financing cash use included $245 of share repurchases and $27 of common dividends.
Material changes and unusual items
- Q3 net income benefited from a $77 income-tax benefit, including a $100 release of U.S. deferred-tax valuation allowance. Excluding that release, the company reported a 51% Q3 effective tax rate. The filing says up to $400 of U.S. valuation allowances could potentially be released in the next 12 months, subject to future profitability and other factors.
- A $36 impairment charge eliminated the carrying value of an intangible asset tied to supplier SIFCO after SIFCO stopped production and did not comply with court orders to resume supply. The filing also reports a $6 increase in environmental expense related to a former Argentine foundry.
- Q3 SG&A included a one-time $5 executive separation and transition expense. The prior-year comparison included higher other income, including Venezuela currency-related gains and other items.
- The company completed its Venezuela operations divestiture in January 2015. It also redeemed the remaining $55 of its 6.5% notes due 2019 during the first quarter, recording a $2 extinguishment loss.
Outlook, management commentary and risks
Management lowered its 2015 outlook from July estimates: sales to approximately $6,050 from $6,200–$6,300; adjusted EBITDA to approximately $675 from $720–$730; and free cash flow to approximately $170. The outlook included about $280 of capital spending, approximately $90 each for net interest and cash taxes, about $20 of restructuring expenditures, and approximately $15 of pension contributions. Management cited weaker North American commercial-vehicle demand, supply-chain constraints and softer off-highway demand, alongside continued currency headwinds. Full-year 2015 currency translation was expected to reduce sales by approximately $500.
- SIFCO supply exposure: SIFCO was the only practical near-term source for certain parts. Dana warned that, absent resumed production or another solution, it could be unable to meet customer requirements and sales would be adversely affected. SIFCO-supplied products represented $225 of Commercial Vehicle sales in 2014; Dana’s legal remedy prospects were described as uncertain.
- Markets: Management expected South American vehicle markets to remain weak into 2016. It also lowered production expectations for several off-highway and Asia-Pacific commercial-vehicle markets. Weaker demand in Brazil contributed to restructuring actions.
- Affiliate investment: DDAC’s results weakened amid lower Chinese commercial-vehicle production. Dana said a future impairment could result if the decline in value of its investment is determined to be other than temporary; approximately $51 of the $126 investment represented value above DDAC’s net-asset carrying value.
- Pensions: Management estimated a possible $35 actuarial loss in other comprehensive income at year-end under stated assumptions, with funded status around 90%; it expected no minimum U.S. pension contribution for 2016.
- Contingencies: Dana reported about 25,000 pending asbestos claims, a $79 liability accrual and a $51 related insurance-recovery asset. Environmental liabilities were $11. The filing states that other pending legal matters were not expected, based on current information, to have a material adverse effect. A Brazilian antitrust investigation concerns a former business divested in 2004; the outcome is uncertain, and Dana did not then expect a material liability.
Management said liquidity and operating cash flow should be sufficient for anticipated needs over the next 12 months. However, $144 of cash and marketable securities held by a subsidiary could be transferred only with independent-board approval, and other foreign cash faced regulatory, tax or practical repatriation constraints. Disclosure controls were assessed as effective, with no material change in internal control reported.
Key facts for investors to verify
- Whether SIFCO resumed supply or Dana secured alternative sources, and the resulting customer, revenue and margin effects.
- Whether actual 2015 sales, adjusted EBITDA, free cash flow, capital spending and currency impacts matched management’s revised outlook.
- How much of Q3 and year-to-date earnings depended on the $100 tax valuation-allowance release, and whether further releases occur.
- Cash availability and use, debt maturities and covenant headroom, especially given repurchases and declining cash balances.
- Developments in the DDAC investment, pension funding, environmental remediation and asbestos claims and insurance recoveries.