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DAN > SEC Filings for DAN > Form 10-Q on 26-Oct-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 our Light Vehicle Driveline (LVD), Commercial Vehicle and Off-Highway segments. Our fourth global segment - 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 broad geographic footprint which minimize our exposure to individual market and segment declines. At September 30, 2012, we employed approximately 24,500 people, operated in 27 countries and had 92 major manufacturing/distribution, engineering and office facilities around the world.

In the first nine months of 2012, 48% of our sales came from North American operations and 52% from operations throughout the rest of the world. Our sales by operating segment were LVD - 38%, Commercial Vehicle - 27%, Off-Highway - 21% and Power Technologies - 14%.

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, 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. Our September 2012 strategic alliance with Fallbrook Technologies Inc. (Fallbrook) will enable us to leverage leading edge continuously variable planetary (CVP) technology into the development of advanced driveline solutions for customers in certain of our end markets.

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. Earlier this year, 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 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 Fallbrook, SIFCO and AIL transactions 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 has provided selected assets and assistance to Dana to establish assembly capabilities for these systems. We are 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.

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.

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. Both Dana and Bosch Rexroth contributed an additional $1 to the venture in the third quarter of 2012.

Fallbrook - In September 2012, we entered into a strategic alliance with Fallbrook Technologies Inc. In connection with this transaction, we obtained an exclusive license to Fallbrook's CVP technology, allowing Dana to engineer, produce and sell driveline products using this technology for passenger and certain off-highway vehicles in the end markets Dana serves. As part of this alliance, Fallbrook will also provide Dana with development and other support through an engineering services agreement, and several Fallbrook engineers are being hired by Dana. Under the exclusive license agreement, Dana will pay Fallbrook $15, with additional consideration being paid if the affected parties mutually agree on additional markets being exclusively licensed to Dana.


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 had received cash proceeds of $134 by the end of 2011 and $12 remains in escrow pending resolution of claims presented by Metalsa. The Structural Products business that we retained generated sales of $48 in 2011 and $34 in 2012 through the August cessation date. Prior to the third quarter of 2012, Structural Products was reported as an operating segment of continuing operations. With the cessation of operations in this year's third quarter, the activities relating to the Structural Products operation are now reported as discontinued operations.

Divestiture of Leisure and All-Terrain Business- We completed the divestiture of our axle, differential and brake systems business serving the leisure, all-terrain and utility vehicle markets in August 2012. The total proceeds to be received of $8 approximated the net assets of the business following an asset impairment charge of $2 recorded in the first quarter of 2012. Sales of the divested business approximated $53 in 2011 and $37 in 2012 through the date of the disposition.


We manage our operations globally through four operating segments. Our LVD and Power Technologies segments primarily support light vehicle original equipment manufacturers (OEMs) with products for light trucks, SUVs, CUVs, vans and passenger cars. The Commercial Vehicle segment supports the OEMs of on-highway commercial vehicles (primarily trucks and buses), while our Off-Highway segment supports OEMs of 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)                   14,800 to 15,100           13,125            11,941
Light Truck (excl. CUV/Minivan)          3,600 to 3,700             3,625             3,520
Medium Truck (Classes 5-7)                 175 to 180                 167               116
Heavy Truck (Class 8)                      265 to 275                 255               152
Europe (including E. Europe)
Light Vehicle                           18,800 to 19,000           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                      0 to +5%          +20 to +25%       +20 to +25%

North America

Light vehicle markets - Gradually improving economic conditions during the past two years and the first nine months of 2012 have contributed to increased light vehicle sales and production levels in North America. Release of built-up demand to replace older vehicles and greater availability of credit have also stimulated new vehicle demand. Nine-month production of around 11.5 million light vehicles is 19% higher than comparable 2011 production of 9.7 million vehicles. Third quarter 2012 light vehicle production levels were about 12% higher than the comparable 2011 period. The higher production occurred predominantly in the passenger car and crossover segments. In the light truck pickup, van and SUV segment where more of our programs are focused, third quarter 2012 production was 5% lower than the same period of last year while nine month 2012 production increased 3% from the comparable 2011 period. As compared to this year's second quarter, light truck production was down 10%, with light truck pickup, van and SUV production being down 14%. The higher 2012 production levels are generally reflective of higher light vehicle unit sales which are about 14% higher in the first nine months of 2012 than in last year's first nine months. The light truck pickup, van and SUV segment posted a sales increase of only 5% over the same period. U.S. days supply of total light vehicles at the end of September 2012 was around 59, unchanged from days supply at June 30, 2012 and up from 51 days at December 31, 2011. The increase in overall light vehicle inventory levels from the end of 2011 is driven primarily by activity in the light truck pickup, van and SUV segment. Inventory levels in this segment increased to around 84 days at the end of September 2012, down slightly from 86 days at the end of June 2012, but up considerably from 56 days at the end of 2011.

