Dana Holding Corporation — Q2 2011 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2011. Dana supplies driveline, power technology and service-parts products to global light-vehicle, commercial-vehicle and off-highway markets. It reported five operating segments; segment results were recast to reflect a reporting-structure change.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $1,933 | $1,526 | $3,733 | $3,034 |
| Gross margin | $233; 12.1% | $169; 11.1% | $448; 12.0% | $309; 10.2% |
| Income before interest and taxes | $114 | $43 | $135 | $34 |
| Net income (loss) attributable to parent | $68 | $9 | $38 | $(22) |
| Net income (loss) available to common stockholders | $61 | $1 | $23 | $(38) |
| Basic / diluted EPS | $0.41 / $0.32 | — / — | $0.16 / $0.15 | $(0.28) / $(0.28) |
| Operating cash flow | Not separately presented in the supplied text | $80 | $122 |
Q2 sales rose $407, with $203 attributed to organic growth, $103 to currency and $101 to acquisitions and divestitures. For the first half, sales rose $699: $533 organic, $135 currency and $31 net from acquisitions and divestitures. Q2 cost of sales fell to 87.9% of sales from 88.9%; first-half cost of sales fell to 88.0% from 89.8%.
Six-month segment EBITDA was $394 versus $285; adjusted EBITDA was $382 versus $262. Q2 segment EBITDA was $204 versus $160; adjusted EBITDA was $201 versus $154. These are non-GAAP measures. Q2 segment EBITDA gains were led by Off-Highway ($51 versus $25) and Commercial Vehicle ($55 versus $39); Light Vehicle Driveline declined to $60 from $64.
Liquidity, debt and cash flow
- Cash and equivalents were $718 at June 30, 2011, down from $1,090 at year-end 2010; marketable securities were $58. Reported global liquidity was $1,184, including $446 of additional credit-facility availability and after deducting $38 of deposits supporting obligations.
- Balance-sheet notes payable and current maturities were $51; long-term debt was $867. Dana had $750 principal amount of senior notes outstanding, bearing fixed rates of 6.50% and 6.75%, due in 2019 and 2021. No borrowings were outstanding under the $500 revolving facility, though $85 was used for letters of credit; net availability was $347. European receivables-program availability was $99, with no borrowings.
- Six-month cash flows were $80 provided by operations, $354 used in investing and $134 used in financing. Working capital used $172, including $300 for increased receivables and $83 for increased inventory. Investing included $150 for SIFCO, $124 for the increased DDAC interest and $13 for Axles India; capital expenditures were $71.
- Management said it expected available liquidity and operating cash flow to meet anticipated requirements for the next 12 months. Dana was in compliance with debt covenants at quarter-end. Some overseas cash is subject to repatriation restrictions, and $64 was held at less-than-wholly-owned subsidiaries where access may be restricted.
Material changes, outlook and management commentary
- Management raised full-year 2011 sales guidance to more than $7,600, adjusted EBITDA to $765–$785, and free cash flow to more than $200. The prior April outlooks were more than $7,300, $755–$775 and more than $175, respectively. Capital spending was forecast at $185–$225, down from the April range of $200–$250.
- North American Class 8 truck production guidance increased to 260,000–270,000 units from 240,000–250,000; other market production forecasts were mixed, including softer Asia-Pacific light-vehicle expectations after the Japan earthquake. Dana estimated the Japan-related events reduced Q2 sales by $50 and expected to recover most of that in the second half.
- Management cited higher commodity costs as a first-half profit headwind; contractual recoveries and pricing actions lagged costs. It expected commodity costs to stabilize or improve in the second half and anticipated recovering some of the first-half profit impact. Weak housing, low consumer confidence, unemployment, fuel-price volatility and vehicle mix were cited as market risks.
- Acquisitions and investments expanded commercial-vehicle operations: SIFCO rights and supply arrangements were expected to generate about $350 annual sales; Axles India was expected to add about $50 annual sales. Dana’s 50% DDAC interest was accounted for under the equity method. On July 27, Dana agreed to sell its GETRAG interests for $136, with closing anticipated by September 30, 2011.
- First-half restructuring charges were $41, including a $20 Yennora lease-settlement charge in Q1; estimated remaining restructuring costs were $35. The company estimated restructuring cash expenditures of $33 in 2011 and $6 thereafter.
- First-half results included a $53 loss on extinguishment of debt associated with refinancing; this contributed to other expense of $28. Q2 other income included a $6 asbestos-insurance recovery. Dana refinanced term debt with $750 of senior notes and replaced its revolving facility, extending maturity and moving to incurrence-based covenants.
- Dana disclosed a prior-period cash classification error: certain securities with original maturities over 90 days had been included in cash and equivalents. Prior-period amounts were revised; management said the revisions were not material. Controls and procedures were concluded effective, and the filing reported no material change in internal control or risk factors.
Risks and contingencies
Dana accrued $96 for asbestos indemnity and defense costs and recorded a $51 asset for expected insurance recoveries. It reported approximately 27,000 active pending asbestos claims. Environmental liabilities were $12. Management said other pending legal proceedings were not expected to have a material adverse effect beyond recorded accruals. A reported alleged engine-cooler quality issue was not believed, based on information then available, to create a material liability. Warranty liabilities were $92 at quarter-end.
Investor verification priorities
- Confirm the full-year sales, adjusted EBITDA, free-cash-flow and capital-spending outlook against subsequent results and filings; adjusted EBITDA and free cash flow are non-GAAP measures.
- Assess the sustainability and cash conversion of sales growth, especially the $172 working-capital use and rising receivables and inventory.
- Review liquidity access, including foreign-cash restrictions, credit-facility borrowing-base availability, letters of credit and debt covenants.
- Track whether commodity-cost recovery, Japan-related customer production recovery and restructuring savings materialized as management expected.
- Monitor preliminary acquisition valuations and contingent consideration, the GETRAG sale completion and proceeds, and asbestos insurance recoveries and claim developments.
- Review the revised cash-versus-marketable-securities presentation and preferred-stock dilution effects on reported EPS.