<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
Commission
For the Quarterly Period Ended September 30, 1998 File Number 1-1063
------------------ ------
Dana Corporation
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Virginia 34-4361040
- ---------------------------------------- -----------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
4500 Dorr Street, Toledo, Ohio 43615
- ---------------------------------------- -----------------------------------
(Address of Principal Executive Offices) (Zip Code)
(419) 535-4500
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1998
------------------- -------------------------------
Common stock, $1 par value 165,540,470
1
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DANA CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Cover 1
Index 2
Part I. Financial Information
Item 1. Financial Statements
Condensed Balance Sheet
December 31, 1997 and
September 30, 1998 3
Statement of Income
Three Months and Nine Months Ended
September 30, 1997 and 1998 4
Condensed Statement of Cash Flows
Nine Months Ended
September 30, 1997 and 1998 5
Notes to Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9-16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. DANA CORPORATION
- -------
CONDENSED BALANCE SHEET (Unaudited)
(in Millions)
<TABLE>
<CAPTION>
ASSETS December 31, 1997 September 30, 1998
----------------- ------------------
<S> <C> <C>
Cash and Cash Equivalents $ 422.7 $ 160.7
Accounts Receivable
Trade 1,439.4 1,672.4
Other 132.2 151.8
Inventories
Raw Materials 420.1 459.9
Work in Process and Finished Goods 1,155.2 1,170.1
Lease Financing 1,330.1 1,468.4
Investments and Other Assets 1,811.9 1,865.0
Property, Plant and Equipment 5,301.0 5,448.8
Less: Accumulated Depreciation 2,524.3 2,421.5
--------- ---------
Total Assets $ 9,488.3 $ 9,975.6
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable and Other Liabilities $ 2,166.8 $ 2,243.4
Short-Term Debt 1,255.6 1,479.7
Long-Term Debt 2,227.2 2,154.4
Deferred Employee Benefits 1,082.7 1,095.8
Minority Interest 153.6 141.1
Shareholders' Equity 2,602.4 2,861.2
--------- ---------
Total Liabilities and
Shareholders' Equity $ 9,488.3 $ 9,975.6
========= =========
</TABLE>
3
<PAGE> 4
ITEM 1. (Continued)
- ------------------
DANA CORPORATION
STATEMENT OF INCOME (Unaudited)
(in Millions Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 2,865.4 $ 2,962.4 $ 8,951.3 $ 9,431.8
Revenue from Lease Financing
and Other Income 189.0 63.6 398.0 175.1
------------ ------------ ------------ ------------
3,054.4 3,026.0 9,349.3 9,606.9
------------ ------------ ------------ ------------
Costs and Expenses
Cost of Sales 2,447.6 2,479.2 7,552.9 7,859.8
Selling, General and
Administrative Expenses 284.9 271.5 875.5 864.5
Restructuring and Rationalization
Charges 265.3 - 300.2 -
Merger Expense - 45.5 - 46.5
Interest Expense 61.0 72.1 186.4 211.2
------------ ------------ ------------ ------------
3,058.8 2,868.3 8,915.0 8,982.0
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (4.4) 157.7 434.3 624.9
Estimated Taxes on Income (44.6) (68.0) (235.6) (247.1)
Minority Interest (7.8) (2.6) (19.4) (10.6)
Equity in Earnings of Affiliates 11.4 11.2 24.3 31.9
------------ ------------ ------------ ------------
Net Income (Loss) $ (45.4) $ 98.3 $ 203.6 $ 399.1
============ ============ ============ ============
Net Income (Loss) Per Common Share -
Basic $ (.29) $ .59 $ 1.25 $ 2.42
============ ============ ============ ============
Diluted $ (.29) $ .59 $ 1.24 $ 2.39
============ ============ ============ ============
Dividends Declared and Paid per
Common Share $ .27 $ .29 $ .77 $ .85
Average Number of Shares Outstanding -
For Basic 162.4 164.9 162.4 164.9
For Diluted 164.1 166.9 164.1 166.9
</TABLE>
4
<PAGE> 5
ITEM 1. (Continued)
- ------------------
DANA CORPORATION
CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
(in Millions)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1997 1998
---- ----
<S> <C> <C>
Net Income $ 203.6 $ 399.1
Depreciation and Amortization 340.6 366.3
Gain on Sale of Businesses (136.1) -
Working Capital Change and Other 228.0 (199.2)
-------- --------
Net Cash Flows from Operating Activities 636.1 566.2
-------- --------
Purchases of Property, Plant and Equipment (382.5) (454.2)
Purchases of Assets to be Leased (331.3) (472.0)
Payments Received on Leases and Loans 308.5 382.2
Acquisitions (596.8) (389.2)
Divestitures 424.6 267.5
Other (45.6) (189.0)
-------- --------
Net Cash Flows-Investing Activities (623.1) (854.7)
-------- --------
Net Change in Short-Term Debt (241.5) 301.9
Proceeds from Long-Term Debt 1,300.8 547.9
Payments on Long-Term Debt (846.3) (709.7)
Dividends Paid (122.2) (150.2)
Other 21.9 36.6
-------- --------
Net Cash Flows-Financing Activities 112.7 26.5
-------- --------
Net Change in Cash and Cash Equivalents 125.7 (262.0)
Cash and Cash Equivalents-beginning of period 271.5 422.7
-------- --------
Cash and Cash Equivalents-end of period $ 397.2 $ 160.7
======== ========
</TABLE>
5
<PAGE> 6
ITEM 1. (Continued)
- ------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in Millions Except Per Share Amounts)
1. In the opinion of management, all normal recurring adjustments necessary to a
fair presentation of results for the unaudited interim periods have been
included.
