EX-13 4 l86729aex13.htm EXHIBIT 13 Financials from Annual Report Exhibit 13

Exhibit 13

Management Statement

      We have prepared the accompanying consolidated financial statements and related information included herein for the three years ended December 31, 2000.

      The management of Dana Corporation is primarily responsible for the accuracy of the financial information that is presented in this annual report. These statements were prepared in accordance with generally accepted accounting principles and, where appropriate, we used our estimates and judgment with consideration to materiality.

      To meet management’s responsibility for financial reporting, we have established internal control systems which we believe are adequate to provide reasonable assurance that our assets are protected from loss. These systems produce data used for the preparation of financial information.

      We believe internal control systems should be designed to provide accurate information at a reasonable cost which is not out of line with the benefits to be received. These systems and controls are reviewed by our internal auditors in order to ensure compliance, and by our independent accountants to support their audit work.

      The Audit Committee of the Board of Directors meets regularly with management, internal auditors and our independent accountants to review accounting, auditing and financial matters. Our Audit Committee is composed of only outside directors. This committee and the independent accountants have free access to each other with or without management being present.

      We believe people are Dana’s most important asset. The proper selection, training and development of our people is a means of ensuring that effective internal controls and fair, uniform reporting are maintained as standard practice throughout the Company.

/s/ Robert C. Richter

Robert C. Richter
Vice President and
Chief Financial Officer

Report of Independent Accountants

[PRICEWATERHOUSECOOPERS LOGO]

To the Board of Directors and Shareholders of Dana Corporation

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of shareholders’ equity and of cash flows, including pages 22 through 39, present fairly, in all material respects, the financial position of Dana Corporation and its subsidiaries at December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Toledo, Ohio
February 2, 2001

 

 

Annual Report 2000    21

Statement of Income
in millions except per share amounts

                           
Year Ended December 31
1998 1999 2000
Net sales $ 12,464 $ 13,159 $ 12,317
Revenue from lease financing 173 111 143
Other income, net 202 83 231
12,839 13,353 12,691
Costs and expenses
Cost of sales 10,449 10,964 10,599
Selling, general and administrative expenses 1,122 1,192 1,132
Restructuring and integration charges 118 181 173
Merger expenses 50
Interest expense 280 279 323
12,019 12,616 12,227
Income before income taxes 820 737 464
Estimated taxes on income 315 251 171
Income before minority interest and equity in earnings of affiliates 505 486 293
Minority interest (8 ) (13 ) (13 )
Equity in earnings of affiliates 37 40 54
Net income $ 534 $ 513 $ 334
Net income per common share
Basic income per share $ 3.24 $ 3.10 $ 2.20
Diluted income per share $ 3.20 $ 3.08 $ 2.18
Cash dividends declared and paid per common share $ 1.14 $ 1.24 $ 1.24
Average shares outstanding — Basic 165 165 152
Average shares outstanding — Diluted 167 166 153

The accompanying notes are an integral part of the financial statements.

 
 
 
 
 
 

22    DANA CORPORATION

Balance Sheet
in millions except par value

                     
December 31
1999 2000
Assets
Current assets
Cash and cash equivalents $ 111 $ 179
Accounts receivable
Trade, less allowance for doubtful accounts of $44 - 1999 and $42 - 2000 1,935 1,548
Other 411 318
Inventories 1,784 1,564
Other current assets 560 714
Total current assets 4,801 4,323
Investments and other assets 1,858 2,367
Investment in leases 1,014 1,037
Property, plant and equipment, net 3,450 3,509
Total assets $ 11,123 $ 11,236
 
Liabilities and Shareholders’ Equity
Current liabilities
Notes payable, including current portion of long-term debt $ 1,418 $ 1,945
Accounts payable 1,129 1,015
Accrued payroll and employee benefits 462 398
Other accrued liabilities 755 856
Taxes on income 124 117
Total current liabilities 3,888 4,331
Deferred employee benefits and other noncurrent liabilities 1,398 1,507
Long-term debt 2,732 2,649
Minority interest in consolidated subsidiaries 148 121
Total liabilities 8,166 8,608
Shareholders’ equity
Common stock, $1 par value, shares authorized, 350; shares issued, 163 - 1999 and 148 - 2000 163 148
Additional paid-in capital 520 159
Retained earnings 2,762 2,909
Accumulated other comprehensive loss (488 ) (588 )
Total shareholders’ equity 2,957 2,628
Total liabilities and shareholders’ equity $ 11,123 $ 11,236

The accompanying notes are an integral part of the financial statements.

 
 
 
 
 
 

Annual Report 2000    23

Statement of Cash Flows
in millions

                           
Year Ended December 31
1998 1999 2000
Net cash flows from operating activities $ 795 $ 608 $ 984
Cash flows from investing activities:
Purchases of property, plant and equipment (661 ) (807 ) (662 )
Purchases of assets to be leased (546 ) (480 ) (191 )
Acquisitions (829 ) (18 ) (511 )
Divestitures 1,039 36 571
Changes in investments and other assets (96 ) (155 ) (183 )
Loans made to customers and partnerships (232 ) (259 ) (643 )
Payments received on leases 265 200 146
Proceeds from sales of certain assets 9 45 41
Proceeds from sales of leased assets 91 135 82
Payments received on loans 228 206 561
Other (2 ) (4 ) (5 )
Net cash flows — investing activities (734 ) (1,101 ) (794 )
Cash flows from financing activities:
Net change in short-term debt 54 (341 ) 577
Issuance of long-term debt 473 1,396 368
Payments on long-term debt (624 ) (376 ) (504 )
Dividends paid (198 ) (206 ) (187 )
Shares repurchased (100 ) (381 )
Other 41 1 5
Net cash flows — financing activities (254 ) 374 (122 )
Net increase (decrease) in cash and cash equivalents (193 ) (119 ) 68
Cash and cash equivalents — beginning of year 423 230 111
Cash and cash equivalents — end of year $ 230 $ 111 $ 179
Reconciliation of net income to net cash flows from operating activities:
Net income $ 534 $ 513 $ 334
Depreciation and amortization 488 519 523
Unremitted earnings of affiliates (33 ) (37 ) (54 )
Deferred income taxes 64 66 118
Minority interest 12 6 10
Change in accounts receivable (162 ) (528 ) 327
Change in inventories (72 ) (183 ) 128
Change in other operating assets 17 1 (122 )
Change in operating liabilities 13 296 (141 )
Additions to lease and loan loss reserves 20 8 18
Gains on divestitures (80 ) (5 ) (106 )
Other (6 ) (48 ) (51 )
Net cash flows from operating activities $ 795 $ 608 $ 984

The accompanying notes are an integral part of the financial statements.

 
 
 
 
 
 

24    DANA CORPORATION

Statement of Shareholders’ Equity
in millions

                                                               
Accumulated Other
Comprehensive Income (Loss)
Additional Foreign Minimum Net Unrealized
Common Paid-In Retained Currency Pension Investment Shareholders'
Stock Capital Earnings Translation Liability Gain (Loss) Equity
Balance, December 31, 1997 $ 164 $ 540 $ 2,105 $ (210 ) $ (2 ) $ 7 $ 2,604
Comprehensive income:
Net income for 1998 534
Foreign currency translation (54 )
Minimum pension liability (9 )
Net unrealized investment gains (4 )
Total comprehensive income 467
Cash dividends declared (184 ) (184 )
Cost of shares repurchased (14 ) (14 )
Issuance of shares for director and
employee stock plans 2 65 67
Balance, December 31, 1998 166 591 2,455 (264 ) (11 ) 3 2,940
Comprehensive income:
Net income for 1999 513
Foreign currency translation (214 )
Minimum pension liability (2 )
Total comprehensive income 297
Cash dividends declared (206 ) (206 )
Cost of shares repurchased (3 ) (105 ) (108 )
Issuance of shares for director
and employee stock plans 34 34
Balance, December 31, 1999 163 520 2,762 (478 ) (13 ) 3 2,957
Comprehensive income:
Net income for 2000 334
Foreign currency translation (90 )
Minimum pension liability (10 )
Total comprehensive
income 234
Cash dividends declared (187 ) (187 )
Cost of shares repurchased (15 ) (366 ) (381 )
Issuance of shares for director
and employee stock plans 5 5
Balance, December 31, 2000 $ 148 $ 159 $ 2,909 $ (568 ) $ (23 ) $ 3 $ 2,628

The accompanying notes are an integral part of the financial statements.

 
 
 
 
 
 

Annual Report 2000    25

Notes to Financial Statements
in millions except share and per share amounts

Note 1.

Summary of Significant Accounting Policies

      Dana is a global leader in the engineering, manufacturing and distribution of components and systems for worldwide vehicular and industrial manufacturers and the related aftermarkets and a leading provider of lease financing services in selected markets through its wholly-owned subsidiary, Dana Credit Corporation (DCC).

      The preparation of these financial statements requires estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Some of the more significant estimates include depreciation and amortization of long-lived assets; deferred tax assets and inventory valuations; sales returns, restructuring, environmental and warranty accruals; postemployment and postretirement benefits; residual values of leased assets and allowances for doubtful accounts. Actual results could differ from those estimates.

      The following summary of significant accounting policies should help you evaluate the financial statements. Certain amounts in 1998 and 1999 have been reclassified to conform with the 2000 presentation.

Principles of Consolidation

      The consolidated financial statements include all significant subsidiaries in which we have the ability to control operating and financial policies. Affiliated companies (20% to 50% ownership) are generally recorded in the statements using the equity method of accounting. Operations of affiliates accounted for on the equity method of accounting are generally included for periods ended within one month of our year end. Less than 20%-owned companies are included in the financial statements at the cost of our investment. Dividends, royalties and fees from these cost basis affiliates are recorded in income when received.

Foreign Currency Translation

      The financial statements of subsidiaries and equity affiliates outside the United States (U.S.) located in non-highly inflationary economies are measured using the currency of the primary economic environment in which they operate as the functional currency, which for the most part is the local currency. Transaction gains and losses which result from translating assets and liabilities of these entities into the functional currency are included in net earnings. When translating into U.S. dollars, income and expense items are translated at average monthly rates of exchange and assets and liabilities are translated at the rates of exchange at the balance sheet date. Translation adjustments resulting from translating the functional currency into U.S. dollars are reported as a component of accumulated other comprehensive income in shareholders’ equity. For affiliates operating in highly inflationary economies, non-monetary assets are translated into U.S. dollars at historical exchange rates and monetary assets are translated at current exchange rates. Translation adjustments for these affiliates are included in net earnings.

Inventories

      Inventories are valued at the lower of cost or market. Cost is generally determined on the last-in, first-out (LIFO) basis for U.S. inventories and on the first-in, first-out (FIFO) or average cost basis for non-U.S. inventories.

Pre-Production Costs Related to Long-Term Supply Arrangements

      The cost of tooling that we own that is used to make products sold under long-term supply arrangements is capitalized as part of property, plant and equipment and amortized over its useful life. These costs are also capitalized if our customer owns the tooling and we have a noncancelable right to use the tooling over the contract period. Costs incurred in connection with the design and development of tooling that will be billed to customers upon completion is carried as a component of other accounts receivable. Design and development costs related to customer products are deferred if we have an agreement to collect such costs from the customer; otherwise, they are expensed as incurred.

Lease Financing

      Lease financing consists of direct financing leases, leveraged leases and equipment on operating leases. Income on direct financing leases is recognized by a method which produces a constant periodic rate of return on the outstanding investment in the lease. Income on leveraged leases is recognized by a method which produces a constant rate of return on the outstanding net investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Initial direct costs are deferred and amortized using the interest method over the lease period. Equipment under operating leases is recorded at cost, net of accumulated depreciation. Income from operating leases is recognized ratably over the term of the leases.

