Dana Holding Corporation — Q1 2014 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2014; comparisons are with Q1 2013 unless noted. Dana supplies driveline, sealing and thermal-management products to vehicle and off-highway manufacturers through four operating segments: Light Vehicle, Commercial Vehicle, Off-Highway and Power Technologies. It reported approximately 23,100 employees and operations in 26 countries.
Financial performance and position
- Sales: $1.688 billion, up $12 million (0.7%). Organic sales increased $56 million, offset in part by $44 million of unfavorable currency effects.
- Profitability: Gross profit was $234 million versus $214 million; gross margin improved to 13.9% from 12.8%. Continuing-operations income before interest and taxes was $101 million versus $92 million. Net income was $37 million versus $50 million; net income available to common stockholders was $31 million versus $34 million. Diluted EPS was $0.19, unchanged from Q1 2013. Adjusted EBITDA, a non-GAAP measure, increased to $165 million from $158 million.
- Segment EBITDA: Light Vehicle $30 million (down from $41 million); Commercial Vehicle $44 million (up from $41 million); Off-Highway $42 million (up from $41 million); Power Technologies $44 million (up from $36 million). Light Vehicle results included a $17 million Venezuelan currency remeasurement charge.
- Cash flow: Operating cash flow was zero, compared with cash use of $15 million. Working capital used $145 million, principally reflecting higher receivables and inventory. Capital expenditures were $36 million; free cash flow, as defined by Dana, was negative $36 million versus negative $44 million.
- Liquidity and debt: Cash and equivalents were $1.116 billion and marketable securities $144 million at quarter-end. Dana reported total global liquidity of $1.540 billion, including $302 million of revolving-facility availability. Debt was $1.600 billion, including $32 million of current notes and debt; long-term debt was $1.568 billion. No revolving-facility borrowings were outstanding, and Dana reported covenant compliance.
- Balance sheet and shareholder actions: Total assets were $5.158 billion and total equity $1.377 billion. Dana repurchased 3.1 million common shares for $64 million and declared a $0.05-per-share dividend. Holders converted 1.7 million Series B preferred shares into approximately 14.5 million common shares.
Material changes versus Q1 2013
- Sales were nearly flat overall; stronger North American and European activity was partly offset by currency weakness and lower Asia Pacific sales.
- Gross margin improved as better manufacturing cost conversion, higher volumes and material savings outweighed higher commodity, engineering and warranty costs.
- Net income declined by $13 million, including higher interest and tax expense, increased restructuring charges, lower affiliate earnings and a shift from income to a loss from discontinued operations. Interest expense rose to $30 million from $21 million, mainly reflecting higher average debt.
- Cash at quarter-end fell $140 million from December 31, 2013. The cash-flow statement reports a $117 million net decrease during the quarter, including $23 million of adverse exchange-rate effects.
Outlook, commentary and risks
- 2014 guidance: Sales of $6.8–$6.9 billion, adjusted EBITDA of $760–$770 million, and free cash flow of $275–$295 million. Guidance was unchanged, but management said sales and adjusted EBITDA were trending toward the low end of their ranges. These are company forecasts and non-GAAP measures where indicated.
- Management expected stable or modestly improving conditions in many markets, but cited challenges in Venezuela, Argentina, Thailand and India and continuing currency headwinds. North American Class 8 truck production guidance increased to 265,000–275,000 units.
- Free-cash-flow assumptions included capital spending of $210–$230 million, cash taxes of about $130 million, restructuring expenditures of about $40 million, net interest cash costs around $70 million and pension contributions around $25 million.
- Venezuelan operations were significantly curtailed as major customers suspended production amid foreign-exchange and import constraints. Dana adopted the SICAD rate of 10.7 bolivars per U.S. dollar at quarter-end, recording a $17 million charge. Management said continued nominal or no production for the rest of 2014 could reduce adjusted EBITDA by as much as $40 million; recovery of the $54 million net investment remains uncertain. Dana also had $44 million of exchange requests awaiting approval at the official rate.
- Other exposures include approximately 25,000 pending asbestos claims, with an $85 million accrued liability and a $53 million insurance-recovery asset; an ongoing supply-contract dispute with Sypris; and a $10 million escrow receivable subject to arbitration with Metalsa. Dana stated that additional liabilities from pending legal matters were not expected to be material, while noting outcomes are uncertain.
- After quarter-end, supplier SIFCO and affiliates filed for judicial reorganization in Brazil and a Chapter 15 proceeding in the U.S. Dana did not anticipate significant supply disruption at the time of filing; its Commercial Vehicle segment purchased approximately $170 million of SIFCO products in 2013.
- Dana said up to $700 million of U.S. deferred-tax valuation allowances could potentially be released within 12 months if profitability and forecasts support it; no release was recorded at quarter-end.
Important facts for investors to verify
- Whether Venezuela production resumes, foreign-exchange access improves, and the reported $17 million remeasurement charge or potential $40 million earnings exposure changes.
- Whether Dana delivers its 2014 sales, adjusted EBITDA and free-cash-flow guidance, particularly given the stated low-end trend and working-capital demands.
- Cash accessibility: $181 million held by Dana Companies, LLC requires independent-board approval for transfer, and some non-U.S. cash faces regulatory, tax or other repatriation limits.
- Progress on the Sypris dispute, SIFCO’s reorganization and supply continuity, the Metalsa escrow arbitration, and asbestos liabilities and recoveries.
- The effect of share repurchases and preferred-share conversions on capital allocation, common-share count and per-share results.