2. In July 1998, Dana Corporation completed a merger with Echlin Inc. by
exchanging 59.6 million shares of its common stock for all of the common
stock of Echlin. Each share of Echlin was exchanged for .9293 of one share of
Dana common stock. The merger has been accounted for as a pooling of
interests and, accordingly, all prior period consolidated financial
statements have been restated to include the combined results of operations,
financial position and cash flows of Dana and Echlin. Where accounting
policies, fiscal year ends and statement presentation differed, they have
been conformed to Dana's methods. The resulting differences were immaterial
and have been charged to retained earnings. There were no material
intercompany transactions between Dana and Echlin during the periods prior
to the merger.
The following information presents certain income statement data of the
separate companies for the periods preceding the merger:
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended
---------------- -----------------
June 30, 1998 September 30, 1997
------------- ------------------
<S> <C> <C>
Net Sales:
Dana $ 4,690.5 $ 6,216.8
Echlin 1,778.9 2,734.5
--------- ---------
$ 6,469.4 $ 8,951.3
========= =========
Net Income (Loss):
Dana $ 223.6 $ 284.7
Echlin 77.1 (81.1)
--------- ---------
$ 300.7 $ 203.6
========= =========
</TABLE>
3. In February 1997, Dana acquired the assets of Clark-Hurth Components, a
worldwide manufacturer of off-highway vehicle and equipment components, and
the Sealed Power worldwide piston ring and cylinder liner operations and
assets of SPX Corporation. In May 1997, Dana purchased the Brazilian engine
components business of Industria e Commercio Brosol Ltda. In June 1997, Dana
acquired the North American Aftermarket division of ITT Automotive (ITT), a
unit of ITT Industries, Inc. In January 1998, Dana acquired both the heavy
axle and brake business of Eaton Corporation and General Automotive Specialty
Company, Inc. (GAS), a manufacturer of motor vehicle switches and locks. In
April 1998, the Company acquired 98 percent of the share capital of Nakata
S.A. Industria e Comercio. These acquisitions have been accounted for as
purchases and their results of operations have been included since the dates
of acquisition. Goodwill relating to the acquisitions is included in
Investments and Other Assets.
6
<PAGE> 7
ITEM 1. (Continued)
- ------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in Millions)
4. In March 1997, Dana completed the sale of its warehouse distribution
operations in the U.K., the Netherlands and Portugal to U.K.-based Partco
Group plc for pound sterling 103 (U.S. $164) resulting in an after-tax gain
of $45 (28 cents per share). In August 1997, Dana sold its vehicular clutch
business to Eaton Corporation recognizing an after-tax gain of $70 (43 cents
per share) and its Preferred Plastic Sheet Division resulting in an after-tax
gain of $13 (8 cents per share). In September 1997, Dana sold Ace Electric, a
producer of starting and charging parts; Dana also sold the vehicular
transmission operations to a subsidiary of Dana's 49% owned Mexican
affiliate, Spicer S.A. de C.V. In February 1998, Dana completed the sale of
its hydraulic brake hose facilities in Columbia City, Ind., and Garching,
Germany, to CF Gomma, S.p.A. In April 1998, Dana sold its Midland-Grau heavy
duty brake operations to the Haldex Group and in May 1998, Dana completed the
sale of its hydraulic cylinder business to Hyco International, Inc.
5. Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," is effective for periods ending after December 15, 1997. Accordingly,
basic and diluted income per share have been computed in accordance with this
statement. Following is a reconciliation of weighted average common shares
outstanding for purposes of calculating basic and diluted net income per
share.
