DAN

Dana Corporation 10-Q Summary: Period Ended June 30, 1998

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1998, and the six-month period ended on that date. Dana Corporation is a global manufacturer of automotive and off-highway vehicle components, including axles, brakes, and drivetrain systems. The company operates through various strategic business units and a leasing subsidiary, Dana Credit Corporation (DCC). Significant corporate activity during the period included the acquisition of Eaton Corporation's heavy axle and brake business, the acquisition of Nakata S.A. in Brazil, and the completion of the Echlin Inc. merger in July 1998.

Key Financial Metrics

Liquidity: Cash and cash equivalents decreased significantly to $145.9 million due to heavy investing activities, including $353.7 million in acquisitions and $232.0 million in capital expenditures. However, the company maintains $1,047 million in committed and uncommitted bank lines (excluding DCC) and $861 million for DCC.

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 10% year-over-year, driven by a 12% increase in U.S. sales and a 4% increase in international sales. Acquisitions and divestitures contributed $175 million to the growth, while organic growth was 6%.
• Profitability: Net income rose 20% to a record $223.6 million. This improvement was aided by the absence of significant restructuring charges in 1998 compared to 1997 (which included $36 million for Perfect Circle Europe and $9 million for the Berwick plant closing).
• Margin Expansion: Gross margin improved to 15.7% from 14.3%, and operating margin rose to 7.2% from 5.4%. Excluding 1997 charges, operating margin improved by 1.0%.
• Regional Performance: North American sales grew 13%, and South America grew 13%. Conversely, Europe sales declined 4% and Asia Pacific sales fell 11% due to regional financial difficulties.
• Divestitures: The company sold its hydraulic brake hose facilities and hydraulic cylinder business in 1998, recording a $3 million after-tax gain.

Guidance, Outlook, and Risks

• Outlook: Management anticipates strong second-half demand for light truck and sport utility vehicle components. Sales to medium and heavy truck markets are expected to remain significantly above last year's levels due to the Eaton integration.
• GM Work Stoppages: A work stoppage at General Motors in the second quarter adversely affected sales. Management expects this to negatively impact third-quarter sales and profits, with the full-year impact dependent on GM's ability to recoup lost production.
• Year 2000 (Y2K) Readiness: Dana has spent $13 million to date on Y2K remediation (excluding Echlin) and anticipates additional costs of $41 million. Echlin has spent $18 million with anticipated future costs of $47 million. The company expects to complete system remediation by Q1 1999.
• Legal and Environmental: The company has accrued $46 million for product liability and $52 million for environmental liabilities. Management does not believe pending proceedings will have a material adverse effect on financial condition.
• Dividends: The Board approved a 7% increase in the dividend to an annualized rate of $1.16 per share.

Investor Verification Checklist

• Verify the extent of the impact of the General Motors work stoppage on Q3 and Q4 production schedules and revenue.
• Confirm the integration progress and financial contribution of the Eaton heavy axle and brake business acquisition.
• Monitor the actual costs incurred for Year 2000 remediation against the projected $41 million (Dana) and $47 million (Echlin) estimates.
• Review the cash burn rate given the significant drop in cash equivalents ($248 million decrease) and high capital expenditure levels ($232 million in six months).
• Assess the stability of the Asia Pacific market, where sales declined 11% due to regional financial difficulties.