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DAN > SEC Filings for DAN > Form 10-Q on 25-Apr-2012All Recent SEC Filings

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Form 10-Q for DANA HOLDING CORP


25-Apr-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions)

Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and accompanying notes in this report.

Forward-Looking Information

Statements in this report (or otherwise made by us or on our behalf) that are not entirely historical constitute "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are indicated by words such as "anticipates," "expects,"

"believes," "intends," "plans," "estimates," "projects," "outlook" and similar expressions. These statements represent the present expectations of Dana Holding Corporation and its consolidated subsidiaries (Dana) based on our current information and assumptions. Forward-looking statements are inherently subject to

risks and uncertainties. Our plans, actions and actual results could differ materially from our present expectations due to a number of factors, including those discussed below and elsewhere in this report and in our other filings with the Securities and Exchange Commission (SEC). All forward-looking statements speak only as of the date made and we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances that may arise after the date of this report.

Management Overview

Dana is headquartered in Maumee, Ohio and was incorporated in Delaware in 2007. We are a global provider of high technology driveline, sealing and thermal-management products for virtually every major vehicle manufacturer in the on-highway and off-highway markets. Our driveline products - axles, driveshafts and transmissions - are delivered through the Light Vehicle Driveline (LVD) and Commercial Vehicle segments of our global On-Highway Driveline Technologies (On-Highway) business unit and through our Off-Highway Driveline Technologies (Off-Highway) business unit. Our third global business unit - Power Products Technologies (Power Technologies) - is the center of excellence for the sealing and thermal technologies that span all customers in our on-highway and off-highway markets. We have a diverse customer base and geographic footprint which minimizes our exposure to individual market and segment declines. At March 31, 2012, we employed approximately 25,500 people, operated in 26 countries and had 95 major manufacturing/distribution, engineering and office facilities around the world.

In the first quarter of 2012, 49% of our sales came from North American operations and 51% from operations throughout the rest of the world. Our On-Highway business accounted for 64% of our global sales, the Off-Highway business represented 21%, Power Technologies accounted for 14% and Structures was 1%.

Our internet address is www.dana.com. The inclusion of our website address in this report is an inactive textual reference only and is not intended to include or incorporate by reference the information on our website into this report.

Operational and Strategic Initiatives

During the past three years, we have significantly improved our financial condition - reducing debt, raising additional equity, improving the profitability of customer programs and eliminating structural costs. We have also strengthened our leadership team and streamlined our operating segments to focus on our core competencies of driveline technologies, sealing systems and thermal management. As a result, we believe that we are well-positioned to put increasing focus on profitable growth.

While we intend to continue aggressively reducing cost and streamlining our business operations, our future strategy includes several growth initiatives directed at strengthening the competitiveness of our products through innovation and technology, geographic expansion, aftermarket opportunities and selective acquisitions.

Strengthening the competitiveness of our products - We are committed to making investments and diversifying our product offerings to strengthen our competitive position in these core technologies. We've prioritized our focus on innovation around these core technologies because of the opportunities to create value for our customers through improved fuel efficiency, emission control, electric and hybrid electric solutions, durability and cost of ownership.

Additional engineering and operational investment is being channeled into reinvigorating our product portfolio and capitalizing on technology advancement opportunities. In 2010, we combined the North American engineering centers of our LVD and Commercial Vehicle segments, allowing us the opportunity to better share technologies among these businesses. In 2011, commitments to new engineering facilities in India and China are more than doubling our engineering presence in the Asia Pacific region with state-of-the-art design and test capabilities that globally support each of our businesses.

Geographic expansion - Although there are growth opportunities in each region, we have a primary focus in the Asia Pacific region, especially India and China. In addition to new engineering facilities in India and China, during the second quarter of 2011 a new hypoid gear manufacturing facility in India began production and we completed two transactions - our planned investment in our China-based joint venture with Dongfeng Motor Co., Ltd. (Dongfeng) and the acquisition of the axle drive head and final assembly business from our Axles India Limited (AIL) joint venture - which significantly increased our commercial vehicle driveline presence in the region. We have experienced considerable success in the China off-highway and industrial markets and we believe there is considerable opportunity for future growth in these markets. In South America, our strategic agreement with SIFCO S.A. (SIFCO) completed in February 2011 makes us the leading full driveline supplier in the South American commercial vehicle market.

Aftermarket opportunities - We have established a global group dedicated to identifying and developing aftermarket growth opportunities that leverage the capabilities within our existing businesses - targeting increased future aftermarket revenues as a percent of consolidated sales.

