Dana Holding Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Dana supplies driveline, sealing and thermal-management products to global vehicle manufacturers. Figures are in millions of dollars except per-share amounts.
Financial results and position
- Sales: $1,608, down $80 (4.7%) from $1,688. Currency reduced sales by $121 and the Venezuela divestiture by $27; organic growth added $68, including higher volume and pricing.
- Profitability: Gross profit was $228 versus $234; gross margin improved to 14.2% from 13.9%. Continuing-operations income was $74 versus $38. Net income attributable to Dana was $63 versus $34; diluted EPS was $0.38 versus $0.19. Net income included a $9 correction to noncontrolling-interest income.
- Segment EBITDA: $176 versus $160. Light Vehicle increased to $64 from $30; Commercial Vehicle fell to $35 from $44, Off-Highway to $39 from $42, and Power Technologies to $38 from $44.
- Cash flow: Operating cash flow was negative $20 versus positive $31. Capital expenditures were $62; free cash flow, a company-defined non-GAAP measure, was negative $82 versus negative $36. Working capital used $141 of cash.
- Liquidity and debt: Reported global liquidity was $1,414, comprising $885 cash, $165 marketable securities and $384 revolver availability. Cash included $156 in a subsidiary subject to independent-board approval for transfers. Total debt in the financing note was $1,606, versus $1,659 at year-end; no revolver borrowings were outstanding. Dana reported compliance with debt covenants.
- Other: Assets were $4,738 and total equity $1,097 at March 31. Dana repurchased $63 of shares and declared a $0.05-per-share dividend.
Material changes and management commentary
- Sales declined primarily because of foreign-exchange movements and the Venezuela divestiture. North America and Asia Pacific organic sales rose; South America was weak, while European organic sales increased modestly.
- Gross margin improved despite lower sales. Material-cost savings helped offset commodity inflation and $8 of Commercial Vehicle supplier-transition disruption costs. The Commercial Vehicle segment’s EBITDA was also affected by weaker South American production.
- Dana completed the Venezuela divestiture in January for no consideration. It recorded a $5 gain on derecognition of a noncontrolling interest; the 2014 comparison included a $17 Venezuela currency devaluation charge. Dana said it retained no investment in Venezuela, but entered a product-supply and technology agreement.
- Dana redeemed the remaining 2019 senior notes during Q1, recording a $2 extinguishment loss. The refinancing replaced higher-rate notes with 2024 notes issued in December 2014.
- The filing disclosed an immaterial prior-period error in calculating noncontrolling interests; it was corrected in Q1 by increasing noncontrolling-interest income by $9. Prior-period cash-flow presentation was also revised for unpaid capital invoices, with no impact on total cash flows.
Outlook, risks and contingencies
- 2015 outlook: Sales of $6.3–$6.4 billion, adjusted EBITDA of $740–$750, and free cash flow of $190–$220. These are management estimates and non-GAAP measures where noted. Dana lowered its sales outlook from $6.4–$6.5 billion in February, citing further currency weakening; it expected currency to reduce year-over-year sales by about $450 and the Venezuela divestiture by $110.
- Management expected continued margin improvement from cost actions and new programs, but anticipated higher working-capital needs as sales strengthen in the second half. Planned 2015 capital spending was $300–$320; cash taxes about $95, restructuring spending about $20, and pension contributions about $15.
- Market conditions were uneven: North American light-truck and heavy-truck expectations improved; South American light-vehicle and truck forecasts were reduced. Dana cited foreign-exchange exposure, vehicle-market demand, commodity prices, warranty costs and supplier disruption as operating risks.
- Dana said liquidity and operating cash flow should cover anticipated needs over the next 12 months. Cash access may be constrained by local regulations, taxes, subsidiary restrictions and the independent-board approval requirement for certain subsidiary funds.
- Contingencies include asbestos claims (about 25,000 pending; $79 accrued and $51 in expected insurance recoveries), environmental liabilities of $7, and a lease guarantee with approximately $6 in annual payments through June 2025. Sypris appealed a ruling in Dana’s favor concerning whether a new supply agreement had been formed. Dana also disclosed SIFCO’s reorganization; it did not expect significant supply disruption. Management did not expect pending legal matters to have a material adverse effect.
- Dana retained a U.S. deferred-tax-asset valuation allowance; it said up to $500 could potentially be released within 12 months if profitability evidence supports release. Disclosure controls were deemed effective, and Dana reported no material change in risk factors.
Important facts for investors to verify
- Whether 2015 sales, adjusted EBITDA and free-cash-flow guidance was achieved, particularly given currency exposure and regional market weakness.
- Whether working-capital demands and capital spending affected cash generation and liquidity as expected.
- Whether Commercial Vehicle supplier-transition costs, warranty expense and South American conditions improved.
- Whether the $9 noncontrolling-interest correction and revised cash-flow presentation were fully reflected in comparative reporting.
- Developments in the potential U.S. tax valuation-allowance release, asbestos recoveries, the Sypris appeal and SIFCO supply relationship.