<TABLE>
<CAPTION>
Three and Nine Months Ended September 30
----------------------------------------
1997 1998
---- ----
<S> <C> <C>
Weighted average common shares outstanding - Basic 162.4 164.9
Plus: Incremental shares from
assumed conversion of -
Deferred compensation units .4 .5
Stock options 1.3 1.5
------- ------
Total potentially dilutive securities 1.7 2.0
------- ------
Adjusted average common shares outstanding - Diluted 164.1 166.9
======= ======
</TABLE>
6. SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal years
beginning after December 15, 1997. The statement requires, among other
things, the reporting of total comprehensive income in condensed financial
statements of interim periods. Comprehensive income includes net income and
components of other comprehensive income, such as foreign currency
translation adjustments, unrealized investment gains or losses and minimum
pension liability adjustments. Dana's total comprehensive earnings were as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30 September 30
------------ ------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $ (45.4) $ 98.3 $ 203.6 $ 399.1
Other Comprehensive Income/(Loss)
Net unrealized investment gain 4.3 - 4.3 -
Deferred translation gain/(loss) (19.5) .7 (58.0) (40.9)
------- ------ ------- -------
Total comprehensive income/(loss) $ (60.6) $ 99.0 $ 149.9 $ 358.2
======= ====== ======= =======
</TABLE>
7
<PAGE> 8
ITEM 1. (Continued)
- ------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in Millions)
7. The Company initiated a rationalization plan at its Perfect Circle Europe
operations resulting in a charge of $36 (22 cents per share) in the first
quarter of 1997. In the second quarter of 1997, Dana announced the closing of
its Berwick, Pa. facility and the sale of its operating assets. In the third
quarter of 1997, Dana recorded non-recurring charges totaling $234 ($1.43 per
share). This amount included $182 ($1.11 per share) related to the former
Echlin Inc. for facility realignments and rationalizations and the writedown
to net realizable value of businesses to be disposed, $22 (13 cents per
share) resulting from the rationalization of Dana's Parish facilities in
Reading, Pa. and $20 (12 cents per share) related to deferred tax benefits
not expected to be utilized due to the ongoing rationalization of Dana's
Perfect Circle Europe operations in France.
Restructuring and rationalization charges of $417 were recorded in 1997 of
which $59 was charged to cost of sales and $358 to restructuring. An accrued
liability of $180 remained at December 31, 1997. During the first nine months
of 1998, $82 was charged against the liability, consisting of cash payments
of $51 ($28 related to severance pay and benefits and $23 related to closed
facilities) and non-cash charges of $31 relating to impaired assets and
investment in operations that were closed or sold. The remaining estimated
cash outlays of $87 ($46 in 1998, $25 in 1999, and $16 thereafter) generally
represent employee separation costs for the approximately 460 workers
affected by these activities. The balance of the accrual is non-cash and will
be utilized to write down the affected assets. Dana's liquidity and cash
flows will not be materially impacted by these actions. Dana's operations
over the long term are expected to benefit from these realignment strategies.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In July 1998, Dana Corporation completed a merger with Echlin Inc. The
merger has been accounted for as a pooling of interests and, accordingly, all
prior period consolidated financial statements have been restated to include the
combined results of operations, financial position and cash flows of Dana and
Echlin.
LIQUIDITY AND CAPITAL RESOURCES
(in Millions)
<TABLE>
<CAPTION>
- ------------------------------------------------------------
CASH FLOWS FROM OPERATIONS
FOR NINE MONTHS ENDED SEPTEMBER 30
<S> <C>
- ------------------------------ -----------------------------
1996 $626
- ------------------------------ -----------------------------
1997 636
- ------------------------------ -----------------------------
1998 566
- ------------------------------ -----------------------------
</TABLE>
Net cash provided by operating activities amounted to $566 for the nine
months ended September 30, 1998, compared with $636 in 1997. The decrease was
attributable to increased working capital requirements in 1998, partially offset
by higher operating net income and depreciation and amortization expenses.
Net cash flows used for investing activities were $855 through nine months
of 1998 primarily due to acquisitions and capital expenditures. In 1998 Dana
acquired Eaton Corporation's heavy axle and brake business, General Automotive
Specialty Company, Inc., the remaining 40% interest in Simesc (its Brazilian
structural components manufacturing company), and 98% of the share capital of
Brazilian suspension components producer Nakata. During the period, Dana also
divested the Midland-Grau heavy duty brake operations, the Weatherhead brake
hose operations and its hydraulic cylinder business. In the first nine months of
1997, Dana acquired the assets of Clark-Hurth Components, the piston ring and
cylinder liner operations of SPX Corporation, the North American Aftermarket
division of ITT Automotive and the Brazilian engine components business of
Industria e Commercio Brosol Ltda. Also in 1997 the Company sold its European
warehouse distribution operations, vehicular clutch business, Ace Electric and
its Preferred Plastic Sheet Division.
<TABLE>
<CAPTION>
- ------------------------------------------------------------
CAPITAL EXPENDITURES
- ------------------------------------------------------------
NINE MONTHS YEAR ENDED
ENDED SEPT 30 DECEMBER 31
<S> <C> <C>
- ------------ --------------------- -------------------------
1996 $347 $ 470
- ------------ --------------------- -------------------------
1997 383 579
- ------------ --------------------- ------------------------
1998 454 620*
- ------------------------------------------------------------
* Projected
- ------------------------------------------------------------
</TABLE>
Capital expenditures for the first nine months of 1998 were $71 higher than
in 1997 to support the Company's growth initiatives and continued manufacturing
process improvements. The Company currently anticipates capital spending for the
full year to be above the 1997 level.
Net purchases of leased assets (purchases less principal payments received
on leases and loans) were $90 in the first nine months 1998, an increase of $67
over 1997.