Allowance for Losses on Lease Financing

      Provisions for losses on lease financing receivables are determined based on loss experience and assessment of inherent risk. Adjustments are made to the allowance for losses to adjust the net investment in lease financing to an estimated collectible amount. Income recognition is generally discontinued on accounts which are contractually past due and where no payment activity has occurred within 120 days. Accounts are charged against the allowance for losses when determined to be uncollectible. Accounts where equipment repossession has started as the primary means of recovery are classified within other assets at their estimated realizable value.

Goodwill

      Cost in excess of net assets of companies acquired is generally amortized on a straight-line basis over the estimated period of expected benefit, ranging from 10 to 40 years.

Loans Receivable

      Loans receivable consist primarily of loans to partnerships in which DCC has an interest and loans secured by equipment and first mortgages on real property. The loans to partnerships are secured by the partnerships’ assets. Income on all loans is recognized using the interest method. Interest income on impaired loans is recognized as cash is collected or on a cost recovery basis.

Allowance for Losses on Loans Receivable

      Provisions for losses on loans receivable are determined on the basis of loss experience and assessment of inherent risk. Adjustments are made to the allowance for losses to adjust loans receivable to an estimated collectible amount. Income

 
 
 
 
 
 

26    DANA CORPORATION

recognition is generally discontinued on accounts which are contractually past due and where no payment activity has occurred within 120 days. Accounts are charged against the allowance for losses when determined to be uncollectible.

Properties and Depreciation

      Property, plant and equipment are valued at historical costs. Depreciation is recognized over the estimated useful lives using primarily the straight-line method for financial reporting purposes and accelerated depreciation methods for federal income tax purposes. Long-lived assets are reviewed for impairment and where appropriate are adjusted to fair market value.

Revenue Recognition

      Sales are recognized when products are shipped. Accruals for warranty costs, sales returns and other allowances are provided at the time of shipment based upon experience. Adjustments are made as new information becomes available. Shipping and handling fees billed to customers are included in sales and the costs of shipping and handling are included in cost of sales.

Income Taxes

      Current tax liabilities and assets are recognized for the estimated taxes payable or refundable on the tax returns for the current year. Deferred tax balances reflect the impact of temporary differences between the carrying amount of assets and liabilities and their tax basis. Amounts are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. Deferred tax assets are reduced, if necessary, by the amount of any tax benefits not expected to be realized. The “flow-through” method of accounting is used for investment tax credits, except for investment tax credits arising from leveraged leases and certain direct financing leases for which the deferred method is used for financial statement purposes.

Financial Instruments

      The reported fair values of financial instruments are based on a variety of factors. Where available, fair values represent quoted market prices for identical or comparable instruments. Where quoted market prices are not available, fair values are estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of credit risk. Fair values may not represent actual values of the financial instruments that could be realized as of the balance sheet date or that will be realized in the future.

Derivative Financial Instruments

      Various types of derivative financial instruments are used primarily to hedge interest rate and foreign currency effects. Derivatives are not used for trading or speculative purposes. Gains and losses relating to qualifying hedges of firm commitments or anticipated transactions are deferred and recognized as adjustments of carrying amounts when the hedged transaction occurs. Interest rate swaps are primarily used to manage exposure to fluctuations in interest rates. Differentials to be paid or received on certain interest rate agreements are accrued and recognized as adjustments to interest expense.

      Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” was issued in June 1998 and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Transactions,” was issued in June 2000. The Statements require, among other things, that all derivative instruments be recognized on the balance sheet at fair value. We will adopt SFAS Nos. 133 and 138 in 2001. Interest rate swap arrangements are being formally designated as hedges and will be marked to market through other comprehensive income beginning in 2001. Foreign currency forwards and other derivatives are not being designated as hedges and will be marked to market through current earnings. We will evaluate these transactions from time to time to determine whether they should be designated as hedges. The adoption of SFAS Nos. 133 and 138 will not have a material effect on the results of operations.

Environmental Compliance and Remediation

      Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to existing conditions caused by past operations which do not contribute to current or future revenue generation are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Estimated costs are based upon current laws and regulations, existing technology and the most probable method of remediation. The costs are not discounted and exclude the effects of inflation and other societal and economic factors. If the cost estimates result in a range of equally probable amounts, the lower end of the range is accrued.

Pension Plans

      Annual net periodic pension costs under defined benefit pension plans are determined on an actuarial basis. Our policy is to fund these costs as accrued, including amortization of the initial unrecognized net obligation over 15 years and obligations arising due to plan amendments over the period benefited, through deposits with trustees. Benefits are determined based upon employees’ length of service, wages or a combination of length of service and wages.

Postretirement Benefits Other Than Pensions

      Annual net postretirement benefits liability and expense under the defined benefit plans are determined on an actuarial basis. Our policy is to pay these benefits as they become due. Benefits are determined primarily based upon employees’ length of service and include applicable employee cost sharing.

Postemployment Benefits

      Annual net postemployment benefits liability and expense under our benefit plans are accrued as service is rendered for those obligations that accumulate or vest and can be reasonably estimated. Obligations that do not accumulate or vest are recorded when payment of the benefits is probable and the amounts can be reasonably estimated.

Statement of Cash Flows

      For purposes of reporting cash flows, we consider highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Marketable Securities

      The majority of our marketable securities satisfy the criteria for cash equivalents and are classified accordingly. The remainder of our marketable securities are classified as available for sale. Available-for-sale securities, which are included in investments and other assets, are carried at fair value and any

 
 
 
 
 
 

27    Annual Report 2000

Notes to Financial Statements
in millions except share and per share amounts

Note 1.
Summary of Significant Accounting Policies (Continued)

unrealized gains or losses, net of income taxes, are reported as a component of accumulated other comprehensive income or loss in shareholders’ equity.

Stock-Based Compensation

      Stock-based compensation is accounted for using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No compensation expense is recorded for stock options when granted as the option price is set at the market value of the underlying stock.

Note 2. Preferred Share Purchase Rights

      We have a Preferred Share Purchase Rights Plan which is designed to deter coercive or unfair takeover tactics. One right has been issued on each share of our common stock outstanding on and after July 25, 1996. Under certain circumstances, the holder of each right may purchase 1/1000th of a share of our Series A Junior Participating Preferred Stock, no par value. The rights have no voting privileges and will expire on July 15, 2006, unless exercised, redeemed or exchanged sooner.

      Generally, the rights cannot be exercised or transferred apart from the shares to which they are attached. However, if any person or group acquires 15% or more of our outstanding common stock or commences a tender offer that would result in the acquirer owning 15% of our outstanding shares, the rights not owned by the acquirer will become exercisable and, for the exercise price of $110 per share (unless adjusted), holders of these rights will be able to purchase Dana common shares at 50% of the market value. If we merge with or sell 50% or more of our assets or earnings power to the acquirer or engage in similar transactions, the rights not held by the acquirer can also be exercised. In that event, for the $110 exercise price, the holders will be able to purchase common shares of the acquiring or surviving company at 50% of market value.

      The Board may redeem the rights at a price of $.01 each before anyone acquires 15% or more of our common shares. After that, and before the acquirer owns 50% of our outstanding shares, the Board may exchange each right for one share of our common stock.

Note 3. Preferred Shares

      There are 5,000,000 shares of preferred stock authorized, without par value, including 1,000,000 shares reserved for issuance under the Rights Plan. No shares of preferred stock have been issued.

Note 4. Common Shares

      Certain employee and director stock plans provide that employees and directors may tender stock to satisfy the purchase price of the shares, the income taxes required to be withheld on the transaction, or both. In connection with these stock plans, we repurchased 299,082 shares in 1998, 304,927 in 1999 and 91,074 in 2000.

      During 1999, the Board of Directors (Board) authorized the expenditure of up to $350 to repurchase shares of our common stock and in 2000 it authorized an additional expenditure of $250 for a total authorization of $600. The authorizations expired at the end of 2000. The repurchases were accomplished through open market transactions. In 1999, we repurchased 2,994,400 shares at an aggregate cost of $100 and in 2000, 15,455,747 shares were repurchased at a cost of $381.

      All shares repurchased were cancelled and became authorized but unissued shares.

      Common stock transactions in the last three years are as follows:

                           
1998 1999 2000
Shares outstanding at
   beginning of year		 163,810,306 165,690,844 163,151,142
Issued for director and
   employee stock plans		 2,179,620 764,535 272,713
Repurchased under stock
   plans		 (299,082 ) (309,837 ) (91,074 )
Repurchase program (2,994,400 ) (15,455,747 )
Shares outstanding at end of
   year		 165,690,844 163,151,142 147,877,034
Average shares outstanding
   for the year - basic		 165,057,443 165,322,644 152,038,862
Plus: Incremental shares from
assumed conversion of -
Deferred compensation
   units		 476,197 461,112 571,029
Deferred restricted stock
    units		 27,917 106,044 226,253
Stock options 1,480,967 608,165 95,182
Potentially dilutive shares 1,985,081 1,175,321 892,464
Average shares outstanding
   for the year - diluted		 167,042,524 166,497,965 152,931,326
 
 
 
 
 
 

28    DANA CORPORATION

Note 5. Inventories

      The components of inventory are as follows:

                 
December 31
1999 2000
Raw materials $ 534 $ 436
Work in process and finished goods 1,250 1,128
$ 1,784 $ 1,564

      Inventories amounting to $1,161 and $1,005 at December 31, 1999 and 2000, respectively, are valued using the LIFO method. If all inventories were valued at replacement cost, inventories would be increased by $135 and $119 at December 31, 1999 and 2000, respectively.

Note 6. Short-Term Debt

      Short-term funds for certain U.S. and non-U.S. operations are obtained from issuing commercial paper, short-term notes payable to banks and bank overdrafts.

      At December 31, 2000, Dana, excluding DCC, had $427 of commercial paper outstanding, $300 borrowed against committed U.S. bank lines, $40 borrowed against uncommitted U.S. bank lines, $143 of non-U.S. notes and $96 of notes payable at its non-U.S. subsidiaries. DCC had $406 of commercial paper issued, $75 borrowed against uncommitted U.S. bank lines and $39 of notes payable at its non-U.S. subsidiaries.

      Dana, excluding DCC, had committed borrowing lines of $1,665 and uncommitted borrowing lines of $639 at December 31, 2000. DCC had committed borrowing lines of $570 and uncommitted borrowing lines of $180 at December 31, 2000. Fees are paid to the banks for providing committed lines, but not for uncommitted lines. Such fees are not considered material.

      Selected details of short-term borrowings are as follows:

                 
Weighted
Average
Interest
Amount Rate
Balance at December 31, 1999 $ 968 6.0 %
Average during 1999 1,162 5.4
Maximum during 1999 (month end) 1,490 5.6
Balance at December 31, 2000 $ 1,526 7.0 %
Average during 2000 1,614 6.6
Maximum during 2000 (month end) 1,872 6.7

Note 7. Interest Rate Agreements

      We enter into interest rate agreements to manage interest rate risk by reducing our exposure to the effects of future interest rate movements. Under interest rate swap agreements, we agree to exchange with third parties, at specific intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to an agreed notional amount. At December 31, 2000, DCC was committed to receive interest rates which change periodically in line with prevailing short-term market rates (the average rate being received at December 31, 2000 was 7.10%) and to pay an average rate of 7.00% which is fixed over the period of the agreements on notional amounts of $125. DCC’s notional amounts of interest rate swaps expire as follows: 2001, $30; 2002, $50 and 2003, $45. Dana, exclusive of DCC, was not a party to any interest rate swap agreements at December 31, 2000.

