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DAN > SEC Filings for DAN > Form 10-Q on 26-Jul-2012All Recent SEC Filings

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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 June 30, 2012, we employed approximately 25,500 people, operated in 26countries and had 95 major manufacturing/distribution, engineering and office facilities around the world.

In the first half 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 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 our core driveline, sealing and thermal technologies. We have 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 - increasing the ownership interest in our China-based joint venture with Dongfeng Motor Co., Ltd. (Dongfeng) to 50% and acquiring 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. During 2012, we opened a business development office in Moscow, Russia to focus on expanding our business opportunities in this region. 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 have 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 are 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.


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.


Divestiture of Structural Products business - In 2010, we completed the sale of 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 Metalsa. The Structural Products business that we retained, which generated sales of $48 in 2011, is expected to conclude operations in the third quarter of 2012.


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 the third quarter of 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)

(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)                         270     to          280                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                            160     to          180                219                191
Light Vehicle                              41,000     to       42,000             36,803             37,046
Medium/Heavy Truck                          1,450     to        1,550              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 - Gradually improving economic conditions during the past two years and the first half of 2012 have contributed to increased light vehicle sales and production levels in North America. First half 2012 production of around 7.9 million light vehicles is about 21% higher than first half 2011 production of 6.5 million vehicles. Second quarter 2012 light vehicle production levels were about 25% higher than the comparable 2011 period. The higher production occurred predominantly in the passenger car and crossover SUV segments. In the light truck pickup, van and SUV segment where more of our programs are focused, as anticipated, production in both the second quarter and first half of 2012 increased a more modest 4% from production levels in the comparable 2011 periods. The higher 2012 production levels are generally reflective of higher light vehicle unit sales which are about 14% higher in the first half of 2012 than last year's first half. The light truck pickup, van and SUV segment posted higher sales of only 7% over the same period. U.S. days supply of total light vehicles at the end of June 2012 were around 59, which is up from 51 days at December 31, 2011 and 54 days at June 30, 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 around 86 days at the end of June 2012, which is comparable to a year ago, but up considerably from 56 days at the end of 2011. Although first half 2012 sales in this segment declined about 6% from sales in the second half of 2011, vehicle production was up about 8% - contributing to the increased inventory levels.

Mixed news on the economic front continues to create an element of uncertainty over near-term vehicle sales and production. Fuel prices in recent months have remained relatively stable, as has unemployment data. An improved financing environment and signs that the housing sector may have bottomed out are also positive developments. Nevertheless, continued concern in these areas, and adverse economic developments in other parts of the world, contributed to declining levels of consumer confidence in recent months. As such, the current economic environment continues to pose some risk and uncertainty to the sustainability of near-term vehicle production levels. On balance, we are still expecting a modest level of economic strengthening in North America in 2012. Our outlook for full year light vehicle production is unchanged from our April 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 half of 2012. Heavy-duty Class 8 truck production of about 75,000 units in this year's second quarter and about 150,000 for the first half of this year is up about 24% and 37% from the same periods of 2011. In the medium-duty Classes 5-7 segment, year-over-year second quarter production was about the same, with first half 2012 production about 11% higher than last year.

With the mixed and uncertain outlook surrounding the global economy, order levels for Class 8 trucks have weakened in recent months causing the near-term outlook for production levels to be down from our previous expectations. We've reduced the range on our full year Class 8 production outlook for 2012 to 270,000 to 280,000 units from our April outlook of 280,000 to 290,000 units. As revised, this market is now expected to be up about 6 to 10% from last year. Our full year outlook for medium-duty Classes 5-7 production is unchanged from April and 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. A challenging economic environment continues to pose considerable uncertainty. First half 2012 production of light vehicles in Europe was down about 6% from the corresponding period of 2011. We expect the tough economic environment to continue during the second half of 2012, resulting in full year production levels being down from 2011. After increasing the past two years, South American production levels have weakened in 2012, with vehicle production for the first half of 2012 being down about 6% from last year's first half. At present, we expect production levels to improve a bit during the second half of 2012, putting production for the year at a level comparable to that of 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 half 2012 production up about 15% from the first half 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 half is down about 6% from the first half of 2011 - in line with our outlook for the full year. South American production also increased significantly the past two years, up about 15% in 2011 and 45% in 2010. The combination of a pull back in purchases caused by engine emissions changes in Brazil and some overall economic weakness has caused 2012 production levels to decline significantly, with second quarter and first half production being down more than 30% from those same periods in 2011. The second half production rebound that we expected earlier this year has moderated. As such, we've reduced our full year production outlook in South America to levels which are now expected to be down 18 to 27% from 2011 as compared to our April outlook which expected production levels that were 2 to 6% lower than 2011. Asia Pacific production in 2011 declined about 8% as a consequence of the natural disasters disrupting 2011 production, 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 half being up about 9% from the second half of last year. Compared to last year's first half which was relatively strong until the tsunami in Japan, 2012 production is down about 10%. The effects of overall weaker global economic conditions are also impacting this region, and we now see this continuing into the second half. Consequently, we've lowered our full year Asia Pacific production expectations from our April outlook to levels reflecting a 2 to 8% decline from 2011.

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 flat to an increase of 5% in the agriculture segment and an increase of 5 to 10% in the construction segment, which is unchanged from our April outlook.

Sales, Earnings and Cash Flow Outlook

                          Outlook           2011        2010
 Sales                 $7,475 - $7,575     $ 7,592     $ 6,109

 Adjusted EBITDA *       $820 - $840       $   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 now has sales down slightly or comparable to 2011, which is reduced from our April 2012 outlook which had sales at $7,800+, up more than 5% from 2011. The reduced outlook is driven in part by expected currency translation effects of weaker international exchange rates in certain of our major markets. Additionally, we've scaled back expected second half 2012 medium/heavy truck production levels in most of our markets, and now expect a third quarter divestiture of the leisure industry component of our off-highway segment. With the reduced sales, our Adjusted EBITDA for the year is now expected to be in the range of $820 to $840. However, we expect to maintain Adjusted EBITDA margins at around 11% as we respond quickly to the changing market conditions and benefit from restructuring, cost reduction and pricing actions.

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. With the lower sales levels, we've scaled back our capital spend expectation, and, as such, our full year free cash flow of more than $200 (before a January 2012 $150 incremental one-time U.S. pension contribution) is unchanged from our April 2012 outlook. Our current capital spend outlook of $210 to $230 is 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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