Financing activities provided net cash of $27 in the first nine months of
1998. In the first quarter of 1998, Dana sold $350 of new senior unsecured notes
consisting of $150 of 6.5% notes due March 15, 2008 and $200 of 7.0% notes due
March 15, 2028. Proceeds from the issues were used to pay down existing
short- and medium-term debt.
In January, Standard & Poor's Corporation increased Dana's corporate credit
and senior debt ratings to "A-" from "BBB+." The ratings of Dana Commercial
Credit Corporation (DCC), Dana's wholly-owned leasing subsidiary, were also
raised to "A-" from "BBB+."
9
<PAGE> 10
ITEM 2. (Continued)
- ------------------
LIQUIDITY AND CAPITAL RESOURCES
(in Millions)
Cash dividends paid in the first nine months of 1998 were $150 compared to
$122 last year. In the second quarter, Dana's Board of Directors approved a 7%
increase in the dividend to an annualized rate of $1.16 per share.
Dana utilizes committed and uncommitted bank lines for the issuance of
commercial paper and bank direct borrowings. Dana (excluding DCC) had committed
and uncommitted borrowing lines of credit totaling $2,247 at September 30, 1998,
while DCC's lines were $911. Dana's strong cash flows from operations, together
with its worldwide credit facilities, are expected to provide adequate liquidity
to meet the Company's debt service obligations, projected capital expenditures,
acquisition obligations and working capital requirements for the balance of
1998.
Dana's management and legal counsel have reviewed the legal proceedings to
which the Company and its subsidiaries were parties as of September 30, 1998
(including, among others, those involving product liability claims and alleged
violations of environmental laws) and concluded that neither the liabilities
that may result from these legal proceedings nor the cash flows related to such
liabilities are reasonably likely to have a material adverse effect on the
Company's liquidity, financial condition or results of operations. The Company
estimates its contingent environmental and product liabilities based upon the
most probable method of remediation or outcome considering currently enacted
laws and regulations and existing technology. Measurement of liabilities is made
on an undiscounted basis and excludes the effects of inflation. In those cases
where there is a range of equally probable remediation methods or outcomes, the
Company accrues at the lower end of the range. At September 30, 1998, the
Company had accrued $41 for product liability costs (products) and $58 for
environmental liability costs (environmental), compared to $50 for products and
$61 for environmental at December 31, 1997. The difference between the Company's
minimum and maximum estimates for contingent liabilities, while not considered
material, was $15 for products and $2 for environmental at September 30, 1998,
unchanged since December 31, 1997. At September 30, 1998, the Company had
recorded (as assets) probable recoveries from insurance or third parties in the
amounts of $20 for products and $5 for environmental, compared to $29 for
products and $10 for environmental at December 31, 1997.
RESTRUCTURING AND RATIONALIZATION EXPENSES
Restructuring and rationalization charges of $417 were recorded in 1997 of
which $59 was charged to cost of sales and $358 to restructuring. An accrued
liability of $180 remained at December 31, 1997. During the first nine months of
1998, $82 was charged against the liability, consisting of cash payments of $51
($28 related to severance pay and benefits and $23 related to closed facilities)
and non-cash charges of $31 relating to impaired assets and investment in
operations that were closed or sold. The remaining estimated cash outlays of $87
($46 in 1998, $25 in 1999, and $16 thereafter) generally represent employee
separation costs for the approximately 460 workers affected by these activities.
The balance of the accrual is non-cash and will be utilized to write down the
affected assets. Dana's liquidity and cash flows will not be materially impacted
by these actions. Dana's operations over the long term are expected to benefit
from these realignment strategies.
10
<PAGE> 11
ITEM 2. (Continued)
- ------------------
LIQUIDITY AND CAPITAL RESOURCES
(IN MILLIONS)
IMPACT OF THE YEAR 2000
Dana has a Year 2000 readiness program for assessing its products and its
critical information technology (IT) and non-IT systems, including those systems
which interface with major customers, suppliers and other third parties. This
program is under the leadership of the Company's Global Year 2000 Readiness
Team, which includes Year 2000 Project Managers for each of Dana's Strategic
Business Units and geographic regions. The Company has engaged
PricewaterhouseCoopers LLP to assist the Readiness Team with methodology,
training and data collection tools. In large part, the Company is utilizing
assessment tools developed by the Automotive Industry Action Group, an industry
trade association.
While Dana's various operations are at different stages of Year 2000
readiness, the Company has nearly completed its global product review. Based
on the information available to date, the Company does not anticipate any
significant readiness problems with respect to its products.
Most Dana facilities have completed the inventory and assessment of their
internal IT and non-IT systems (including business, operating and factory floor
systems) and are working on remediation, as appropriate, for these systems.
Those facilities that have not yet completed this process are expected to be
finished by the end of 1998. The remediation may include repair, replacement,
upgrading, or retirement of specific systems and components, with priorities
based on a business risk assessment. Dana expects that remediation activities
for its internal systems will be completed during the first quarter of 1999.
Post-remediation testing is scheduled for the second quarter of 1999, and
contingency plans, if needed, will be developed before the end of 1999.