Note 8. Long-Term Debt

                     
December 31
1999 2000
Indebtedness of Dana, excluding consolidated subsidiaries —
Unsecured notes payable, fixed rates -
6.25% notes, due March 1, 2004 $ 250 $ 250
6.5% notes, due March 15, 2008 150 150
7.0% notes, due March 15, 2028 200 197
6.5% notes, due March 1, 2009 350 350
7.0% notes, due March 1, 2029 400 375
6.32% - 7.04%, due 2001 to 2002 745 470
Various industrial revenue bonds and other 4
Indebtedness of DCC —
Unsecured notes payable, fixed rates, 4.25% - 8.54%, due
   2001 to 2007		 654 865
Unsecured notes payable, variable rates, 6.31% - 7.87%, due
   2001 to 2003		 215 220
Nonrecourse notes payable, fixed rates, 6.80% - 12.05%, due
   2001 to 2010		 154 108
Indebtedness of other consolidated subsidiaries 60 83
Total long-term debt 3,182 3,068
Less: Current maturities 450 419
$ 2,732 $ 2,649

      The total maturities of all long-term debt for the five years after 2000 are as follows: 2001, $419; 2002, $477; 2003, $99; 2004, $459 and 2005, $77.

      We filed universal shelf registration statements in December 1997 and December 1998 authorizing us to issue debt or equity securities, or a combination thereof, in an aggregate amount not to exceed $1,350. In March 1998, we issued $150 of 6.5% unsecured notes due March 15, 2008 and $200 of 7.0% unsecured notes due March 15, 2028. In March 1999, we issued $250 of 6.25% unsecured notes due March 1, 2004, $350 of 6.5% unsecured notes due March 1, 2009 and $400 of 7.0% unsecured notes due March 1, 2029.

      During 1999, DCC established a $500 Medium-Term Note Program. Notes under the program are offered on terms determined at the time of issuance. At December 31, 2000, notes totaling $500 were outstanding under the program. Interest on the notes is payable on a semi-annual basis. These notes are general, unsecured obligations of DCC. DCC has agreed that it will not issue any other notes which are secured or senior to notes issued under the program, except as permitted by the program.

      Interest paid on short-term and long-term debt was $283 in 1998, $285 in 1999 and $314 in 2000.

 
 
 
 
 
 

29    Annual Report 2000

Notes to Financial Statements

in millions except share and per share amounts

Note 9. Stock Option Plans

      The Compensation Committee of the Board grants stock options to selected Dana employees under the 1997 Stock Option Plan. The option price is equal to the market price of the stock at the date of grant. One-fourth of the options granted become exercisable at each of the first four anniversary dates of the grant; options generally expire 10 years from the date of grant. Stock appreciation rights may be granted separately or in conjunction with the options.

      This is a summary of transactions under the plan in the last three years:

                     
Number Weighted Average
of Shares Exercise Price
Outstanding at
December 31, 1997 8,227,608 $ 30.01
Granted - 1998 2,519,524 48.14
Exercised - 1998 (2,062,466 ) 25.17
Cancelled - 1998 (174,009 ) 35.89
Outstanding at
December 31, 1998 8,510,657 $ 36.43
Granted - 1999 2,333,919 45.50
Exercised - 1999 (569,933 ) 30.65
Cancelled - 1999 (193,138 ) 43.24
Outstanding at
December 31, 1999 10,081,505 $ 38.78
Granted - 2000 3,322,750 23.06
Exercised - 2000 (120,857 ) 17.93
Cancelled - 2000 (420,999 ) 38.08
Outstanding at
December 31, 2000 12,862,399 $ 34.94

      The following table summarizes information about stock options under this plan at December 31, 2000:

                                           
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Options Life in Years Price Options Price
$13.18-28.13 4,986,495 7.6 $ 24.22 1,845,595 $ 26.20
29.06-38.44 3,288,055 5.4 34.58 3,129,705 34.38
40.08-52.56 4,587,849 8.0 46.85 2,263,161 47.07
12,862,399 7.2 $ 34.94 7,238,461 $ 36.26

      At December 31, 2000, there were 1,503,658 shares available for future grants under this plan.

      In accordance with our accounting policy for stock-based compensation, we have not recognized any expense relating to these stock options. If we had used the fair value method of accounting, the alternative policy set out in SFAS No. 123, “Accounting for Stock-Based Compensation,” the after-tax expense relating to the stock options would have been $12 in 1998, $11 in 1999 and $14 in 2000. If we had charged this expense to income, our pro forma net income and earnings per share would have been as follows:

                         
1998 1999 2000
Net Income $ 522 $ 502 $ 320
Basic EPS 3.16 3.03 2.10
Diluted EPS 3.13 3.01 2.09

      The fair value of each option grant was estimated on the date of grant using the Black-Scholes model with the following assumptions:

                         
1998 1999 2000
Risk-free interest rate 4.24 - 5.52 % 5.82% 6.16%
Dividend yield 2.21 - 2.87 % 2.73% 5.38%
Expected life 5.4 years 5.4 years 5.4 years
Stock price volatility 30.1 - 33.7 % 38.60% 40.72%

      Based on the above assumptions, the weighted average fair value per share of options granted under the plan was $14.27 in 1998, $15.79 in 1999 and $6.51 in 2000.

      Under our Directors’ Stock Option Plan, options for 3,000 common shares are automatically granted to each non-employee director once a year. The option price is the market value of the stock at the date of grant. The options can be exercised after one year and expire 10 years from the date of grant.

      This is a summary of the stock option activity of the Directors’ plan in the last three years:

                     
Number Weighted Average
of Shares Exercise Price
Outstanding at
December 31, 1997 99,000 $ 28.74
Granted - 1998 24,000 60.09
Exercised - 1998 (3,000 ) 24.25
Outstanding at
December 31, 1998 120,000 $ 35.12
Granted - 1999 21,000 50.25
Exercised - 1999 (3,000 ) 24.25
Outstanding at
December 31, 1999 138,000 $ 37.66
Granted - 2000 21,000 28.78
Outstanding at
December 31, 2000 159,000 $ 36.49

      The following table summarizes information about stock options under this plan at December 31, 2000:

                                           
Outstanding Options Exercisable Options
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contractual Exercise Number of Exercise
Prices Options Life in Years Price Options Price
$24.25-32.25 114,000 5.5 $ 28.98 93,000 $ 29.03
50.25-60.09 45,000 7.8 55.50 45,000 55.50
159,000 6.0 $ 36.49 138,000 $ 37.66

      At December 31, 2000, there were 106,000 shares available for future grants under this plan.

 
 
 
 
 
 

30    DANA CORPORATION

      The non-employee directors of Echlin participated in the 1996 Non-Executive Director Stock Option Plan under which options for 232,325 shares were authorized for issuance. Options were granted at market value at the date of grant, were exercisable after one year and expire 10 years from the date of grant, except in the event of the retirement or death of the director. During 1998, options to purchase 17,654 shares were exercised at $33.49. During 1999, options to purchase 39,265 shares were exercised at $35.43. No options were exercised in 2000. At December 31, 2000, there were 38,752 options outstanding and exercisable at exercise prices ranging from $33.49 to $37.93 per share with a weighted average exercise price of $34.40. The weighted average remaining contractual life of these options was 6.2 years. No future grants are expected under this plan.

Note 10. Employees’ Stock Purchase Plan

      The majority of our full-time U.S. and some of our non-U.S. employees are eligible to participate in our stock purchase plan. Plan participants can authorize us to withhold up to 15% of their earnings and deposit this amount with an independent custodian. The custodian uses the funds to purchase our common stock at current market prices. As record keeper for the plan, we allocate the purchased shares to the participants’ accounts. Shares are distributed to the participants on request.

      We match up to 50% of the participants’ contributions over a five-year period beginning with the year the amounts are withheld. If a participant withdraws any shares before the end of five years, the amount of our match will depend on how long the shares were in the account. The custodian purchased 874,272 shares in 1998, 1,177,541 shares in 1999 and 2,212,391 shares in 2000. The charge to expense for our match was $9 in 1998, $9 in 1999 and $10 in 2000.

Note 11. Additional Compensation Plans

      We have numerous additional compensation plans under which we pay our employees for increased productivity and improved performance. One such plan is our Additional Compensation Plan for certain officers and other key employees. Under this plan, a percentage of the participants’ compensation is accrued for additional compensation if we attain certain profit levels. The Compensation Committee selects the participants and determines whether to pay the awards immediately in cash or to defer them for payment later in cash, stock or a combination of both. Participants may elect to convert deferred awards to units which are the economic equivalent of shares of Dana common stock. Units are credited the equivalent of dividends on our common stock and adjusted in value based on the market value of our common stock. Compensation expense was credited $3 in 1998, $3 in 1999 and $7 in 2000 in connection with reductions in the value of deferred units. Awards not converted to units are credited quarterly with interest earned at a rate tied to the prime rate.

      Activity related to the plan for the last three years is as follows:

                         
1998 1999 2000
Awarded to participants based on preceding year’s performance $ 14 $ 14 $ 15
Dividends and interest credited to participants’ accounts 1 4 2
Charges to expense 9 19 (5 )
Shares issued to participants 1,143 3,721 5,240

      We also have a Restricted Stock Plan under which the Compensation Committee grants restricted common shares to certain key employees. The shares are subject to forfeiture until the restrictions lapse or terminate. Generally, the employee must remain employed with us for a specified number of years after the date of grant to receive shares. There were 55,100 shares granted in 1998, 102,500 shares in 1999 and 31,200 shares in 2000. Since 1997, participants have been able to convert their restricted stock into restricted stock units under certain conditions. The units are payable in unrestricted stock upon retirement or termination of employment. There were 200,037 restricted shares converted to restricted units in 1999 and 32,736 in 2000. Charges to expense for this plan were $1 in 1998, $2 in 1999 and $2 in 2000. There are 652,268 shares authorized for future issuance under the plan at December 31, 2000.

 
 
 
 
 
 

Annual Report 2000    31

Notes to Financial Statements

in millions except share and per share amounts

Note 12.
Pension and Other Postretirement Benefits

      We provide defined contribution and defined benefit, qualified and nonqualified, pension plans for certain employees. We also provide other postretirement benefits including medical and life insurance for certain employees upon retirement.

      The following tables provide a reconciliation of the changes in the defined benefit pension plans’ and other postretirement plans’ benefit obligations and fair value of assets over the two-year period ended December 31, 2000, statements of the funded status and schedules of the net amounts recognized in the balance sheet at December 31, 1999 and 2000:

                                     
Pension Benefits Other Benefits
1999 2000 1999 2000
Reconciliation of benefit obligation
Obligation at January 1 $ 2,382 $ 2,425 $ 1,083 $ 1,140
Service cost 78 76 18 16
Interest cost 153 168 69 79
Employee contributions 4 4 4 4
Plan amendments 20 6 (28 )
Actuarial (gain) loss (41 ) 28 48 56
Benefit payments (162 ) (224 ) (78 ) (84 )
Settlement, curtailment and terminations 15 (12 )
Acquisitions and divestitures (5 ) 11 23
Translation adjustments (4 ) (32 ) 1 (1 )
Obligation at December 31 $ 2,425 $ 2,477 $ 1,140 $ 1,198
Reconciliation of fair value of plan assets
Fair value at January 1 $ 2,703 $ 2,931
Actual return on plan assets 284 49
Acquisitions and divestitures 58 (26 )
Employer contributions 36 24
Employee contributions 4 4
Benefit payments (158 ) (198 )
Settlements (1 )
Translation adjustments 4 (31 )
Fair value at December 31 $ 2,931 $ 2,752
Funded Status
Balance at December 31 $ 506 $ 275 $ (1,140 ) $ (1,198 )
Unrecognized transition obligation 1 (1 )
Unrecognized prior service cost 82 57 (29 ) (30 )
Unrecognized (gain) loss (581 ) (351 ) 254 321
Accrued cost $ 8 $ (20 ) $ (915 ) $ (907 )
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 129 $ 88
Accrued benefit liability (150 ) (168 ) $ (915 ) $ (907 )
Intangible assets 8 23
Accumulated other comprehensive loss 21 37
Net amount recognized $ 8 $ (20 ) $ (915 ) $ (907 )

      Benefit obligations of the U.S. non-qualified and certain non-U.S. pension plans, amounting to $125 at December 31, 2000, and the other postretirement benefit plans are not funded.