Selective acquisitions - Our current acquisition focus is to identify "bolt-on" acquisition opportunities like the strategic agreement with SIFCO and the AIL acquisition completed in 2011 that have a strategic fit with our existing businesses, particularly opportunities that would support the other growth initiatives discussed above and enhance the value proposition of our customer product offerings. Any potential acquisition will be evaluated in the same manner we currently consider customer program opportunities - with a disciplined financial approach designed to ensure profitable growth.

Cost management - Although we've taken significant strides to improve our margins, particularly through streamlining and rationalizing our manufacturing activities and rationalizing our administrative support processes, additional opportunities remain. We have ramped up our material cost efforts to ensure that we are rationalizing our supply base and obtaining appropriate competitive pricing. Further, we're putting a major focus on reducing product complexity - something that not only improves our cost, but brings added value to our customers through more efficient assembly processes. With a continued emphasis on process improvements and productivity throughout the organization, we expect cost reductions to continue contributing to future margin improvement.

Acquisitions

SIFCO - In February 2011, we entered into an agreement with SIFCO, a leading producer of steer axles and forged components in South America. In return for a payment of $150 to SIFCO, we acquired the distribution rights to SIFCO's commercial vehicle steer axle systems as well as an exclusive long-term supply agreement for key driveline components. Additionally, SIFCO will provide selected assets and assistance to Dana to establish assembly capabilities for these systems. We are now responsible for all customer relationships, including marketing, sales, engineering and assembly. The addition of truck and bus steer axles to our product offering in South America effectively positions us as the leading full-line supplier of commercial vehicle drivelines - including front and rear axles, driveshafts and suspension systems - in South America. This acquisition contributed $390 to 2011 sales.

Dongfeng Dana Axle - In June 2011, we paid $124 to increase our equity investment in Dongfeng Dana Axle Co., Ltd. (DDAC) from 4% to 50%. Our investment in DDAC is being accounted for on the equity method. DDAC is the primary supplier of truck axles to Dongfeng. DDAC offers a complete range of truck axles in the Chinese market, including drive, steer, tandem, and hub-reduction axles for light-, medium- and heavy-duty trucks, as well as buses.

Axles India - In June 2011, we acquired the axle drive head and final assembly business of our AIL equity affiliate for $13. This business contributed $14 to our 2011 sales.

Dana Rexroth Transmission Systems- In October 2011, we formed a 50/50 joint venture with Bosch Rexroth to develop and manufacture advanced powersplit drive transmissions for the off-highway market. We contributed $8 to the venture and are accounting for our investment under the equity method.

Divestitures

Divestiture of Structural Products business - In December 2009, we signed an agreement to sell substantially all of the assets of our Structural Products business to Metalsa S.A. de C.V. (Metalsa), the largest vehicle frame and structures supplier in Mexico. We completed the sale in 2010 for a selling price of $148. We received cash proceeds of $118 during 2010 and $16 in 2011. The remaining proceeds are held in escrow pending resolution of claims presented by the buyer. The Structural Products business that we retained, which generated sales of $48 in 2011, is expected to conclude operations in mid-2012.

Segments

We manage our operations globally through five operating segments. Our LVD, Power Technologies and Structures segments primarily support light vehicle original equipment manufacturers (OEMs) with products for light trucks, SUVs, CUVs, vans and passenger cars. As indicated above, the Structural

Products business is expected to cease operations in mid-2012. The Commercial Vehicle and Off-Highway operating segments support the OEMs of on-highway commercial vehicles (primarily trucks and buses) and off-highway vehicles (primarily wheeled vehicles used in construction and agricultural applications).

Trends in Our Markets



Global Vehicle Production (Full Year)



                                                                                          Actual
(Units in thousands)                            Dana 2012 Outlook                 2011               2010
  North America
 Light Vehicle (Total)                     14,000        to       14,500             13,125             11,941
 Light Truck (excl. CUV/Minivan)            3,500        to        3,700              3,625              3,520
 Medium Truck  (Classes 5-7)                  170        to          180                167                116
 Heavy Truck (Class 8)                        280        to          290                255                152
 Europe (including E. Europe)
 Light Vehicle                             19,000        to       19,500             20,089             19,094
 Medium/Heavy Truck                           400        to          420                430                325
 South America
 Light Vehicle                              4,300        to        4,500              4,318              4,173
 Medium/Heavy Truck                           205        to          215                219                191
 Asia-Pacific
 Light Vehicle                             41,000        to       42,000             36,803             37,046
 Medium/Heavy Truck                         1,700        to        1,800              1,575              1,714
 Off-Highway - Global (year-over-year)
 Agricultural Equipment                        +0        to          +5%        +15 to +20%          +2 to +5%
 Construction Equipment                        +5        to         +10%        +20 to +25%        +20 to +25%