Dana has reviewed its production and non-production supplier base to
identify critical suppliers and has begun to assess the Year 2000 readiness of
these suppliers by means of surveys, visits and audits. An assessment program
for major customers will commence shortly. These assessments will be completed
as quickly as possible during the first half of 1999 and contingency plans will
be prepared, as needed, before the end of the year.
The most reasonably likely worst case scenario that Dana currently
anticipates with respect to Year 2000 is the failure of some of its suppliers,
including utilities suppliers, to be ready. This could cause a temporary
interruption of materials or services that Dana needs to make its products,
which could result in delayed shipments to customers and lost sales and profits
for Dana. As the critical supplier assessments are completed, Dana will develop
contingency plans, as necessary, to address the risks which are identified.
Although such plans have not been developed yet, they might include resourcing
materials or building inventory banks.
Dana has spent approximately $34 on Year 2000 activities to date, of which
$23 has been charged to expense and $11 has been capitalized. Based on the work
performed to date and on current information and plans, Dana anticipates that it
will incur additional future costs of $82 in addressing Year 2000 issues, of
which $57 will be charged to expense and $25 will be capitalized.
The outcome of the Company's Year 2000 program is subject to a number of
risks and uncertainties, some of which (such as the availability of qualified
computer personnel and the Year 2000 responses of third parties) are beyond its
control. Therefore, there can be no assurances that Dana will not incur material
remediation costs beyond the above anticipated future costs, or that the
Company's business, financial condition, or results of operations will not be
significantly impacted if Year 2000 problems with its systems, or with the
products or systems of other parties with whom it does business, are not
resolved in a timely manner.
11
<PAGE> 12
ITEM 2. (Continued)
- ------------------
LIQUIDITY AND CAPITAL RESOURCES
(in Millions)
IMPACT OF EURO
Dana has a Euro Currency program for its European facilities. The program
is under the leadership of the Company's Euro Steering Committee. Guidelines
have been prepared establishing timetables for compliance with the various
requirements of the Euro conversion. Questionnaires have been developed to aid
the facilities in accessing their needs and the Committee is monitoring progress
at all locations.
While various operations are at different stages of Euro currency
readiness, the Company expects all facilities to be capable of complying with
the Euro conversion timetable and with customer requirements for quoting and
billing in Euro.
Preliminary indications are that the cost to convert to the Euro will not
be material. However, the effect on margins due to the transparency of prices
and the potential consequences of incomplete or untimely resolution of any
required modification to systems has not been determined at this time.
RESULTS OF OPERATIONS (THIRD QUARTER 1998 VS THIRD QUARTER 1997)
(in Millions)
Worldwide sales for the third quarter of $2,962 exceeded 1997 third quarter
sales by $97 or 3%. Sales of companies divested, net of acquisitions, decreased
sales by $14. On a comparable basis sales increased $111 or 4% during the
quarter with price changes having a minimal effect. Dana's U.S. sales were
comparable with 1997 (excluding the effect of acquisitions and divestitures, an
increase of $27 or 1%). U.S. sales in the third quarter of 1998 were adversely
affected by a work stoppage at General Motors (GM). Sales from Dana's
international operations increased $101 or 12% over 1997, with the impact of
acquisitions, net of divestitures, equaling $17 or 1%. Changes in foreign
currency exchange rates since the third quarter of 1997 served to reduce third
quarter 1998 sales by approximately $25.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
THIRD QUARTER SALES
- -------------------------------------------------------------
%
1997 1998 CHANGE
- -------------------- ----------- ------------ ---------------
<S> <C> <C> <C>
U.S. $2,029 $2,025 -
- -------------------- ----------- ------------ ---------------
International 836 937 12
- -------------------- ----------- ------------ ---------------
Total $2,865 $2,962 3
- -------------------- ----------- ------------ ---------------
</TABLE>
U.S. sales of light truck components to original equipment (OE)
manufacturers decreased 6% from 1997. The GM work stoppage and the Weatherhead
brake hose divestiture contributed to the decline. U.S. sales of heavy truck OE
components rose 47% over last year (19% excluding acquisitions, net of
divestitures). Worldwide sales to manufacturers of off-highway vehicles
decreased 4% (up 1% excluding acquisitions, net of divestitures) and passenger
car OE sales grew 1% (down 2% excluding acquisitions, net of divestitures).
12
<PAGE> 13
ITEM 2. (Continued)
- ------------------
RESULTS OF OPERATIONS (THIRD QUARTER 1998 VS THIRD QUARTER 1997)
(in Millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------
THIRD QUARTER SALES BY REGION
- -------------------------------------------------------------
%
REGION 1997 1998 CHANGE
- ---------------------- ----------- ------------ -------------
<S> <C> <C> <C>
North America $2,185 $2,247 3
- ---------------------- ----------- ------------ -------------
Europe 409 437 7
- ---------------------- ----------- ------------ -------------
South America 209 233 11
- ---------------------- ----------- ------------ -------------
Asia Pacific 62 45 (27)
- ---------------------- ----------- ------------ -------------
</TABLE>
All regions except Asia Pacific saw an increase in sales over the third
quarter of 1997. Excluding the net effect of acquisitions and divestitures,
sales in North America and Europe increased 4% and 12%, respectively. Sales in
South America and Asia Pacific, excluding acquisitions, net of divestitures,
were down 7% and 14%, respectively. Continuing economic difficulty is putting
pressure on sales in these two regions.