Despite the relatively robust market thus far in 2012, a number of economic indicators continue to create an element of uncertainty over near-term vehicle sales and production. Unemployment levels have not decreased markedly and fuel prices continue to be volatile. An improved financing environment and signs that the housing sector may have bottomed out are positive developments. Adverse economic developments in other parts of the world have added a further element of uncertainty, impacting consumer confidence within the North American markets. Although the current economic environment continues to pose some risk and uncertainty to the sustainability of near-term vehicle production levels, on balance, we are expecting continued strengthening in North America for the remainder of 2012. Our current outlook for full year light vehicle production is 14.8 to 15.1 million units, up from our July 2012 guidance of 14.0 to 14.5 million units. At our current outlook, total light vehicle production will be up about 13 to 15% over 2011. The improved outlook is principally in the passenger car and cross-over vehicle segments. Our outlook for full year light truck pickup, van and SUV segment production is substantially unchanged from July 2012
- with production in this segment still 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 nine months of 2012. However, the pace of improvement in these markets in 2012 has been tempered by slower than expected improvement in economic conditions, which has led to lower new vehicle order levels. Heavy-duty Class 8 truck production of about 65,000 units in this year's third quarter is down about 5% from unit production of approximately 68,000 vehicles in the same period in 2011 and 17% when compared to this year's second quarter production of 78,000 units. For the comparable nine-month periods, 2012 production is up about 23%. In the medium-duty Classes 5-7 segment, year-over-year third quarter production was up about 2%, with this year's third quarter production about 15% lower than this year's second quarter. For the nine-month period of 2012, medium-duty production levels were around 12% higher than last year.

With the mixed and uncertain outlook surrounding the global economy, order levels for Class 8 trucks in the third quarter of 2012 have been relatively weak, leading to reductions in planned production levels by OEMs in this market. We have further reduced the range on our full year 2012 Class 8 production outlook range to 265,000 to 275,000 units from our July outlook of 270,000 to 280,000 units. As revised, this market is now expected to be up about 4 to 8% from last year. Our full year outlook for medium-duty Classes 5-7 production is substantially unchanged from July and expected to come in around 175,000 to 180,000 units, an increase of 5 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. Nine-month 2012 production of light vehicles in Europe was down about 5% from the corresponding period of 2011. We expect the tough economic environment to persist through the remainder 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 nine months of 2012 being down about 3% from the corresponding period of last year. At present, we expect full year 2012 production levels to be 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 nine-month 2012 production up about 13% from 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 nine months is down about 11% from the same period 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. Third quarter 2012 production rebounded some, coming in about 13% higher than the first two quarters of this year. Compared with last year, third quarter 2012 production is 13% lower, with nine-month production being down more than 20% from those same periods in 2011. With expected fourth quarter production that is comparable to the third quarter, our full year 2012 outlook is in line with July expectation at a level that is 18 to 27% lower than 2011. Asia Pacific production in 2011 declined about 5% as a consequence of the natural disasters disrupting 2011 production, after being up more than 50% the previous year. Although first-half 2012 production rebounded some from the second half of 2011, the effects of overall weaker global economic conditions have similarly impacted this market, with year-over-year third quarter production being down from 2011. We expect the sluggish economic conditions to continue through the remainder of the year, resulting in a full year Asia Pacific production outlook that is unchanged from July coming in below 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 full-year outlook is slightly changed from July, with agriculture and construction markets now expected to be flat to up 5% over last year.

Sales, Earnings and Cash Flow Outlook

                        Outlook        2011        2010
Sales               $7,200 - $7,300   $ 7,592     $ 6,109

Adjusted EBITDA *     $780 - $800     $   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 2012 sales have been adversely impacted by weaker international exchange rates and softening demand levels, principally in the Europe region and in South and North America medium/heavy truck markets. While the South America commercial vehicle market has been weak all year, weakening in the North America market began mid-year. Particularly in light of a weaker second half 2012 commercial vehicle market we're now expecting full-year 2012 sales to be $7,200 to $7,300, a reduction from our July outlook of $7,475 to $7,575. With the reduced sales, our Adjusted EBITDA for the year is now expected to be in the range of $780 to $800. 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 to $160 to $170, which compares to $196 in 2011. With the reduced level of capital spend, our full-year free cash flow outlook of more than $200 (before the incremental U.S. pension contribution of $150 made in January 2012) is unchanged from our previous outlook. In comparison to 2011, increased cash requirements for interest, taxes and pension fund contributions in 2012 are expected to consume some of the increased free cash flow attributable to higher profits and lower capital spending.

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