Still, we also assume private equity firm Centerbridge Partners L.P. (which
acquired Dana's interest when the company emerged from bankruptcy in early
2008) will influence Dana's financial policy and business strategy.
Centerbridge has two of the nine members on Dana's board and elects one member
that is independent. The capital structure includes $753 million in 4%
cash-pay convertible preferred stock held by Centerbridge and certain previous
creditors, which we view as equity.
Dana's lease- and pension-adjusted total debt to EBITDA was 2.0x as of Sept.
30, 2012. We expect Dana can keep leverage below or at 2.5x, even as it
expands its global presence for automotive driveline products and power
technologies and increases its aftermarket business. We assume EBITDA
expansion will be sufficient to offset any growth-related incremental debt we
believe it might incur in 2013. In addition, we believe funding for small
acquisitions and investments will not drive free operating cash flow into
negative territory. Discretionary free cash flow totaled $270 million (per our
calculation) for the 12 months ended Sept. 30, 2012, before a voluntary $150
million pension contribution. Funds from operations (FFO) to total debt rose
to 36% as of Sept. 30 (excluding the $150 million voluntary pension
contribution), and we expect it to remain above 30% for the significant
financial risk profile score.
Dana manufactures driveline products including axles, driveshafts,
transmissions, and power technologies, including sealing and thermal products.
Dana's customers are original equipment manufacturers (OEMs) of vehicles in
the light-vehicle, heavy-duty commercial, and heavy off-road markets. The
company began to expand its aftermarket business in 2012, which should, over
the long term, increase the diversity and counter-cyclicality of its revenue
The business profile is "weak," reflecting Dana's exposure to the cyclical and
highly competitive light and heavy duty vehicle markets. For example
(excluding foreign exchange), organic revenue in the third quarter decreased
5% compared with 2011 because of production volumes, pricing, and product mix.
Results in the regions were mixed according to variations in light and heavy
vehicle production and new product launches--sales were up in Europe and Asia
Pacific and down in North and South America. We assume these types of regional
differences will continue.
We estimate lease- and pension-adjusted EBITDA can reach $850 million in 2012.
The company's lowered guidance for 2012 adjusted EBITDA is $780 million to
$800 million. Dana's trailing-12-month adjusted EBITDA margin rose to 11.2% as
of Sept. 30, 2012, up from 10.3% as of Sept. 30, 2011. We believe Dana can
achieve EBITDA margins near 11% in 2012 and 2013 because of expected volume
growth in selected global markets and cost side efficiencies. By segment,
EBITDA margins for the first nine months of 2012 were 13.7% for power
technologies, 12.9% off highway, 9.8% light vehicle driveline, and 10.6%
Dana's OE end markets are fairly diverse relative to the rated auto supply
sector. For 2011, light vehicles made up about 42% of sales, medium- and
heavy-duty commercial vehicles 38%, and off-road vehicles (construction,
mining, and agriculture) 20%. Although Dana's customer mix is somewhat
diverse--the Michigan-based OEMs account for less than 25% of Dana's
sales--its axle and driveshaft businesses depend materially on Ford Motor Co.,
which accounts for 15% of global sales. Dana's geographic diversity is good,
reflecting the distribution of its OEM customers. For the nine months ended
Sept. 30, 2012, North America accounted for 44% of Dana's revenues, Europe
25%, South America 11%, and Asia 20%. Still, in the event of another global
downturn, we believe this diversity would be of limited benefit to any auto
supplier, as in 2008-2009.
We assume Dana's organic revenue will be positive in 2013 because of our
expectations for modest growth in North American auto production, possibly
flat 2013 North American commercial-truck demand, and potential improvement in
the Brazilian truck market. We expect light-vehicle production in Europe to
decline about 5%, and commercial vehicle production to be flat or down
somewhat. In the North American light-vehicle market, we expect 2013 sales to
increase 6% to 15.3 million units from 14.4 million units sold in 2012 (13.4%
increase over 2011). In the North American light-vehicle market, we view
Dana's significant exposure to light trucks and SUVs, relative to passenger
cars, as a potential risk if gasoline prices rise closer to $5 per gallon and
consumers purchase smaller vehicles cars in response.
We expect the competitive landscape to remain highly competitive, but largely
unchanged for Dana in 2013. As with virtually all Tier 1 auto suppliers, Dana
faces competition from formidable peers as well as the internal production of
a few OEMs. Also, all Tier 1 light-vehicle suppliers are exposed to their own
suppliers, and we believe many smaller suppliers remain in fragile financial
health and depend on their customers for periodic financial assistance in the
We believe an additional long-term risk for Dana is any unrecouped increases
in commodity costs--primarily for steel and aluminum, the costs of which
remain volatile. We believe Dana addresses this exposure through customer
purchase programs, price increases, and negotiated contracts that allow for a
lag in recovering the cost of materials. Dana has indicated that 75% of its
incremental steel costs are recoverable through contracts.
Dana invests heavily in markets that it expects will have good future growth,
as are many of its competitors. In our view, slower-than-expected demand near
term in these markets remains a risk, given the large increases in capacity
many suppliers are making in these regions. In China, Dana has a 50% its stake
in Dongfeng Dana Axle Co., a commercial vehicle axle joint venture (JV) and
the sole supplier of medium and heavy truck axles to Dongfeng Motor Co. Ltd.,
which is the largest commercial truck manufacturer in China. In South America,
Dana has an agreement with SIFCO SA for the distribution rights to SIFCO's
commercial vehicle steer axle systems and an exclusive long-term supply
agreement for certain driveline components.