      Components of net periodic benefit costs for the last three years are as follows:

                                                 
Pension Benefits Other Benefits
1998 1999 2000 1998 1999 2000
Service cost $ 71 $ 78 $ 76 $ 18 $ 18 $ 16
Interest cost 153 153 168 70 69 79
Expected return on plan assets (181 ) (219 ) (232 )
Amortization of transition obligation 4 3 3
Amortization of prior service cost 16 23 23 (9 ) (10 ) (7 )
Recognized net actuarial gain (loss) (8 ) 5 (6 ) 5 4 10
Net periodic benefit cost 55 43 32 84 81 98
Curtailment (gain) loss 4 18 (19 ) (23 )
Settlement gain (3 ) (3 )
Termination expenses 2
Net periodic benefit cost after curtailments
    and settlements $ 58 $ 43 $ 47 $ 65 $ 81 $ 75

      The assumptions used in the measurement of pension benefit obligations are as follows:

                         
U.S. Plans
1998 1999 2000
Discount rate 6.75 % 7.25 % 7.75 %
Expected return on plan assets 8.75 % 9.25 % 9.25 %
Rate of compensation increase 4.31-5 % 4.31-5 % 4.31-5 %
                         
Non-U.S. Plans
1998 1999 2000
Discount rate 5-8 % 5.5-7 % 5.5-7.75 %
Expected return on plan assets 7.25-9 % 6.5-9 % 6.5-9 %
Rate of compensation increase 3.5-5 % 3-5 % 2.5-5 %
 
 
 
 
 
 

32    DANA CORPORATION

      The assumptions used in the measurement of other postretirement benefit obligations are as follows:

                         
1998 1999 2000
Discount rate 6.75 % 7.25 % 7.75 %
Initial weighted health care costs trend rate 7.5 % 7.2 % 6.8 %
Ultimate health care costs trend rate 5 % 5 % 5 %
Years to ultimate 10 9 9

      Assumed health care costs trend rates have a significant effect on the health care plan. A one-percentage-point change in assumed health care costs trend rates would have the following effects for 2000:

                 
1% Point 1% Point
Increase Decrease
Effect on total of service and interest cost components $ 7 $ (6 )
Effect on postretirement benefit obligations 91 (77 )

Note 13. Business Segments

      Our operations are organized into seven market-focused Strategic Business Units (SBUs). This structure allows our people in each of these units to focus their resources to benefit Dana and our global customers. We realigned certain businesses within our SBU structure in 2000. The most significant change was shifting our fluid handling products operations from the Engine Systems Group (ESG) to the Fluid Systems Group (FSG). The segment information was restated to reflect these changes.

      The Automotive Systems Group (ASG) designs, develops and manufactures “under the vehicle” products for passenger cars and light trucks. Its global, full-service engineering provides its customers with complete modules and systems. In the automotive market, the group is a leading manufacturer of axles, driveshafts, structural components and modules and chassis systems.

      The Automotive Aftermarket Group (AAG) provides more than 300,000 different parts to cover a vast array of aftermarket needs for brake and chassis products, filtration products and engine systems.

      The Heavy Truck Group (HTG) serves the global market for class 5 through 8 trucks. Products include heavy axles and brakes, drivetrain components, power take-offs, trailer products and heavy systems modular assemblies.

      The ESG provides its customers with complete engine systems for their sealing and power cylinder needs. Its products include gaskets and other sealing products, piston rings, bearings, liners and camshafts.

      The FSG manufactures an extensive line of products focused on the pumping, routing and thermal management of fluid systems for a wide range of applications, from passenger cars to heavy trucks and off-highway vehicles. Products include an extensive line of rubber hose, fluid products and fluid management systems.

      The Off-Highway Systems Group (OHSG) manufactures and markets off-highway axles, powershift transmissions, transaxles, torque converters and electronic controls.

      Dana Credit Corporation (DCC) provides leasing and financing services to a broad range of customers in selected markets around the world.

 
 
 
 
 
 

Annual Report 2000    33

Notes to Financial Statements

in millions except share and per share amounts

Note 13. Business Segments (Continued)

      Management evaluates the operating segments and regions as if DCC were accounted for on the equity method of accounting. Information used to evaluate the SBUs and regions is as follows:

                                                         
Operating Net Net Capital Depreciation/
1998 Sales EBIT PAT Profit Assets Spend Amortization
ASG $ 4,180 $ 504 $ 325 $ 261 $ 1,810 $ 221 $ 132
AAG 2,888 225 138 88 1,822 86 68
HTG 1,746 170 104 72 654 42 37
ESG 978 58 42 29 1,192 65 54
FSG 1,193 124 76 60 774 56 49
OHSG 888 77 47 34 552 45 38
DCC 34 34 122
Other 591 (148 ) (175 ) 13 27 37 18
Total operations 12,464 1,010 591 591 6,953 552 396
Restructuring and non-recurring items (166 ) (57 ) (57 )
Consolidated $ 12,464 $ 844 $ 534 $ 534 $ 6,953 $ 552 $ 396
North America $ 9,657 $ 1,036 $ 642 $ 520 $ 4,825 $ 339 $ 258
Europe 1,844 110 66 37 1,392 116 86
South America 779 26 27 14 777 61 40
Asia Pacific 184 (6 ) (5 ) (12 ) 138 12 8
DCC 34 34 122
Other (156 ) (173 ) (2 ) (301 ) 24 4
Total operations 12,464 1,010 591 591 6,953 552 396
Restructuring and non-recurring items (166 ) (57 ) (57 )
Consolidated $ 12,464 $ 844 $ 534 $ 534 $ 6,953 $ 552 $ 396
1999
ASG $ 4,461 $ 538 $ 343 $ 271 $ 1,761 $ 190 $ 142
AAG 3,039 307 188 127 1,998 117 76
HTG 1,904 208 127 91 689 48 34
ESG 1,318 103 69 49 1,136 85 73
FSG 1,238 133 82 63 757 60 50
OHSG 812 56 34 22 546 31 37
DCC 34 34 145
Other 387 (194 ) (199 ) 21 208 16 17
Total operations 13,159 1,151 678 678 7,240 547 429
Restructuring and non-recurring items (229 ) (165 ) (165 )
Consolidated $ 13,159 $ 922 $ 513 $ 513 $ 7,240 $ 547 $ 429
North America $ 10,308 $ 1,235 $ 771 $ 612 $ 5,222 $ 379 $ 283
Europe 2,051 99 57 20 1,267 102 96
South America 549 16 13 3 581 48 37
Asia Pacific 251 (1 ) (10 ) 143 13 9
DCC 34 34 145
Other (199 ) (196 ) 19 (118 ) 5 4
Total operations 13,159 1,151 678 678 7,240 547 429
Restructuring and non-recurring items (229 ) (165 ) (165 )
Consolidated $ 13,159 $ 922 $ 513 $ 513 $ 7,240 $ 547 $ 429
2000
ASG $ 4,634 $ 423 $ 287 $ 196 $ 2,097 $ 180 $ 149
AAG 2,850 125 77 2 1,940 74 78
HTG 1,598 126 76 41 557 32 42
ESG 1,293 86 63 40 1,082 77 75
FSG 1,163 110 66 45 673 43 48
OHSG 674 49 30 18 438 19 29
DCC 35 35 174
Other 105 (243 ) (257 ) 19 9 6
Total operations 12,317 676 377 377 6,980 434 427
Restructuring and non-recurring items (25 ) (43 ) (43 )
Consolidated $ 12,317 $ 651 $ 334 $ 334 $ 6,980 $ 434 $ 427
North America $ 9,449 $ 804 $ 525 $ 346 $ 4,730 $ 306 $ 286
Europe 1,947 74 44 4 1,542 78 96
South America 563 24 11 451 32 30
Asia Pacific 358 7 5 (8 ) 169 11 11
DCC 35 35 174
Other (233 ) (243 ) (86 ) 7 4
Total operations 12,317 676 377 377 6,980 434 427
Restructuring and non-recurring items (25 ) (43 ) (43 )
Consolidated $ 12,317 $ 651 $ 334 $ 334 $ 6,980 $ 434 $ 427
 
 
 
 
 
 

34    DANA CORPORATION

      With the exception of DCC, operating profit after taxes (PAT) represents earnings before interest and taxes (EBIT), tax effected at 39% (our estimated long-term effective rate), plus equity in earnings of affiliates. The Other category includes discontinued businesses, trailing liabilities for closed plants, interest expense net of interest income, corporate expenses and adjustments to reflect the actual effective tax rate. SBU and regional expenses are included in the respective SBU or region; otherwise they are included in Other. In arriving at net profit from operating PAT, allocations are based on sales.

      Net assets at the SBU and regional level is intended to correlate with invested capital. It includes accounts receivable, inventories (on a first-in, first-out basis), net property, plant and equipment, investments in affiliates, goodwill, trade accounts payable and 2% of annualized sales as an assumption for cash and prepaid expense.

      DCC is evaluated based upon numerous criteria of which net profit and net assets (equity investment) shown above are the major items.

      Restructuring and non-recurring items consist of the restructuring and integration charges discussed in Note 20, gains on sales of business discussed in Note 19 and other non-recurring charges.

      Sales by region are based on the location of the entity recording the sale. Sales from the U.S. amounted to $8,784 in 1998, $9,413 in 1999 and $8,552 in 2000. No other country’s sales exceeded 10% of total sales. U.S. long-lived assets were $1,835 in 1999 and $1,865 in 2000. No other country’s long-lived assets exceeded 10% of total long-lived assets.

      Net operating assets differ from consolidated assets as follows:

                         
1998 1999 2000
Net operating assets $ 6,953 $ 7,240 $ 6,980
Accounts payable 996 1,129 1,014
DCC’s assets in excess of equity 1,330 1,902 2,279
Non-trade receivables and other current assets 629 655 755
Other long-term assets 230 197 208
Consolidated assets $ 10,138 $ 11,123 $ 11,236

      The difference between operating capital spend and depreciation shown above and purchases of property, plant and equipment and depreciation shown on the cash flow statement represents the method of measuring DCC for operating purposes. DCC’s capital spend and depreciation are not included above. In addition, DCC purchases equipment and leases the equipment to the other SBUs. These operating leases are included in the consolidated statements as purchases of assets and depreciated over their useful lives.

      Export sales from the U.S. to customers outside the U.S. amounted to $756 in 1998, $939 in 1999 and $832 in 2000. Total export sales (including sales to our non-U.S. subsidiaries which are eliminated for financial statement presentation) were $1,001 in 1998, $1,229 in 1999 and $1,115 in 2000.

      Worldwide sales to Ford Motor Company and subsidiaries amounted to $1,911 in 1998, $2,130 in 1999 and $2,396 in 2000, which represented 15%, 16% and 19% of our consolidated sales. Sales to DaimlerChrysler AG and subsidiaries were $1,602 in 1998, $1,777 in 1999 and $1,669 in 2000 representing 13%, 14% and 14% of our consolidated sales. Sales to Ford were primarily from our ASG and FSG segments, while sales to DaimlerChrysler were primarily from the ASG and HTG segments. No other customer accounted for more than 10% of our consolidated sales.