Dana's worldwide distribution business declined 3% in the third quarter led
by a 12% decline in truck parts distribution sales. U.S. distribution sales
declined 9%; international distribution sales increased 11%. Worldwide
automotive distribution sales increased 1% (5% excluding acquisitions, net of
divestitures). Truck parts distribution sales fell 12% in large part due to the
dispositions of the clutch operations in 1997 and the heavy-duty brake
operations in 1998. Excluding all acquisitions, net of divestitures, truck parts
distribution sales increased 5%.
Revenue from lease financing and other income decreased $125 in the third
quarter of 1998. Other income recorded in 1997 included $118 from the sale of
the vehicular clutch operations and $21 from the divestiture of the Preferred
Plastic Sheet Division. Lease-related revenue increased $9 or 26% in 1998
corresponding to an 18% increase in average lease financing assets.
Dana's gross margin for the third quarter was 16.3%, compared to 14.6% in
1997. Gross margin in 1997 was adversely affected by a charge of $41 to cost of
sales related to the former Echlin operations' write down of discontinued and
rationalized product lines. Excluding the charge, 1997 gross margin would have
been 16%.
Selling, general and administrative expenses (SG&A) decreased $13 in 1998
due to the restructuring efforts started in 1997 along with ongoing cost control
initiatives. The net impact of acquisitions and divestitures decreased SG&A by
$4 in the third quarter. DCC generated higher expenses during the quarter due to
start-up and development costs associated with new programs and expansion. The
ratio of SG&A expense to sales improved from 9.9% in 1997 to 9.2% in 1998.
Dana's operating margin for the third quarter of 1998 was 7.1% compared to
4.6% in 1997. The previously mentioned charge of $41 to cost of sales had a 1.5%
negative impact on operating margin in 1997.
Merger expense of $46 recorded in the third quarter of 1998 related to the
merger of the former Echlin Inc.
Interest expense was $11 higher than in 1997 due to higher average debt
levels related to acquisitions.
Minority interest in net income of consolidated subsidiaries decreased $5,
primarily due to the lower earnings of Albarus S.A. (a Brazilian subsidiary) and
its majority-owned subsidiaries.
13
<PAGE> 14
ITEM 2. (Continued)
- ------------------
RESULTS OF OPERATIONS (THIRD QUARTER 1998 VS THIRD QUARTER 1997)
(in Millions)
Dana's third quarter effective tax rate was 43% in 1998. A large portion of
the merger expenses recorded in the third quarter of 1998 are not deductible for
tax purposes.
The Company reported record third-quarter earnings of $98. The earnings for
1998 included non-recurring merger expenses of $38 after-tax, associated with
the Echlin merger. The 1997 loss of $45 included the after-tax impact of
restructuring and other charges ($234), the clutch division sale ($70) and the
sale of a plastics division ($13). Excluding the effect of non-recurring gains
and charges for the periods, net income in the third quarter was $136, up 30%
over 1997.
RESULTS OF OPERATIONS (NINE MONTHS 1998 VS NINE MONTHS 1997)
(in Millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------
SALES FOR NINE MONTHS ENDED SEPTEMBER 30
- -------------------------------------------------------------
%
1997 1998 CHANGE
<S> <C> <C> <C>
- -------------------- ----------- ------------ ---------------
U.S. $6,323 $6,638 5
- -------------------- ----------- ------------ ---------------
International 2,628 2,794 6
- -------------------- ----------- ------------ ---------------
Total $8,951 $9,432 5
- -------------------- ----------- ------------ ---------------
</TABLE>
Dana's worldwide sales of $9,432 in the first nine months were $481 or 5%
higher than the same period last year. Sales of companies acquired, net of
divestitures, amounted to $65 of the increase. Excluding such activities, sales
increased $416 or 5% with price changes having a minimal effect. Dana's U.S.
sales increased $315 or 5% over 1997 ($278 or 5% excluding the effect of
acquisitions and divestitures). U.S. sales in 1998 were adversely affected by a
work stoppage at GM. Sales from Dana's international operations increased $166
or 6% over 1997, with the impact of acquisitions, net of divestitures, equaling
$28. The impact of changes in foreign currency exchange rates decreased 1998
sales by approximately $129.
U.S. sales of light truck components to OE manufacturers increased 2% over
Dana's strong performance in 1997 despite the impact of the GM work stoppage
during the second and third quarters of 1998 and the Weatherhead brake hose
divestiture. U.S. sales of heavy truck OE components rose 64% over last year
(54% excluding acquisitions, net of divestitures). Worldwide sales to
manufacturers of off-highway vehicles increased 5%, an increase of 6% excluding
acquisitions, net of divestitures. Passenger car OE sales grew 3%, with little
impact from acquisitions, net of divestitures.