North America

Light vehicle markets - With gradually improving economic conditions during the past two years, light vehicle production levels in North America have increased, and there continues to be strengthening in demand early in 2012. First quarter 2012 production of around 3.9 million light vehicles is about 15% higher than first quarter 2011 production of 3.4 million vehicles. The higher production occurred predominantly in the passenger car segment. In the light truck pickup, van and SUV segment where more of our programs are focused, as anticipated, production in the first three months of 2012 was largely unchanged from production levels in the comparable 2011 period. The higher 2012 production levels are generally reflective of higher light vehicle unit sales which are about 13% higher in the first quarter of 2012 than last year's first quarter. The light truck pickup, van and SUV segment posted higher sales of only 6% over the same period. Days supply of total light vehicles at the end of March 2012 were around 55, which is comparable to inventory levels a year ago, but up from 51 days at the end of December 2011. The increase in inventory levels from the end of 2011 is driven by activity in the light truck pickup, van and SUV segment. Inventory levels in this segment increased to more than 80 days at the end of March 2012, which is comparable to a year ago, but up considerably from 56 days at the end of 2011. Although first quarter 2012 sales in this segment declined about 15% from sales in the fourth quarter of 2011, vehicle production was up about 6% - contributing to the increased inventory levels.

On the economic front, rising fuel prices are again at levels where they are beginning to influence demand. In addition to declining light truck unit sales from the fourth quarter of 2011, the truck mix in the first quarter of 2012 was about 48% whereas light trucks accounted for about 52% of sales in calendar 2011. Other economic developments have shown some signs of improvement with recent unemployment data tracking favorably and consumer sentiment, while still mixed at times, strengthening somewhat. With the housing sector continuing to be soft, fuel prices remaining high and mixed employment data, there continues to be concern about the sustainability of continued economic recovery. These factors continue to pose some risk and uncertainty to near-term vehicle production levels, particularly in the light truck segment. On balance, we are still expecting a modest level of economic strengthening in North America in 2012, and our outlook for full year light vehicle production has increased from our February 2012 guidance - with total light vehicle production up about 7 to 10% over 2011 and light truck pickup, van and SUV segment production expected to be comparable with 2011.

Medium/heavy vehicle markets - As with the light vehicle market, medium/heavy truck production has steadily increased over the past two years and into the first quarter of 2012. Heavy-duty Class 8 truck production of about 76,000 units in this year's first quarter was up about 2% from the fourth quarter of 2011 and up about 48% from the first quarter of 2011. In the medium-duty Classes 5-7 segment, first quarter 2012 production of around 45,000 units was about 15% higher than last year's fourth quarter and up 13% over the first quarter of 2011.

With the continued improvement in the North American economy and some pent up end user demand, order levels for medium/heavy commercial trucks have continued to be relatively strong, albeit slowing some in March 2012. Our full year outlook for 2012 remains unchanged from February 2012, with Class 8 production being around 280,000 to 290,000 units, an increase of 10 to 14%, and medium-duty Classes 5-7 production expected to come in around 170,000 to 180,000 units, an increase of 2 to 8%.

Markets Outside of North America

Light vehicle markets - Europe production levels were tempered in 2011 by softness brought on in part by sovereign debt concerns and a challenging economic environment continues to pose considerable uncertainty. First quarter 2012 production of light vehicles in Europe was down about 7% from the corresponding period of 2011. We expect the tough economic environment to continue for much of 2012, with full year production levels being down from 2011. South American production levels increased the past two years. However, weakening in 2012 has led to vehicle production for the first quarter of 2012 being down about 6% from last year's first quarter. We expect that production levels will improve a bit during the second half of 2012, putting production for the year at a level comparable to 2011. Asia Pacific production levels in 2011 were adversely impacted by the effects of natural disasters in Japan and Thailand. Production levels began rebounding in late 2011 and have continued to improve in 2012, with first quarter 2012 production up about 8% from the first quarter of last year. We expect year-over-year production to continue rebounding throughout 2012 with full year production coming in around 11 to 14% higher than 2011.