Note 14. Estimated Income Taxes

      Income tax expense (benefit) consists of the following components:

                           
Year Ended December 31
1998 1999 2000
Current
U.S. federal $ 140 $ 23 $ 22
U.S. state and local 46 15 18
Non-U.S. 74 139 74
260 177 114
Deferred
U.S. federal 43 120 48
Non-U.S. 12 (46 ) 9
55 74 57
Total expense $ 315 $ 251 $ 171

      Deferred tax benefits (liabilities) consist of the following:

                         
Year Ended December 31
1998 1999 2000
Postretirement benefits other than pensions $ 386 $ 387 $ 328
Postemployment benefits 38 38 32
Expense accruals 144 150 210
Inventory reserves 28 35 58
Net operating loss and credit carryforwards 123 117 151
Valuation allowances (59 ) (83 ) (102 )
Other employee benefits 16 24 23
Other 30 63 65
Deferred tax benefits 706 731 765
Depreciation — non-leasing (179 ) (215 ) (239 )
Leasing activities (383 ) (441 ) (557 )
Pension accruals (23 ) (15 ) (12 )
Other (11 ) (17 ) (17 )
Deferred tax liabilities (596 ) (688 ) (825 )
Net deferred tax benefits (liabilities) $ 110 $ 43 $ (60 )

      Worldwide, we have operating loss carryforwards of approximately $366 with remaining lives ranging from one year to an indefinite period. Valuation allowances are provided for deferred benefits if the realization of the benefits is uncertain. To reflect uncertainties related to utilization of specific loss carryforwards, we increased the valuation allowance by $24 in 1999 and $19 in 2000. Net benefits recognized for loss and tax credit carryforwards generally relate to the U.S., where we have traditionally

 
 
 
 
 
 

Annual Report 2000    35

Notes to Financial Statements

Note 14. Estimated Income Taxes (Continued)

been a taxpayer, and Germany and Brazil, where operating losses may be carried forward indefinitely.

      Cumulative undistributed earnings of non-U.S. subsidiaries for which U.S. income taxes, exclusive of foreign tax credits, have not been provided approximated $935 at December 31, 2000. U.S. income taxes have not been provided on these undistributed earnings since we intend to permanently reinvest them. If the total undistributed earnings of non-U.S. subsidiaries had been remitted in 2000, a significant amount of the additional tax provision would have been offset by foreign tax credits.

      We paid income taxes of $228 in 1998, $136 in 1999 and $98 in 2000.

      The effective income tax rate differs from the U.S. federal income tax rate for the following reasons:

                           
Year Ended December 31
1998 1999 2000
U.S. federal income tax rate 35.0 % 35.0 % 35.0 %
Increases (reductions) resulting from:
State and local income taxes, net of federal
   income tax benefit		 3.6 2.1 2.3
Non-U.S. income (1.1 ) (0.7 ) (1.1 )
General business tax credits (0.4 ) (1.9 ) (1.7 )
Amortization of goodwill 0.5 0.6 1.2
Miscellaneous items 0.9 (1.0 ) 1.1
Effective income tax rate 38.5 % 34.1 % 36.8 %

Note 15. Composition of Certain Balance Sheet Amounts

      The following items comprise the net amounts indicated in the respective balance sheet captions:

                 
December 31
1999 2000
Investments and Other Assets
Goodwill $ 997 $ 969
Investments at equity 429 965
Marketable securities, cost of $45 - 1999 and $37 - 2000 49 41
Loans receivable 103 109
Other 280 283
$ 1,858 $ 2,367
Property, Plant and Equipment, net
Land and improvements to land $ 159 $ 146
Buildings and building fixtures 1,202 1,167
Machinery and equipment 4,820 4,859
6,181 6,172
Less: Accumulated depreciation 2,731 2,663
$ 3,450 $ 3,509
Deferred Employee Benefits and Other Noncurrent
   Liabilities
Postretirement other than pension $ 839 $ 831
Deferred income tax 190 310
Pension 79 109
Postemployment 82 82
Compensation 68 54
Other noncurrent liabilities 140 121
$ 1,398 $ 1,507
                 
December 31
1999 2000
Investment in Leases
Direct financing leases $ 173 $ 141
Leveraged leases 816 867
Property on operating leases, net of accumulated
   depreciation		 87 93
Allowance for credit losses (41 ) (43 )
1,035 1,058
Less: Current portion 21 21
$ 1,014 $ 1,037

      The components of the net investment in direct financing leases are as follows:

                 
December 31
1999 2000
Total minimum lease payments $ 201 $ 154
Residual values 43 42
Deferred initial direct costs 2 2
246 198
Less: Unearned income 73 57
$ 173 $ 141

      The components of the net investment in leveraged leases are as follows:

                 
December 31
1999 2000
Rentals receivable $ 7,218 $ 7,597
Residual values 788 874
Nonrecourse debt service (6,036 ) (6,409 )
Unearned income (1,143 ) (1,185 )
Deferred investment tax credit (11 ) (10 )
816 867
Less: Deferred taxes arising from leveraged leases 355 423
$ 461 $ 444

      Total minimum lease payments receivable on direct financing leases as of December 31, 2000 are as follows:

           
Year Ending December 31:
2001 $ 31
2002 25
2003 22
2004 19
2005 14
Later years 43
Total minimum lease payments receivable $ 154

      Total minimum lease payments receivable on operating leases as of December 31, 2000 are as follows:

           
Year Ending December 31:
2001 $ 24
2002 20
2003 15
2004 11
2005 9
Later years 23
Total minimum lease payments receivable $ 102
 
 
 
 
 
 

36    DANA CORPORATION

Note 16. Fair Value of Financial Instruments

      The estimated fair values of Dana’s financial instruments are as follows:

                                   
December 31
1999 2000
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and cash equivalents $ 111 $ 111 $ 179 $ 179
Loans receivable (net) 184 180 219 228
Investment securities 67 67 55 55
Financial liabilities
Short-term debt 968 968 1,526 1,526
Long-term debt 3,198 3,101 3,068 2,943
Security deposits — leases 4 3 1
Deferred funding commitments
   under leveraged leases		 4 3 1 1
Unrecognized financial instruments,
   net		 (4 ) (1 )

Note 17. Commitments and Contingencies

      At December 31, 2000, we had purchase commitments for property, plant and equipment of approximately $166. DCC had commitments to provide loan and lease financing in the aggregate amount of $60. Subsequent financing under the DCC commitments is subject to satisfactory completion of normal conditions precedent to the execution of such lease financing arrangements.

      At December 31, 2000, we had contingent obligations of up to $130 related to guarantees of third-party loans to equity affiliates.

      Future minimum rental commitments under operating leases were $367 at December 31, 2000, with rental payments during the next five years of: 2001, $67; 2002, $64; 2003, $55; 2004, $49 and 2005, $41. Net rental expense was $119 in 1998, $117 in 1999 and $103 in 2000.

      We are a party to various pending judicial and administrative proceedings arising in the ordinary course of business. These include, among others, proceedings based on product liability claims and alleged violations of various environmental laws. We have reviewed the proceedings that are currently pending including the probable outcomes, reasonably anticipated costs and expenses, availability and limits of our insurance coverage and our established reserves for uninsured liabilities. We do not believe that any liabilities that may result from these proceedings are reasonably likely to have a material effect on our liquidity, financial condition or results of operations.

Note 18. Acquisitions

      In 1998, we acquired the heavy axle and brake business of Eaton Corporation; General Automotive Specialty Company, Inc. (GAS); a 98-percent share of the capital of Nakata S.A. Industria e Comercio (Nakata); full ownership of SIMESC-Parish, our Brazilian structural components manufacturing company; the Glacier Vandervell Bearings Group and the AE Clevite North American non-bearing aftermarket engine hard parts business. GAS manufactures motor switches and locks. SIMESC-Parish, which has been renamed Dana Parish Produtos Estruturais, S.A., produces a range of structural products, including full frames and heavy-truck side rails. Nakata and its subsidiaries are the leading Brazilian manufacturers of suspension components, such as tie rods and ball joints. Glacier Vandervell produces and distributes products, primarily engine bearings, used in passenger car and light-duty vehicle applications for both original equipment manufacturers and the aftermarket. The AE Clevite business distributes products such as camshafts, valves and other valvetrain, timing and cylinder components to the automotive aftermarket.

      These acquisitions were accounted for as purchases and the results of their operations have been included in the consolidated financial statements since the dates of acquisition. Sales in 1998 were $784 higher than 1997 as a result of acquisitions and total assets of companies acquired in 1998 amounted to $980.

      In July 1998, we completed the merger with Echlin Inc. by exchanging 59.6 million shares of our common stock for all of the common stock of Echlin. Each share of Echlin was exchanged for .9293 of one share of our common stock. In addition, the outstanding Echlin stock options were converted at the same exchange ratio into options to purchase approximately 1.8 million shares of our common stock.

      The merger has been accounted for as a pooling of interests and all prior period consolidated financial statements have been restated to include the combined results of operations, financial position and cash flows of Echlin.

      In 1999, we acquired Innovative Manufacturing, Inc., a machining operation that supplies machined castings to our Outdoor Power Equipment Components Division. We also acquired the remaining interests not previously owned in Industrias Serva S.A. (30 percent), Dana Heavy Axle Mexico S.A. de C.V. (9 percent), Automotive Motion Technology Limited (49 percent) and Echlin Charger Mfg. Co. Pty. Ltd. (8 percent). These acquisitions have been accounted for as purchases and the results of operations and earnings previously allocated to minority owners have been included from the dates of acquisition. The sales and total assets were not material.

      In January 2000, we acquired the cardan-jointed propeller shaft business of GKN plc. In March, we acquired a majority interest in Tribometal a.s., a manufacturer of polymer bearings. The automotive axle manufacturing and stamping operations of Invensys plc were acquired in July. In November, we acquired a 30-percent interest in GETRAG Cie, a manufacturer of transmissions, transaxles, axles and other automotive components, and a 49-percent interest in GETRAG’s North American operations. Except for the interests in GETRAG, which are being accounted for as equity investments, the acquisitions were accounted for as purchases and the results of their operations have been included in the consolidated financial statements from the dates of acquisition. The acquisitions accounted for as purchases had total assets of $373 at acquisition and recorded sales of $195 since the dates of acquisition.

 
 
 
 
 
 

Annual Report 2000    37

Notes to Financial Statements

dollars in millions

Note 19. Divestitures

      In February 1998, we completed the sale of our hydraulic brake hose facilities in Columbia City, Ind. and Garching, Germany. In April 1998, we sold our Midland-Grau heavy-duty brake operations. In June 1998, we completed the sale of our hydraulic cylinder business. In December 1998, DCC completed the sale of its Technology Leasing Group portfolio resulting in an after-tax gain of $76. These operations contributed sales of $471 in 1997; through the dates of divestiture, 1998 sales for these operations totaled $140.

      In October 1999, we sold the Coldform operations of our Engine Systems Group and in November we sold Sierra International Inc. Coldform manufactured starter components, steering hubs and suspension components and Sierra manufactured and distributed marine and power equipment engine, drive and hose products. Annual sales of these operations were approximately $50.

      In January 2000, we sold our Gresen Hydraulics business, the Truckline Parts Centres heavy-duty distribution business and certain portions of our constant velocity (CV) joint businesses. In February, we sold most of the global Warner Electric businesses and, in March, we sold Commercial Vehicle Cab Systems. In September 2000, we sold the remaining 35% interest in our Brazilian CV joint operation. Net gain recorded on these divestitures totaled $106. These businesses reported sales of $666 in 1999; through the dates of divestiture, 2000 sales for these operations totaled $103.

Note 20. Restructuring of Operations

      In the fourth quarter of 1998, we finalized our synergy plans for integrating the operations of Echlin into our businesses and recorded restructuring and integration charges of $138. Of this amount $118 was charged to restructuring and $20, for writing down inventory, was charged to cost of sales. The announced restructuring and integration plans included the closing of eight facilities (seven in the AAG and one in the ESG) and a workforce reduction of approximately 2,450 people.

      During 1999, we continued executing the Echlin restructuring plan announced in 1998, including the closing and downsizing of facilities begun in 1998. We also incurred integration charges of $51 for relocating assets, training and relocating employees and other integration activities at the acquired operations. These costs were charged to expense as incurred.