<TABLE>
<CAPTION>
- -------------------------------------------------------------
SALES BY REGION FOR NINE MONTHS ENDED
SEPTEMBER 30
- -------------------------------------------------------------
%
REGION 1997 1998 CHANGE
- ---------------------- ----------- ------------ -------------
<S> <C> <C> <C>
North America $6,841 $7,291 7
- ---------------------- ----------- ------------ -------------
Europe 1,369 1,381 1
- ---------------------- ----------- ------------ -------------
South America 553 622 12
- ---------------------- ----------- ------------ -------------
Asia Pacific 188 138 (27)
- ---------------------- ----------- ------------ -------------
</TABLE>
North American sales increased 7% in the first nine months of 1998, with
acquisitions, net of divestitures, accounting for $59 or 1% of the increase.
Excluding the net effect of acquisitions and divestitures, sales in Europe
increased 4% while South America and Asia Pacific sales were down 2% and 11%,
respectively. OE sales increased 10% in Europe and were flat in Asia Pacific
with both regions being impacted by sluggish distribution sales.
14
<PAGE> 15
ITEM 2. (Continued)
- ------------------
RESULTS OF OPERATIONS (NINE MONTHS 1998 VS NINE MONTHS 1997)
(in Millions)
Dana's worldwide distribution business declined 7% in the first nine months
of 1998. Excluding the impact of acquired and divested businesses, worldwide
distribution sales increased 3%. U.S. distribution sales declined 8%;
international distribution sales decreased 3% due to the exchange rate impact of
a stronger U.S. dollar and the disposition of the European warehouse
distribution business in March 1997. Worldwide automotive distribution sales
were down 3%; excluding the impact of acquired and divested businesses, these
sales actually increased 3%. Off-highway/industrial distribution sales decreased
5% and truck parts distribution sales fell 23%; excluding the impact of
acquisitions, net of divestitures, these sales declined 4% and 1%, respectively.
Revenue from lease financing and other income decreased $223 in 1998. Other
income recorded in 1997 included $76 relating to the divestiture of the European
warehouse distribution operations, $118 from the sale of the vehicular clutch
operations and $13 from the sale of an investment in a leveraged lease by DCC.
Lease-related revenue increased $20 or 20% in 1998 corresponding to an 18%
increase in average lease financing assets.
Dana's gross margin for the first nine months of 1998 was 16.7%, compared
to 15.6% in 1997. Gross margin in 1997 was adversely affected by a charge of $41
to cost of sales related to the former Echlin operations' write down of
discontinued and rationalized product lines. Excluding the charge, 1997 gross
margin would have been 16.1%.
SG&A expenses decreased $11 in 1998 due to the restructuring efforts
started in 1997 along with ongoing cost control initiatives. DCC generated
higher expenses during the period due to the effect of higher start-up and
development costs associated with new leasing programs and the expansion of its
lease portfolio. The ratio of SG&A expense to sales improved from 9.8% in 1997
to 9.2% in 1998.
Dana's operating margin for the nine-month period was 7.5% compared to 5.8%
in 1997. Excluding the previously explained charges to cost of sales recorded in
1997, Dana's operating margin improved 1.2% in 1998.
Interest expense was $25 higher than in 1997 due to higher average debt
levels related to acquisitions.
Dana's effective tax rate for the first half of 1998 was 41% compared to
56% for 1997's first nine months. The effective rate in 1997 was higher due to
providing valuation reserves for tax benefits previously recorded in France and
for tax benefits associated with the expenses recorded for the rationalization
plan at Dana's Perfect Circle Europe operations.
Minority interest in net income of consolidated subsidiaries decreased $9,
primarily due to the lower earnings of Albarus S.A. (a Brazilian subsidiary) and
its majority-owned subsidiaries.
Equity in earnings of affiliates was higher in 1998 by $8, primarily due to
losses no longer being recorded for Korea Spicer Corporation, which was sold in
November of 1997, as well as higher earnings of the Company's Mexican affiliates
and DCC's leasing affiliates.
15
<PAGE> 16
ITEM 2. (Continued)
RESULTS OF OPERATIONS (NINE MONTHS 1998 VS NINE MONTHS 1997)
(in Millions)
The Company reported record profit of $399, an increase of $196 over 1997.
The Company's 1998 earnings included the after-tax impact of the gain on sale of
its hydraulic brake hose business ($3), merger expenses ($39) and takeover
defense costs incurred by the former Echlin Inc ($7). The earnings for 1997
included the after-tax impact of the sale of the European warehouse operations
($45), the clutch division sale ($70), the sale of a plastics division ($13) and
restructuring and other charges ($274). Excluding the effect of non-recurring
gains and charges for the periods, net income for the first nine months of 1998
was $442, up 26% over 1997.
Dana's component sales to producers of light truck and sport utility
vehicles (SUV's) continued strong in the first nine months of 1998 as the
popularity of these vehicles remained steady. Fourth-quarter demand for light
truck and SUV's is anticipated to remain strong with aggressive marketing
continuing to help offset threatening economic weakness. The outlook for 1999 is
a slight downturn in sales of light trucks, SUV's, and automobiles to the North
American market. Sales to the medium and heavy truck markets should continue
significantly above last year due to the integration of the Eaton axle
operations and expected higher North American truck production levels.