Medium/heavy vehicle markets - Some of the same factors referenced above that affected light vehicle markets outside of North America similarly affected the medium/heavy markets. After being up more than 30% in 2011, following a production increase of about 59% the previous year, Europe medium/heavy truck production in this year's first quarter is down about 8% from the first quarter of 2011 - in line with results that are expected to continue over the remainder of 2012. South American production also increased significantly the past two years, up about 15% in 2011 and 45% in 2010. Similarly, production levels have declined significantly in 2012, with first quarter production being down about 26% from the first quarter of a year ago. We expect production levels to improve over the remainder of 2012, with full year production now expected to be down 2% to 6% as compared with 2011, a reduction from our February 2012 outlook. Asia Pacific production in 2011 declined about 8% as a consequence of the natural disasters, after being up more than 50% the previous year. Like the light vehicle markets in this region, production in 2012 has begun rebounding with this year's first quarter being up about 8% from last year's fourth quarter. Compared to last year's first quarter which was relatively strong until the tsunami in Japan, 2012 production is down about 3%. We expect production levels in Asia Pacific to continue improving, with full year production in 2012 being up about 8 to 14%.

Off-Highway Markets

Our off-highway business has a large presence outside of North America, with about 70% of its sales coming from Europe and 10% from South America and Asia Pacific combined. We serve several segments of the diverse off-highway market, including construction, agriculture, mining and material handling. Our largest markets are the European and North American construction and agricultural equipment segments - both of which experienced increased demand in 2010 and 2011. Our outlook for these markets for 2012 has demand levels ranging from comparable to up 5% in the agriculture segment and up 5 to 10% in the construction segment.

Sales, Earnings and Cash Flow Outlook



                         2012
                        Outlook         2011        2010
 Sales                   $7,800+       $ 7,592     $ 6,109

 Adjusted EBITDA *     $845 - $865     $   765     $   553

 Free Cash Flow **      $200+***       $   174     $   242

* Adjusted EBITDA is a non-GAAP financial measure discussed under Segment EBITDA within the Segment Results of Operations discussion below. See Item 7 of our 2011 Form 10-K for a reconciliation of 2011 and 2010 adjusted EBITDA to net income.

** Free cash flow is a non-GAAP financial measure, which we have defined as cash provided by operating activities excluding any bankruptcy claim related payments, less purchases of property, plant and equipment. We believe this measure is useful to investors in evaluating the operational cash flow of the company inclusive of the spending required to maintain the operations. Free cash flow is neither intended to represent nor be an alternative to the measure of net cash provided by operating activities reported under GAAP. Free cash flow may not be comparable to similarly titled measures reported by other companies. See Item 7 of our 2011 Form 10-K for a reconciliation of 2011 and 2010 free cash flow to net cash flows provided by operating activities.

*** Exclusive of a special one-time $150 U.S. pension contribution.

During the past three years, significant focus was placed on right sizing and rationalizing our manufacturing operations, implementing other cost reduction initiatives and ensuring that customer programs were competitively priced. These efforts, along with stronger sales volumes, were the primary drivers of our improved profitability. With our financial position substantially improved, in 2011 we began directing increased attention to the growth initiatives described in the Operational and Strategic Initiatives section above. In this regard, certain acquisitions also contributed to the sales growth we achieved in 2011.

Our full year outlook for 2012 has sales up more than 3% from 2011, which is reduced from our February 2012 outlook of sales being up more than 5%. The reduced outlook is driven by expected currency translation effects of weaker international exchange rates in certain of our major markets. Our outlook for increased global sales from stronger demand levels in our markets is generally unchanged. Profit margins in 2012 are expected to benefit from the stronger overall sales volumes and from our prior and continuing restructuring, cost reduction and pricing actions, more than offsetting the adverse effects of weaker international currencies and increased costs associated with commodity purchases and our growth initiatives. Based on our current outlook, we expect full year 2012 adjusted EBITDA to be in the range of $845 to $865.

Our cash flow in recent years benefited primarily from increased earnings and lower capital spending, more than offsetting the higher working capital requirements associated with increased sales. Based on our projected sales and adjusted EBITDA, we expect to generate free cash flow in 2012 of more than $200 before a January 2012 $150 incremental one-time U.S. pension contribution. Our 2012 free cash flow projection includes a capital spend outlook of $225 to $250, up from capital spending of $196 in 2011. Increased cash requirements for interest, taxes and pension fund contributions in 2012 are also expected to consume some of the increased free cash flow attributable to higher profits.

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