      During the fourth quarter of 1999, we announced plans to downsize and close additional operations in the U.S., South America and Europe and recorded restructuring and integration charges totaling $170. The charges included the costs of exiting businesses, asset impairments and termination benefits. The announced restructuring and integration plans included closing five facilities, downsizing three facilities and terminating 1,280 people. The largest component of these plans was the downsizing of our Reading, Pa. structures facility. In total, $229 million was charged to income during the year. This amount consisted of $181 charged to restructuring and integration, $57 charged to cost of sales and a $9 gain on the sale of Sierra credited to other income.

      During the third quarter of 2000, we announced plans to close our Reading, Pa. structures facility and terminate approximately 690 people and recorded restructuring charges of $53. In the fourth quarter, we approved plans to close facilities in France, the United Kingdom and Argentina, resulting in $34 of charges and a workforce reduction of approximately 230 people. We also incurred integration expenses in 2000 related to consolidating our Engine Controls warehouse operations and moving operations from closed facilities.

 
 
 
 
 
 

38    DANA CORPORATION

      The following summarizes the restructuring charges and activity recorded in the last three years:

                                                   
Impairment
Employee Investments
Termination Long-Lived In Operations Exit Integration
Benefits Assets To be Sold Costs Expenses Total
Balance at December 31, 1997 $ 88 $ 30 $ 62 $ – $ – $ 180
Activity during the year
Charged to expense 65 40 13 118
Cash payments (37 ) (2 ) (39 )
Write-off of assets (70 ) (62 ) (132 )
Balance at December 31, 1998 116 – – 11 – 127
Activity during the year
Charged to expense 60 59 11 51 181
Cash payments (85 ) (9 ) (51 ) (145 )
Write-off of assets (59 ) (59 )
Balance at December 31, 1999 91 – – 13 – 104
Activity during the year
Charged to expense 62 8 27 76 173
Cash payments (60 ) (8 ) (20 ) (76 ) (164 )
Balance at December 31, 2000 $ 93 $ – $ – $ 20 $ – $ 113

      Employee terminations relating to the plans were as follows:

                           
1998 1999 2000
Total estimated 2,450 1,280 1,020
Less terminated:
1999 (1,123 ) (595 )
2000 (1,230 ) (615 ) (765 )
Balance at December 31, 2000 97 70 255

      At December 31, 2000, $113 of restructuring charges remained in accrued liabilities. This balance was comprised of $93 for workforce reductions of approximately 420 employees to be completed in 2001 and $20 for lease terminations and other exit costs. We estimate that cash expenditures will be approximately $81 in 2001, $14 in 2002 and $18 thereafter. Our liquidity and cash flows will not be materially impacted by these actions. It is anticipated that our operations over the long term will benefit from these realignment strategies.

Note 21. Noncash Investing and Financing Activities

      In leveraged leases, the issuance of nonrecourse debt financing and subsequent repayments thereof are transacted directly between the lessees and the lending parties to the transactions. Nonrecourse debt issued to finance DCC’s investment in leveraged leases was $225 in 1998, $878 in 1999 and $403 in 2000; nonrecourse debt obligations repaid were $182 in 1998, $273 in 1999 and $106 in 2000.

 
 
 
 
 
 

Annual Report 2000    39

Management’s Discussion and Analysis of Financial Condition and Results of Operations

dollars in millions

      We faced numerous challenges in 2000, in both the original equipment manufacturer (OEM) and automotive aftermarket sectors, internally and externally, domestically and abroad. North American light vehicle production reached 17.2 million units in 2000, mainly on the strength of the first half of the year. By December, OEM production schedules were 16% below those of December 1999, a gap that widened even more in January 2001. This decline has been marked by sharp and sudden shifts in demand for our products, creating operating inefficiencies that are reflected in our margins. Heavy truck production also started the year at near-record volume, only to drop by 40% in the second half in reaction to high retail inventory and slowing demand. The automotive aftermarket was especially soft in the United States and we experienced numerous problems as we attempted to consolidate certain of our domestic warehouses. The euro lost nearly 16% of its value against the dollar in the first ten months of the year before rebounding in November and December to finish the year down 6%. Currency fluctuations overall reduced our sales by $279 and our net income by $10. Our operating units took steps to reduce capacity and costs in the second half of 2000 in response to reduced demand. In the fourth quarter, we recognized approximately $27 of equity losses related to our 49%-owned affiliate in Venezuela.

      There were accomplishments in 2000 as well. We completed several divestitures that were announced in 1999 and a number of strategic acquisitions that should provide important opportunities for us in the near future. We made progress toward our goal of reducing working capital and those efforts are continuing in 2001. Our Spicer Driveshaft Division earned the Malcolm Baldrige National Quality Award in manufacturing, the second time in five years that a Dana unit has received a Baldrige Award.

      As we enter 2001, we face ongoing reductions in demand from our major OEM customers as they react to high dealer inventory and lower sales. We have reduced capacity, including workforce reductions of 8,300 people in 2000, and further rationalization of assets and people is continuing in 2001. We also face pricing pressure that will challenge us to reduce costs through improved capital efficiency, advanced technology and continued advancement of our global sourcing initiatives.

Liquidity and Capital Resources

      Operating activities provided cash of $984 in 2000, exceeding the 1999 total by $376. Net income provided $334, a $179 decline from 1999. Included in net income in 2000 is $106 of non-operating gains on divestitures; net income in 1999 included a net gain of $5. Working capital declined by $483 during 2000. While $240 was the net result of acquisitions and divestitures and $51 was due to currency movements, $192 was the direct result of a company-wide initiative to reduce working capital. We are continuing these efforts in 2001. In particular, our Automotive Aftermarket Group is expected to improve inventory intensity in 2001 after fully resolving its warehouse integration problems.

      Investing activities in 2000 used cash of $794 versus $1,101 in 1999. Capital spending was limited to $662, a reduction of $145 from the 1999 level. Purchases of assets to be leased decreased by $289 but investments in partnerships totaled $181 and loans made to customers exceeded payments received by $82 as DCC shifted its focus from direct ownership of leased assets to other forms of investment. Divestitures generated $571 of proceeds during 2000. Completion of several strategic investments required cash of $511.

      Financing activities in 2000 used cash of $122. Included among 2000 activities were $187 of dividend payments and $381 of common stock repurchases versus $206 paid in dividends and $100 spent on stock repurchases in 1999. We repurchased 15,455,747 shares in 2000 under the repurchase program approved by our directors in April 1999 and amended in February 2000, bringing the total shares repurchased under the program to 18,450,147. We did not make any purchases after September 2000 and the program ended December 31, 2000. This share reduction accounts for the $19 reduction in dividends paid. Debt activity included payments on long-term debt of $504 and new borrowings of $368. Short-term borrowings increased a net of $577.

      At December 31, 2000, we had committed and uncommitted bank lines totaling $3,054, DCC having $750 of this figure. To satisfy a significant portion of our short-term financing requirements, we have generally relied on our ability to borrow money through the issuance of commercial paper. However, the debt rating services downgraded our credit ratings in January 2001 and placed Dana on their watch lists, primarily due to the significant downturn experienced in our markets in the fourth quarter. These rating actions, coupled with the volatility and current lack of depth of the commercial paper market, are currently making it difficult for us to issue commercial paper. As a result, we are borrowing against our committed bank lines. We are also exploring other means of supplementing our liquidity. The interest rates on our committed bank lines and the cost of alternative financing may be higher than those historically

 
 
 
 
 
 

40    DANA CORPORATION

experienced in the commercial paper market. We expect that the combination of our committed bank lines, certain asset-based financing sources and cash flow from operations will satisfy our liquidity requirements for the year.

      We have reviewed the liabilities that may result from the legal proceedings to which we are currently a party, including those involving product liability claims and alleged violations of environmental laws. We do not believe that these liabilities or the related cash flows are reasonably likely to have a material adverse effect on our liquidity, financial condition or results of operations.

      Contingent environmental liabilities are estimated based on the most probable method of remediation, current laws and regulations and existing technology. Estimates are made on an undiscounted basis and exclude the effects of inflation. If there is a range of equally probable remediation methods or outcomes, the lower end of the range is accrued. At December 31, 2000, $40 was accrued for contingent environmental liabilities with no recovery expected from other parties, compared to $45 accrued at December 31, 1999 and $1 recorded as probable recoveries.

      Contingent non-asbestos product liabilities are estimated based on existing claims plus our estimate of incurred but not reported claims based on historical experience. At December 31, 2000, $21 was accrued for contingent non-asbestos product liability costs and $2 was recorded as an asset for probable recoveries, compared to $19 of liabilities with no anticipated recoveries at the end of 1999.

      With respect to contingent asbestos-related product liability, we had approximately 70,000 asbestos-related claims outstanding at December 31, 2000, including approximately 33,000 claims that were settled pending payment. We have agreements with our insurance carriers providing for the payment of a significant majority of the defense and indemnity costs for pending claims as well as claims which may be filed against us in the future. At December 31, 2000, we had accrued $78 for contingent asbestos-related product liability costs and recorded $67 as an asset for probable recoveries from insurance or third parties for asbestos-related product liability claims, compared to $77 accrued for liabilities and $65 recorded as an asset at December 31, 1999. We recorded pre-tax expenses of less than $5 in 2000 related to the settlement and administration of asbestos-related product liability claims.

      For some time, the vast majority of our asbestos-related claims were administered by the Center for Claims Resolution (CCR), which settled claims for its member companies on a shared settlement cost basis. In February 2001, the CCR was reorganized and discontinued negotiating shared settlements. The CCR continues to administer Dana’s claims and will provide some legal and claims adjusting support. However, there will be no sharing of indemnity costs and Dana will independently control its strategy and settlements. Dana will continue to assess the efficiency of this arrangement. We do not expect this change to materially affect our contingent liability for these claims.

      The difference between our minimum and maximum estimates for contingent liabilities, while not considered material, was $2 for the environmental liability claims and $14 for the non-asbestos product liability claims, compared to $3 and $12 at December 31, 1999.

Restructuring and Integration

      In the fourth quarter of 1998, we finalized our synergy plans for integrating the operations of Echlin into our businesses and recorded restructuring and integration charges of $138. Of this amount $118 was charged to restructuring and $20, for writing down inventory, was charged to cost of sales. The announced restructuring and integration plans included the closing of eight facilities (seven in the Automotive Aftermarket Group and one in the Engine Systems Group) and a workforce reduction of approximately 2,450 people.

      During 1999, we continued executing the Echlin restructuring plan announced in 1998, including the closing and downsizing of facilities begun in 1998. We also incurred integration charges of $51 for relocating assets, training and relocating employees and other integration activities at the acquired operations. These costs were charged to expense as incurred.

      During the fourth quarter of 1999, we announced plans to downsize and close additional operations in the U.S., South America and Europe and recorded restructuring and integration charges totaling $170. The charges included the costs of exiting businesses, asset impairments and termination benefits. The announced restructuring and integration plans included closing five facilities, downsizing three facilities and terminating 1,280 people. The largest component of these plans was the downsizing of our Reading, Pa. structures facility. In total, $229 million was charged to income during the year. This amount consisted of $181 charged to restructuring and integration, $57 charged to cost of sales and a $9 gain on the sale of Sierra International Inc. credited to other income.

      During the third quarter of 2000, we announced plans to close our Reading, Pa. structures facility and terminate approximately 690 people and recorded restructuring charges of $53. In the fourth quarter, we approved plans to close facilities in France, the United Kingdom and Argentina, resulting in $34 of charges and a workforce reduction of approximately 230 people. We also incurred integration expenses in 2000 related to consolidating our Engine Controls warehouse operations and moving operations from closed facilities.