FORWARD LOOKING INFORMATION
Any forward-looking statements contained in this report represent
management's current expectations based on present information and current
assumptions. Such statements are indicated by words such as "anticipates,"
"expects," "believes," "intends," "plans," and similar expressions.
Forward-looking statements are inherently subject to risks and uncertainties.
Actual results could differ materially from those which are anticipated or
projected due to a number of factors. These factors include changes in business
relationships with the Company's major customers, work stoppages at major
customers, competitive pressures on sales and pricing, increases in production
or material costs that cannot be recouped in product pricing, factors affecting
the ability of the Company and/or third parties with whom it does business to
resolve Year 2000 problems in a timely manner, and changes in global economic
and market conditions.
OCTOBER SUBSEQUENT EVENTS
Dana's leasing and financial services unit, Dana Commercial Credit
Corporation (DCC), agreed to sell its technology leasing group portfolio to
Heller Financial, Inc. Completion of the sale, which is subject to approval by
U.S. and international agencies, is expected to occur during the fourth quarter
of 1998. The sale is expected to result in an after-tax gain of approximately
$80, which will be recognized upon closing of the transaction.
Dana announced that it has signed a definitive agreement with Federal-Mogul
Corporation to purchase the Glacier Vandervell Bearings business for $410 and
the AE Clevite North American non-bearing aftermarket engine hard parts business
for $20. The transaction is subject to the approval of appropriate regulatory
agencies.
Dana announced that nonrecurring charges relating to the synergy plan for
integrating Echlin into Dana will approximate $170 pre-tax; $130 will be
recorded in the fourth quarter of 1998 and the balance of $40 in 1999. Fourth
quarter 1998 charges will include $65 for people costs, $50 to eliminate excess
assets, and $15 for other exit costs. The estimated 1999 expense represents $40
in cash integration costs.
16
<PAGE> 17
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS.
- --------------------------
The Company and its consolidated subsidiaries are parties to various
pending judicial and administrative proceedings arising in the ordinary course
of business. The Company's management and legal counsel have reviewed the
probable outcome of these proceedings, the costs and expenses reasonably
expected to be incurred, the availability and limits of the Company's insurance
coverage, and the Company's established reserves for uninsured liabilities.
While the outcome of the pending proceedings cannot be predicted with certainty,
based on its review, management believes that any liabilities that may result
are not reasonably likely to have a material effect on the Company's liquidity,
financial condition or results of operations.
Under the rules of the Securities and Exchange Commission, certain
environmental proceedings are not deemed to be ordinary routine proceedings
incidental to the Company's business and are required to be reported in the
Company's annual and/or quarterly reports. The Company is currently a party to
one such proceeding. IN THE MATTER OF DANA CORPORATION is an Administrative
Complaint brought by the U.S. Environmental Protection Agency, Region V (USEPA)
on September 30, 1998, against Dana, alleging periodic violations of discharge
limits of certain metals in the waste water at its plant on Sanford Street in
Muskegon, Mi. The alleged violations of the Clean Water Act occurred during the
period 1993 through 1995, prior to Dana's acquisition of the plant. USEPA is
proposing a fine of $125,000. Dana is filing an answer to the Complaint and has
requested an informal hearing to discuss settlement of the matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
a). The exhibits listed in the "Exhibit Index" are filed as a part of
this report.
b). Reports on Form 8-K
The Company filed a Form 8-K report on September 2, 1998, to incorporate
certain information into the prior report filed on July 9 with respect to the
closing of the Echlin merger. The Company also filed a Form 8-K report on
September 18, 1998, to publish 31 days of combined operating results of Dana and
the former Echlin Inc., and a Form 8-K report on November 9, 1998, to restate
the Company's financial statements for 1995 through 1997 to reflect the merger
with Echlin.
17
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DANA CORPORATION
Date: November 9, 1998 /s/ John S. Simpson
- ---------------------- --------------------------------------------
John S. Simpson
Chief Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
EXHIBIT
27 Financial Data Schedules
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 160,700
<SECURITIES> 0
<RECEIVABLES> 1,672,400
<ALLOWANCES> 0
<INVENTORY> 1,630,000
<CURRENT-ASSETS> 0
<PP&E> 5,448,800
<DEPRECIATION> 2,421,500
<TOTAL-ASSETS> 9,975,600
<CURRENT-LIABILITIES> 0
<BONDS> 2,154,400
0
0
<COMMON> 165,507
<OTHER-SE> 2,695,693
<TOTAL-LIABILITY-AND-EQUITY> 9,975,600
<SALES> 9,431,800
<TOTAL-REVENUES> 9,606,900
<CGS> 7,859,800
<TOTAL-COSTS> 7,859,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 211,200
<INCOME-PRETAX> 624,900
<INCOME-TAX> 247,100
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 399,100
<EPS-PRIMARY> 2.42
<EPS-DILUTED> 2.39
</TABLE>