Liquidity is "adequate" under our criteria. Our assessment of Dana's liquidity
profile incorporates the following expectations and assumptions:
-- We expect sources of liquidity, including cash and facility
availability, to exceed uses by 1.2x or more over the next 12-18 months.
-- We expect net sources to remain positive, even if EBITDA declines as
much as 15%.
-- Compliance with financial covenants could survive a 15% drop in
EBITDA, in our view.
-- Because of Dana's diverse revenue stream and good operating
efficiency, we believe it could absorb low-probability, high impact events.
Dana reported an unrestricted global cash balance of $818 million as of Sept.
30, 2012, of which $202 million was held in the U.S. We assume the company
will retain about $600 million of this cash to run the business and reserve
the remainder for acquisitions and investments in the next few years to expand
its global presence. We estimate Dana can generate free cash from operations
(before one-time pension contributions) of about $200 million for 2012 and
$300 million for 2013 because of lower capital spending and earnings
Dana is restructuring for operating efficiency to offset pricing pressures and
volatile commodity costs. The company has stated that it expects restructuring
expense for 2012 to be about $60 million.
We believe Dana's unfunded pension and other postretirement employee benefits
obligations--which totaled $771 million at year end 2011--are manageable
because of the company's free cash generation and its reduced leverage. During
January 2012, Dana made a voluntary $150 million contribution to its U.S.
pension plans in excess of the expected minimum required contributions for
2012 (which was reported to be $70 million in 2012). Dana states that it
expects U.S. plan to be fully funded by 2019.
Dana has no near-term debt maturities. Its $400 million 6.5% senior notes
mature in 2019, and its $350 million 6.75% senior notes mature in 2021.
Dana has a $500 million asset-based loan (ABL) revolver that expires February
2016. As of Sept. 30, 2012, the undrawn revolver had availability, based on
the company's borrowing base collateral, of $327 million after taking into
account $66 million for letters of credit. At Sept. 30, 2012, the company was
in compliance with the debt covenants under its revolver.
Separately, Dana has a EUR75 million ($96 million) receivables securitization
program that matures in 2016. As of Sept. 30, 2012, there was $91 million of
availability, but no borrowings, under the European trade receivable
securitization program based on the effective borrowing base. We believe Dana
also has a $51 million debt obligation in Brazil, expiring in the fourth
quarter of 2015 that we expect to be rolled over at maturity to support its
The company's capital spending estimate for 2012 has been reduced sharply to
about $160 million (from $230 million) because of lower sales. We expect
capital spending to remain relatively conservative until revenues stabilize.
Dana also has cash dividend payments of about $31 million annually on its $762
million of 4% preferred stock, and the company initiated a small dividend on
common shares early in 2012 that will total about $30 million for the initial
Dana has board authorization to repurchase up to $250 million of its common
shares, as of Oct. 25, 2012.
The rating on Dana's senior secured revolving credit facility is 'BBB-', two
notches above the corporate credit rating. The recovery rating is '1',
indicating our expectation that lenders would receive very high (90% to 100%)
recovery in a default scenario. The rating on Dana's unsecured debt is 'BB',
the same as the corporate credit rating, and the recovery rating on this debt
is '3', indicating our expectation that lenders would receive substantial (50%
to 70%) recovery in a default scenario. (For the complete recovery analysis,
please see the recovery report on Dana Holding Corp., published March 6, 2012,
Our stable rating outlook on Dana reflects our view that its focus on
maintaining operating efficiencies will enable it to increase earnings and
generate free cash flow for 2012 and 2013 from continued modest growth in
global markets. Aside from internal growth, we expect the company to pursue
midsize acquisitions while maintaining the credit measures we believe are
appropriate for the rating. For the rating, we expect Dana to maintain lease-
and pension-adjusted total debt to EBITDA of 2.5x or lower and FFO to total
debt of at least 30%. We expect the company will continue to generate positive
discretionary free cash flow, and we anticipate no material change in the
business strategy or financial policy.
We could raise our ratings if we believe Dana can sustain increased EBITDA
such that adjusted leverage falls to 2.0x or lower and FFO to total debt
approaches 40% or better over a sustained period. An upgrade would also take
into account the sustainability of credit metrics at or above recent levels.
For example, we calculate that Dana's adjusted leverage would decline to a
level comfortably below 2.0x (where it was as of Sept. 30) if its revenues
expand in 2013 and it can achieve gross margin (excluding depreciation) of
15.5% or better. We would also need to believe that any use of its sizable
cash balances would be consistent with our expectations for a higher rating,
indicating that Dana is maintaining a financial policy consistent with that
during the recent post-bankruptcy period.
We could lower our ratings if we believe auto industry markets will not
improve as we have assumed, or if the economic recovery falters, preventing
Dana from achieving the financial assumptions that we expect for the rating in
2013. Leverage could rise to 2.5x or higher if revenue falls 5% or more and
gross margin declines 200 basis points from the 2011 level. We also could
lower the ratings if free cash generated after capital spending drops below
$100 million for any rolling 12-month period, or if Dana pursues a material
debt-financed acquisition or large dividend payouts.
Related Criteria And Research
-- U.S. Auto Sales Poised To Continue Recovery In 2013; 2012 Sales In
Line With Standard & Poor's Expectations, Jan. 4, 2013
-- Top 10 Investor Questions For 2013: Global Autos And Trucks, Dec. 5,
-- Issuer Ranking: Global Auto Suppliers, Strongest To Weakest, Oct. 10,
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Key Credit Factors: Business And Financial Risks In The Auto Component
Suppliers Industry, Jan. 28, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Temporary telephone contact numbers: Nancy C. Messer, CFA (917-623-4910);
Robert Schulz (347-782-3780).