Dana Holding Corporation — Form 10-K summary
Business context and reporting period. This filing covers the fiscal year ended December 31, 2014; the fourth quarter ended the same date. Dana supplies driveline, sealing and thermal-management products to global light-vehicle, commercial-vehicle and off-highway markets. It operates four segments and reported 22,600 employees across 25 countries. Amounts below are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net sales | $6,617 | $6,769 |
| Gross margin | $945; 14.3% of sales | $920; 13.6% |
| Income before interest and income taxes | $378 | $467 |
| Income from continuing operations | $343 | $261 |
| Net income attributable to Dana | $319 | $244 |
| Net income available to common stockholders | $312; diluted EPS $1.84 | $(13); diluted EPS $(0.09) |
| Adjusted EBITDA (non-GAAP) | $746 | $745 |
| Operating cash flow | $510 | $577 |
| Capital expenditures | $234 | $209 |
| Free cash flow (non-GAAP) | $276 | $368 |
Fourth-quarter 2014 sales were $1,582, gross margin was $223, net income was $108, and diluted EPS was $0.64. Quarterly common dividends were $0.05 per share; the annual dividend was $0.20 per share.
At year-end, cash and cash equivalents were $1,121, marketable securities $169, and total debt $1,678. Reported global liquidity was $1,571, including $1,099 available cash, $169 of marketable securities and $303 available under the revolving facility. There were no revolver borrowings, though $44 was used for letters of credit. Some cash is restricted by local rules or subsidiary governance. Total assets were $4,930 and total equity $1,180.
Changes versus prior periods
- Sales declined 2% year over year. Currency effects reduced sales by $213, partly offset by $61 of organic growth; pricing recoveries contributed $65, while overall market volume and mix reduced sales by $4.
- Gross margin improved by $25 and 70 basis points, reflecting lower cost of sales as a percentage of sales. Adjusted EBITDA was broadly flat.
- Segment EBITDA was $250 for Light Vehicle (up $8), $172 for Commercial Vehicle (down $22), $169 for Off-Highway (up $6), and $154 for Power Technologies (up $4). Commercial Vehicle results were pressured by supplier-transition inefficiencies and higher warranty costs; Off-Highway benefited from cost savings despite weaker demand.
- Operating cash flow fell $67 and free cash flow fell $92, with working capital using $39 versus providing $104 in 2013. Capital spending rose to $234.
- Common earnings improved from a 2013 loss, which included a $232 preferred-stock redemption premium. Preferred stock was fully converted to common stock in 2014. Dana repurchased $260 of common shares during 2014.
Outlook, management commentary and notable items
- For 2015, management forecast sales of $6,400–$6,500, adjusted EBITDA of $740–$760 and free cash flow of $190–$220. Planned capital spending was $300–$320; management expected roughly $90 of net interest, $95 of cash taxes, $20 of restructuring expenditures and $15 of pension contributions.
- The outlook assumed modest overall sales growth in global markets, with North America relatively strong, modest improvement in Europe and Asia Pacific, and continued weakness in South America. Currency headwinds and the Venezuela divestiture were expected to weigh on sales; new programs and cost reductions were expected to support margins.
- New-business backlog for launches during 2015–2017 was $730 at year-end, up 30% from approximately $560 at year-end 2013. Management said these programs should support future margins, but the backlog is based on projected program volumes and is not firm orders.
- The Venezuela business was classified as held for sale at year-end and sold in January 2015 for no consideration. Dana recorded an $80 loss to reduce its carrying value. The exit followed severe operating and foreign-exchange constraints; Dana retained a supply and technology relationship but no remaining investment in the country.
- Other significant 2014 items included a $179 deferred-tax valuation-allowance release, $42 of pension settlement charges, and a $19 debt-extinguishment loss. The Venezuela disposal also reduced earnings. The $179 tax benefit was tied to tax-planning actions expected in 2015; Dana said up to a further $500 of U.S. valuation allowance might be released within twelve months if profitability and forecasts support it.
- Dana issued $425 of 5.5% senior notes due 2024 and used proceeds to refinance 2019 notes. It redeemed $345 of the 2019 notes in December 2014 and disclosed further redemptions in 2015. The company reported compliance with financing covenants.
Risks, contingencies and unusual exposures
- High customer concentration: Ford represented 18% of 2014 sales; the ten largest customers represented approximately 55%. Loss of a major customer or vehicle program could materially affect results.
- Exposure to vehicle production cycles, weak off-highway and South American markets, foreign-exchange movements, commodity costs, customer pricing pressure, and supplier or labor disruptions. Dana highlighted a supplier transition and financial reorganization involving a major supplier to its South America operations.
- Debt, pension and tax exposures merit attention. U.S. pension obligations were sensitive to discount rates; a 25-basis-point rate decrease was estimated to increase the U.S. pension liability by about $47. Multiemployer pension plans are not fully funded. U.S. NOLs were approximately $1,235, with $677 subject to annual utilization limits.
- Dana disclosed approximately 25,000 active asbestos claims, an $81 accrued liability and a $52 recorded insurance-recovery asset. It also reported environmental liabilities of $7 and a guarantee of certain divested-business lease obligations through 2025.
- The company was disputing Sypris’s claim that a new long-term supply agreement had been reached; the dispute was pending at year-end. Management did not expect pending legal proceedings, beyond recorded reserves, to have a material adverse effect, but outcomes remain uncertain.
Most important facts for investors to verify
- Whether 2015 sales, adjusted EBITDA and free-cash-flow guidance was achieved, including the impact of foreign exchange, Venezuela’s exit and market volumes.
- How much of the 2014 earnings increase reflects sustainable operations versus the $179 tax benefit and other unusual charges or gains.
- Whether supplier transitions and the South America supplier’s legal reorganization affected production, warranty costs or customer relationships.
- Debt refinancing costs, scheduled maturities, interest expense and the availability and accessibility of reported liquidity.
- Realization of U.S. deferred tax assets and NOLs, pension funding sensitivity, and developments in asbestos, Sypris and other legal contingencies.