 
 
 
 
 
 

Annual Report 2000    41

Management’s Discussion and Analysis of Financial Condition and Results of Operations

dollars in millions

Restructuring and Integration (Continued)

      The following summarizes the restructuring charges and activity recorded in the last three years:

                                                   
Impairment
Employee Investments
Termination Long-Lived In Operations Exit Integration
Benefits Assets To be Sold Costs Expenses Total
Balance at December 31, 1997 $ 88 $ 30 $ 62 $ – $ – $ 180
Activity during the year
Charged to expense 65 40 13 118
Cash payments (37 ) (2 ) (39 )
Write-off of assets (70 ) (62 ) (132 )
Balance at December 31, 1998 116 – – 11 – 127
Activity during the year
Charged to expense 60 59 11 51 181
Cash payments (85 ) (9 ) (51 ) (145 )
Write-off of assets (59 ) (59 )
Balance at December 31, 1999 91 – – 13 – 104
Activity during the year
Charged to expense 62 8 27 76 173
Cash payments (60 ) (8 ) (20 ) (76 ) (164 )
Balance at December 31, 2000 $ 93 $ – $ – $ 20 $ – $ 113

     Employee terminations relating to the plans were as follows:

                           
1998 1999 2000
Total estimated 2,450 1,280 1,020
Less terminated
1999 (1,123 ) (595 )
2000 (1,230 ) (615 ) (765 )
Balance at December 31, 2000 97 70 255

      At December 31, 2000, $113 of restructuring charges remained in accrued liabilities. This balance was comprised of $93 for workforce reductions of approximately 420 employees to be completed in 2001 and $20 for lease terminations and other exit costs. We estimate that cash expenditures will be approximately $81 in 2001, $14 in 2002 and $18 thereafter. Our liquidity and cash flows will not be materially impacted by these actions. It is anticipated that our operations over the long term will benefit from these realignment strategies.

 
 
 
 
 
 

42    DANA CORPORATION

Results of Operations (2000 versus 1999)

      Our worldwide sales were $12,317 in 2000, a 6% or $842 decline from the $13,159 recorded in 1999. The divestitures completed in the first quarter of 2000 were a significant factor. Net of the effect of acquisitions, these divestitures accounted for a $410 reduction in sales for the year. Currency fluctuations accounted for an additional $279 decline in sales.

      Sales by region for 1999 and 2000 are presented in the following table.

                                 
Change
1999 2000 Amount Percent
North America $ 10,308 $ 9,449 $ (859 ) (8.3 )
Europe 2,051 1,947 (104 ) (5.1 )
South America 549 563 14 2.6
Asia Pacific 251 358 107 42.6

      U.S. sales were $8,552, a 9% or $861 decline from the 1999 level, with divestitures net of acquisitions accounting for $408 of the decrease. Exports from the U.S. declined from $939 in 1999 to $832 in 2000

      Overall sales outside the United States increased $20 despite the $279 adverse impact of further strengthening of the U.S. dollar. Sales for our operations in Canada and Mexico were flat after considering a $4 benefit from currency changes; acquisitions and divestitures were not a factor in those countries. Sales in Europe benefited from a net $65 increase related to acquisitions net of divestitures and organic growth added another $79. These positive effects were more than offset by $247 of adverse currency impact as the U.S. dollar equivalent of sales denominated in euros and pounds declined $207 and $32, respectively, due to weakness in those currencies. In South America, where currency weakness resulted in an $11 sales decline, the effect of divestitures net of acquisitions was a $66 drop in sales. Continuing recovery in the region was evident however in the $90 of organic growth. Organic growth in Asia Pacific sales totaled $133, more than offsetting the $25 of adverse currency effects. Sales due to acquisitions equaled those lost by way of divestitures.

      Our Strategic Business Units (SBUs) – Automotive Systems Group (ASG), Automotive Aftermarket Group (AAG), Heavy Truck Group (HTG), Engine Systems Group (ESG), Fluid Systems Group (FSG), Off-Highway Systems Group (OHSG) and Dana Credit Corporation (DCC) – represent our business segments. We realigned certain businesses within our SBU structure in 2000. The most significant change was shifting our fluid handling products operations from the ESG to the FSG. Our segment information has been restated to reflect these changes.

      Sales by SBU for 1999 and 2000 are presented in the following table. DCC did not record sales in either year. The “Other” category in the table represents facilities that have been closed or sold and operations not assigned to a specific SBU.

                                   
Change
1999 2000 Amount Percent
ASG $ 4,461 $ 4,634 $ 173 3.9
AAG 3,039 2,850 (189 ) (6.2 )
HTG 1,904 1,598 (306 ) (16.1 )
ESG 1,318 1,293 (25 ) (1.9 )
FSG 1,238 1,163 (75 ) (6.1 )
OHSG 812 674 (138 ) (17.0 )
Other 387 105 (282 ) (72.9 )

      ASG sales in North America decreased $106 or 3% in 2000 as a result of light vehicle and heavy truck OEM production cuts intended to reduce dealer inventory. Light vehicle production in North America started the year near all-time record levels but declined in the second half of 2000 to end at 17.2 million units. Sport utility vehicles (SUVs) and light trucks displayed a similar trend line while maintaining their share of overall production. While sales appeared flat in South America, internal growth in Brazil across all the ASG product lines was slightly more than the combined negative effect of currency ($8) and net divestitures ($55). Sales in Europe benefited from our acquisition of the GKN driveshaft business early in the year, which added sales of $142, but gave back $75 to currency effects. ASG’s internal growth of nearly $40 resulted from improvement in both driveshaft and axle sales, the latter improving 32% in Austria. The acquisition of the automotive axle manufacturing and stamping business of Invensys plc added $34 of sales in Asia Pacific, more than offsetting the $22 adverse currency effect and complementing the $141 of organic growth resulting mainly from new modular systems business.

      AAG ended the year with a $189 decrease in sales, of which nearly $44 related to the late 1999 divestiture of Sierra. Inefficiencies in consolidating parts of its warehousing operations and softness in the North American automotive aftermarket were key factors in the $85 sales decline at AAG’s operating units in this region. Sales in Europe were marginally higher than in 1999 but the region lost $40 to currency movements. Modest sales improvement in South America was offset by decreases in Asia Pacific. There were no acquisitions or divestitures in either region and currency effects were minimal.

      HTG continued its success of 1999 during the first half of 2000, growing sales 4% after excluding the effects of two divestitures in the first quarter of 2000. However, early in the second half of the year, heavy truck manufacturers sharply reduced production in response to falling demand and excess inventory. HTG sales fell by one-third in the second half and finished the full year $306 below 1999 results. The divestiture impact for the full year was $106 and currency losses pared another $9, leaving $190 of organic sales reductions.

      ESG achieved $31 of organic growth with $23 emanating from Europe and $8 from South America. Similar to the European operations of our other SBUs, those of the ESG lost

 
 
 
 
 
 

Annual Report 2000    43

Management’s Discussion and Analysis of Financial Condition and Results of Operations

dollars in millions

$56 in converting their local sales to U.S. dollars. ESG sales in North America edged up $5 or 1% in 2000.

      FSG sales declined $75 in 2000 as North America lost $51 in its ongoing operations and another $6 due to a divestiture. Operations in Europe incurred currency losses of $17 to account for most of their $19 sales decline. Sales in South America were even with the prior year.

      OHSG sales fell $138 overall as the divestiture of the Gresen Hydraulics business in January 2000 resulted in a $97 decline in sales and adverse currency impacts accounted for another $49. Organic growth was a modest $8. North American sales declined $93 with $86 attributable to the Gresen divestiture. In Europe, sales were $41 lower as weakness in the euro had a $49 adverse effect. South American sales were down $4 as $7 of organic growth was negated by $11 lost through the Gresen divestiture.

      Revenue from lease financing increased $32 or 29% in 2000 on a $15 increase in direct finance lease income and increases of $9 each in interest income and income from property rentals recognized by DCC.

      Other income increased $148 in 2000, primarily the result of a $156 increase in gains on divestitures that was partially offset by a $9 decrease in interest income exclusive of the DCC interest income which is included in lease financing revenue.

      Gross margin in 2000 was 13.9%, well below the 16.7% reported in 1999. Results in all regions reflected lower gross margins, but the declines were most severe in North America and Asia Pacific. In North America, ASG and HTG were both affected by producing above optimum capacity in the first half of the year. In the second half, these units were impacted by erratic demand from their major customers and generally fell well below efficient production levels. AAG margins were impacted by softness in the automotive aftermarket. In Asia Pacific, ASG margins were affected by startup costs related to our new modular business in Australia. We incurred $17 in 2000 in connection with discontinuing certain lines of business and $57 in 1999 related to impairment and other rationalization adjustments and charged these amounts to cost of sales. Gross margins excluding these items would have been 14.1% in 2000 and 17.1% in 1999.

      Selling, general and administrative expenses (SG&A) decreased $60 in 2000, slightly exceeding the $56 attributed to the net effect of divestitures and acquisitions. DCC increased its general and administrative expenses by $9 with higher depreciation on leased assets and expenses related to a real estate investment being the largest components. SG&A as a percentage of sales was 9.2% in 2000 and 9.1% in 1999.

      Interest expense rose $44 or nearly 16% in 2000 as overall debt increased by almost 11%. Average short-term borrowings rose $452 to $1,614 and the average interest rate increased from 5.4% to 6.6%.

      Our effective tax rate was 36.8% in 2000. We continue to benefit from tax credits generated by our leasing operations and from relatively low state and local tax rates.

      Minority interest was unchanged in 2000. The minority interest in the gain recognized by Albarus S.A. on the sale of its interest in one of its affiliates was generally offset by the absence of the minority interest’s participation in operating earnings.

      We recorded $54 of equity in the earnings of our affiliates in 2000. Increased earnings at our affiliate in Mexico and expansion of the portion of leasing revenue earned on DCC’s equity investments more than offset the $27 loss recorded in the fourth quarter at our 49%-owned affiliate in Venezuela.

      Net income was $334 in 2000 versus $513 reported in 1999. Comparisons are made difficult by non-recurring items recorded in both years. In 1999 we recorded $165 of non-recurring charges net of the gain recorded in the AAG on the sale of Sierra. In 2000, we recorded $43 of non-recurring charges net of the gains recorded on several divestitures. Excluding these items, earnings would have been $377 in 2000 and $678 in 1999.

      Non-recurring items in 2000 included net charges of $47 in ASG, $39 in AAG, $33 in ESG and $4 in FSG and net credits of $27 in HTG and $16 in OHSG; a net gain of $37 was reflected in the Other category. In 1999, non-recurring charges were $59 in ASG, $41 in AAG, $3 in HTG, $31 in ESG, $3 in FSG, $1 in OHSG and $27 in Other.

Market Trends

      As 2000 came to a close, dealer inventory of light vehicles was approaching a three-month supply for some models despite severe production cutbacks by the major OEMs. SUV and light truck production exceeded car production throughout the year, but light truck inventories were reported growing at a faster rate near the end of the year. In early 2001, reductions in production schedules range from 17% to 27% at Ford, General Motors and DaimlerChrysler when compared to the first quarter of 2000, while a small number of Japanese manufacturers are reporting increases in their 2001 U.S. production levels thus far. Amid this uncertainty, we currently believe light vehicle volume for the year 2001 will be in the range of 15 to 16 million units, with the latter half of the year expected to be somewhat stronger than the first half. We expect the erratic demand and production schedules that marked the latter part of 2000 to continue through the first half of 2001 and then stabilize in the second half. The continuation of these challenging conditions makes the ongoing rationalization of assets and people critical to any significant improvement in our margins.

      We see the North American heavy truck market maintaining the fourth quarter 2000 build rate during most of 2001. There are likely to be minor fluctuations in quarterly production, but we expect approximately 150,000 units for the year. We also expect the automotive aftermarket to remain soft in 2001. Key factors are higher fuel costs, which tend to reduce the portion of vehicle operating outlays expended on repairs and maintenance, and the general improvement in the quality and durability of automotive parts.

