Dana Holding Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Amounts are in millions of U.S. dollars unless stated otherwise. The filing also provides unaudited fourth-quarter results.
Business context
Dana supplies driveline, sealing and thermal-management products to vehicle and equipment manufacturers. Its four segments are Light Vehicle, Commercial Vehicle, Off-Highway and Power Technologies. The company operated in 26 countries, employed approximately 23,000 people and generated 62% of sales outside the U.S. Ford was its largest customer, representing approximately 18% of 2013 sales; the ten largest customers represented about 56%.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $6,769 | $7,224 |
| Gross margin | $920; 13.6% of sales | $974; 13.5% of sales |
| Income from continuing operations | $261 | $315 |
| Net income | $260 | $315 |
| Net income attributable to parent | $244 | $300 |
| Net income available to common shareholders | Loss of $13; diluted EPS $(0.09) | $269; diluted EPS $1.40 |
| Adjusted EBITDA (non-GAAP) | $745 | $781 |
| Cash from operations | $577 | $339 |
| Capital expenditures | $209 | $164 |
| Free cash flow (non-GAAP) | $368 | $175 |
| Cash and marketable securities | $1,366 | $1,119 |
| Total debt | $1,624 | $904 |
Sales declined about 6%, reflecting lower market volumes, scheduled light-vehicle program roll-offs, currency effects and divestitures. Gross margin percentage edged up, but adjusted EBITDA declined. Higher interest expense and tax expense contributed to lower continuing-operations income. The common-shareholder loss primarily reflects a $232 preferred-stock redemption premium; Dana reported positive net income and parent-company income.
At year-end, reported global liquidity was $1,574, including $1,233 available cash, $110 of marketable securities and $231 of revolver availability. Some cash is held outside the U.S. and may be subject to transfer restrictions; access to $107 held by Dana Companies, LLC was uncertain. Dana had no revolver borrowings and reported compliance with financing covenants.
In July 2013 Dana issued $750 of senior unsecured notes, increasing long-term debt. It used proceeds in part to redeem all Series A preferred stock for $474 and fund a $200 accelerated share repurchase. Dana also repurchased common shares and paid quarterly dividends of $0.05 per share.
Material changes and fourth-quarter results
- Light Vehicle sales fell to $2,549 from $2,743, including $186 from program roll-offs; segment EBITDA was $242 versus $263.
- Commercial Vehicle sales fell to $1,860 from $1,960; segment EBITDA was $194 versus $199, while margin improved to 10.4% from 10.2%.
- Off-Highway sales declined to $1,330 from $1,509 and EBITDA to $163 from $189, mainly due to weaker demand, customer in-sourcing and a prior-year divestiture.
- Power Technologies sales increased to $1,030 from $1,012 and EBITDA to $150 from $137; margin improved to 14.6% from 13.5%.
- Unaudited fourth-quarter 2013 sales were $1,624, gross margin was $212 and net income was $43. Net income attributable to the parent was $42; common diluted EPS was $0.23. Fourth-quarter 2012 sales were $1,609, gross margin $197 and net income $93.
Outlook, commentary and risks
For 2014, management forecast sales of $6,800–$6,900, adjusted EBITDA of $760–$770 and free cash flow of $275–$295. The free-cash-flow outlook included capital spending of $210–$230, cash taxes of about $130, restructuring expenditures of about $40 and net interest cash outflow of around $70. Management expected broadly stable or modestly improving markets, continued cost and pricing benefits, and stronger sales in the second half. New business awarded through 2013 was expected to add $560 of sales over 2014–2016, mainly in the final two years. These are forward-looking estimates, not guarantees.
- Key exposures include vehicle-production cycles, pricing pressure, commodity costs and reliance on major OEM customers. Ford alone accounted for about 18% of sales.
- Currency and country risks are material. Dana reported $43 of Venezuelan bolivar cash and $36 of U.S.-dollar exchange requests pending; further devaluation could reduce earnings. Argentine and Venezuelan operations also face restrictions and other operating uncertainties.
- Dana identified supply-chain risk, including a transition away from a major supplier after its contract expires December 31, 2014. Sypris disputed Dana’s position that no new long-term supply agreement had been formed; litigation and arbitration were pending.
- Other risks include underfunded multiemployer pension plans, sensitivity of pension obligations to interest rates and asset returns, warranty and asbestos claims, tax examinations, and possible limits on use of tax-loss carryforwards. Management said release of up to $700 of U.S. deferred-tax valuation allowances within twelve months was reasonably possible, conditional on sustained profitability.
- Unusual items included $8 of accelerated depreciation after production ceased at an Argentine foundry, $24 of restructuring charges, and the preferred-stock redemption premium. Management said pending legal matters were not expected to have a material adverse effect; asbestos liabilities were accrued at $88 with $55 of related insurance recoveries recorded.
Important facts for investors to verify
- Whether 2014 sales and adjusted EBITDA targets were achieved, and how market volumes, program roll-offs and foreign exchange affected results.
- Whether free cash flow is repeatable after considering working-capital benefits and the $28 of interest received in 2013 on a payment-in-kind note.
- Debt maturities, interest burden and liquidity available after considering cash-transfer restrictions and ongoing repurchases.
- Progress and potential costs of the Sypris supplier transition and resolution of the related dispute.
- Developments in Venezuela and Argentina, including currency conversion, exchange requests and the foundry assets’ recoverable value.
- Any changes in the U.S. deferred-tax valuation allowance, pension funding needs, asbestos recoveries or other contingencies.