 
 
 
 
 
 

44    DANA CORPORATION

      We are currently projecting over $400 in sales for 2001 and more than $4,800 in aggregate sales through 2005 related to net new business. We are encouraged by the new awards, especially since these sales amounts include business not only with our traditional North American OEM customers, but also with foreign-based OEMs.

Forward-Looking Information

      Forward-looking statements in this report are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects” and similar expressions. These statements represent our expectations based on current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our actual results could differ materially from those which are anticipated or projected due to a number of factors, including international economic conditions; the strength of the euro and other currencies relative to the U.S. dollar; the cyclical nature of the global vehicular industry; the performance of the global aftermarket sector; changes in business relationships with our major customers and other factors affecting the timing, size and continuation of our customer programs; the ability of our customers and suppliers to achieve their projected sales and production levels; competitive pressures on our sales and pricing; increases in production or material costs that cannot be recouped in product pricing; and the success of our recent short-term actions and our long-term transformation strategy for the company.

Results of Operations (1999 versus 1998)

      Our worldwide sales increased by $695 in 1999 to $13,159, nearly 6% above the record level of 1998. Organic growth accounted for $359 or 3% while acquisitions, net of divestitures, added $336. U.S. sales increased $629 or 7% with $122 attributable to acquisitions net of divestitures. Exports increased 24% to $939 despite the increasing strength of the U.S. dollar.

                                 
Change
1998 1999 Amount Percent
North America $ 9,657 $ 10,308 $ 651 6.7
Europe 1,844 2,051 207 11.2
South America 779 549 (230 ) (29.5 )
Asia Pacific 184 251 67 36.4

      Overall sales outside of the U.S. increased 2% in 1999 but declined 4% when excluding the net effect of acquisitions and divestitures. The increased strength of the U.S. dollar had an adverse impact on sales in all regions except Asia Pacific. Mexico and Canada incurred a $24 negative currency effect on a combined basis. Europe, which experienced an 11% net increase, benefited by $194 from net acquisitions but gave back $47 in negative currency impact. South America, struggling to recover from economic downturns in Brazil and Argentina, incurred a $230 or 30% decrease in sales. The devaluation of the Brazilian real accounted for nearly all of the $240 in sales lost to currency effects in this region. Asia Pacific increased sales by $67 or 36% with currency changes contributing a $5 increase.

      Sales for 1998 and 1999 are presented in the table below. The amounts are presented consistent with the 2000 segment information.

                                 
Change
1998 1999 Amount Percent
ASG $ 4,180 $ 4,461 $ 281 6.7
AAG 2,888 3,039 151 5.2
HTG 1,746 1,904 158 9.0
ESG 978 1,318 340 34.8
FSG 1,193 1,238 45 3.8
OHSG 888 812 (76 ) (8.6 )
Other 591 387 (204 ) (34.5 )
 
 
 
 
 
 

Annual Report 2000    45

Management’s Discussion and Analysis of Financial Condition and Results of Operations

dollars in millions

      The popularity of sport utility vehicles (SUVs) and light trucks continued to push ASG sales to higher levels. Axle sales experienced most of the growth in this SBU. Driveshaft sales were up slightly less than 3% and structural product sales were relatively flat. Sales growth was most significant in North America where sales increased $354. Asia Pacific experienced a 74% increase and South America was down 36% for the year.

      The December 1998 acquisition of AE Clevite, a distributor of camshafts, valves and engine components, helped the AAG grow its North American sales by $131 in 1999. Our filtration operation in the United Kingdom, acquired early in 1999, helped Europe register a 7% increase over 1998. Sales were down 4% in South America and 2% in Asia Pacific.

      The HTG continued to benefit from high build rates in medium to heavy trucks (class 5 through 8) in the United States. Heavy axle and brake operations led the way to a 12% sales increase in North America where nearly 94% of HTG’s sales occur. Sales were flat in Asia Pacific, down 13% in Europe and down nearly 50% in South America.

      The acquisition of Glacier Vandervell in December 1998 made the difference for the ESG in 1999. The manufacturer of engine bearings helped the ESG increase sales 22% in North America and 82% in Europe. Sales of the other engine and sealing products were generally flat for the year.

      FSG transacted more than 80% of its business in North America, where strength in coolant systems carried it to a 4% sales increase in 1999. Sales increased 13% in Europe but declined 26% in South America.

      OHSG had a challenging year in 1999. Sales decreased 10% in North America and 6% in Europe as the depressed agricultural market limited demand for off-highway axles, powershift transmissions, hydraulic pumps and auxiliary equipment.

      Revenue from lease financing decreased 36% in 1999 due to the sale of DCC’s Technology Leasing Group portfolio in December 1998. Other income in 1998 included a gain of $126 on this divestiture and $27 from the settlement of a lawsuit.

      Our gross margin was 16.7% in 1999 compared to 16.2% in 1998. Cost of sales in 1999 was increased by a charge of $57 related to impairment and other rationalization adjustments. In 1998 we charged $20 of inventory adjustments to cost of sales. Excluding these non-recurring items, the gross margins would have been 17.1% in 1999 and 16.3% in 1998.

      Selling, general and administrative expenses (SG&A) increased only $70 in 1999 despite $83 of expenses at newly acquired businesses. SG&A at our manufacturing and distribution businesses (including newly acquired businesses) increased $76. DCC realized net savings of $8 with the reduction resulting from the December 1998 sale of its Technology Leasing Group portfolio being partially offset by expenses related to development of a new lease administration system. On a regional basis, North America increased $25 with all of it attributable to the net effect of acquisitions and divestitures. Europe increased by $78 including a net acquisition/divestiture impact of $42. Currency devaluation in South America caused SG&A to decline by nearly $28.

      Operating income, which excludes restructuring and integration charges and the 1998 merger expenses, increased by $110 in 1999. Acquisitions, net of divestitures, added $31 and DCC contributed $8. The vast majority of the improvement is based in North America as Europe improved a modest $7 and South America decreased $14. Excluding the non-recurring items charged to cost of sales, operating margin would have increased from 7.3% in 1998 to 8.1% in 1999.

      Interest expense was virtually unchanged in 1999. DCC lowered its borrowing costs following the divestiture of its small-ticket leasing operation but the manufacturing operations incurred greater interest charges due to a higher debt level.

      Our effective tax rate improved from 39% to 34% in 1999. State tax incentives played a significant role in the change as did general business credits realized by our leasing operations. Nondeductible merger expenses adversely affected the 1998 rate.

      Minority interest increased by $5 due to the minority interest acquired as part of the Glacier Vandervell acquisition and earnings improvement at Automotive Motion Technology Limited prior to our acquiring the remaining shares of that subsidiary.

      Equity in earnings of affiliates rose $3 or 8% including a $16 decline in our Venezuelan affiliate, a $13 increase in our Mexican affiliates and a $7 increase related to our leasing partnerships.

      Net income for 1999 came in at $513, slipping 4% from the $534 we earned in 1998. Both years include several items that make it difficult to compare these results. In 1998 we recorded $57 of non-recurring charges net of gains on divestitures and the settlement of a patent infringement case. This year we recorded $165 of non-recurring charges net of the gain on the sale of Sierra. With these items excluded from both years, our earnings would have increased $87 or 15% to $678.

      The SBUs affected by the 1999 adjustments were ASG $59, AAG $41, ESG $31, HTG $3, FSG $3, OHSG $1 and Other $27. In 1998, adverse adjustments were recorded by AAG $45, ESG $17, OHSG $1 and Other $50. DCC recorded a gain of $56.

 
 
 
 
 
 

46    DANA CORPORATION

Additional Information

in millions except per share amounts

Shareholders’ Investment

     The following table shows the range of market prices of our common stock on the New York Stock Exchange and the cash dividends declared and paid for each quarter during 1999 and 2000. At December 31, 2000, the closing price of Dana common stock was $15.31.

                                                                                 
Cash Dividends
Stock Price Declared and Paid
1999 2000 1999 2000
Quarter Ended High Low Close High Low Close
March 31 $ 43.50 $ 34.00 $ 38.00 $ 33.25 $ 20.31 $ 28.19 $ .31 $ .31
June 30 54.06 37.38 46.06 31.81 20.88 21.19 .31 .31
September 30 47.63 35.13 37.13 27.69 20.63 21.50 .31 .31
December 31 39.06 26.00 29.94 24.00 12.81 15.31 31 .31

Unaudited Quarterly Financial Information

                                                             
Net Income (Loss)
Net Sales Gross Profit Net Income Per Share
Quarter Ended Reported Restated Reported Restated (Loss) Basic Diluted
For the year ended
   December 31, 1999
March 31 $ 3,381 $ 566 $ 162 $ .97 $ .97
June 30 3,408 610 190 1.15 1.14
September 30 3,127 563 161 .98 .97
December 31 3,243 456 * * *
For the year ended
   December 31, 2000
March 31 $ 3,459 $ 3,468 $ 571 $ 566 $ 245 $ 1.55 $ 1.54
June 30 3,286 3,296 523 518 144 .95 .95
September 30 2,855 2,865 389 384 29 .19 .19
December 31 2,688 250 (84 ) (.57 ) (.57 )

*   Amount is less than $.5 and per share amounts are less than one-half cent.

      The sales and gross margin amounts for the first three quarters of 2000 have been restated to reflect the adoption of Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs, in the fourth quarter of 2000. The effect on sales and gross margin in 1999 was not material.

      In the fourth quarter of 1999, we recorded rationalization, integration and other non-recurring charges of $144 (87 cents per share). These charges relate to the downsizing of three facilities, including our Reading, Pa., facility, and the closing of five facilities in the U.S., South America and Europe, net of the gain on the sale of the Sierra marine aftermarket operation.

      In the first quarter of 2000, we recognized approximately $85 (53 cents per share) of non-recurring income representing gains on divestitures, net of $12 of integration expenses. In the second quarter, we recorded $10 (7 cents per share) of non-recurring integration charges incurred in connection with consolidating our Engine Controls warehouse operations. In the third quarter, we recorded a charge of $32 (21 cents per share) related to the closing of our Reading, Pa., structures facility.

      In the fourth quarter of 2000, we recorded $86 million of non-recurring charges (58 cents per share), including restructuring expenses related to closing several facilities ($34), integration expenses incurred primarily in the Engine Controls Division and in relocating operations of closed facilities ($21), equity losses related to our 49%-owned affiliate in Venezuela ($20) and costs associated with exiting several lines of business ($11).

 
 
 
 
 
 

50    DANA CORPORATION

Eleven-Year History†

in millions except per share amounts

                                                                                           
Financial Highlights
For the Years 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Net Sales $ 6,553 $ 6,084 $ 6,655 $ 7,404 $ 8,843 $ 10,472 $ 10,979 $ 11,911 $ 12,464 $ 13,159 $ 12,317
Net Income (Loss) 123 55 (318 ) 174 352 443 451 320 534 513 334
Net Income (Loss) per
   Common Share
Basic .92 .41 (2.27 ) 1.18 2.29 2.81 2.83 1.97 3.24 3.10 2.20
Diluted .91 .41 (2.26 ) 1.17 2.28 2.80 2.81 1.94 3.20 3.08 2.18
Cash Dividends per
   Common Share		 .80 .80 .80 .80 .83 .90 .98 1.04 1.14 1.24 1.24
Total Assets 5,705 5,371 5,584 5,895 6,701 7,814 8,522 9,511 10,138 11,123 11,236
Long-Term Debt 1,505 1,684 1,608 1,341 1,381 1,325 1,887 1,790 1,718 2,732 2,649

  †   The information for years prior to 1998 has been restated to reflect the Echlin merger, which has been accounted for as a pooling of interests. Echlin amounts included for years prior to 1995 are for fiscal years ended August 31.

 
 
 
 
 
 

Annual Report 2000    51