Dana Corp. 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
Commission file number 1-1063
Dana Corporation
(Exact name of registrant as specified in its charter)
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Virginia |
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34-4361040 |
(State or other jurisdiction of
incorporation or organization) |
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(IRS Employer
Identification No.) |
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4500 Dorr Street, Toledo, Ohio |
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43615 |
(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code:
(419) 535-4500
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
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Name of each exchange on which registered |
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Common stock, $1 par value
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None |
Securities registered pursuant to section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the
registrant is not required to file reports pursuant to
Section 13 or 15(d) of the
Act Yes o No þ
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past
90 days. Yes þ No o
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K þ
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in
Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark if the
registrant is a shell company (as defined in
Rule 12b-2) of the
Act. Yes o No þ
The aggregate market value of the
voting common stock held by non-affiliates of the registrant
committed by reference to the average high and low trading
prices of the common stock on the New York Stock Exchange as of
the last business day of the registrant’s most recently
completed second fiscal quarter (June 30, 2005) was
approximately $2,249,917,913.
There were 150,389,814 shares
of registrant’s common stock, $1 par value,
outstanding at March 31, 2006.
DANA CORPORATION —
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
1
FORWARD-LOOKING INFORMATION
Statements in this report that are not entirely historical
constitute “forward-looking” statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such forwarding-looking statements are indicated by words such
as “anticipates,” “expects,”
“believes,” “intends,” “plans,”
“estimates,” “projects” and similar
expressions. These statements represent our present expectations
based on our current information and assumptions.
Forward-looking statements are inherently subject to risks and
uncertainties. Our actual results could differ materially from
those we currently anticipate or project due to a number of
factors, including the following and those discussed elsewhere
in this report, including Items 1A, 7 and 7A.
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The reorganization of Dana and forty of our wholly-owned
domestic subsidiaries under Chapter 11 of the United States
Bankruptcy Code (the Bankruptcy Code), that may have adverse
consequences for us and our stakeholders and may or may not be
successful; |
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The cyclical nature of the vehicular markets we serve,
particularly the heavy-duty commercial vehicle market; |
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Changes in national and international economic conditions that
affect our markets, such as increased fuel prices and
legislation regulating vehicle emissions; |
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Increases in our commodity costs (including steel, other raw
materials and energy) that we cannot recoup in our product
pricing; |
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Price reduction pressures from our customers; |
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Changes in business relationships with our major customers and
in the timing, size and continuation of their various programs; |
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Competitive pressures on our sales from other vehicle component
suppliers; |
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Potential bankruptcy or consolidation of key customers or
suppliers; |
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The ability of our customers to maintain their market positions
and achieve their projected sales and production levels; |
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Changes in the competitive environment in our markets due, in
part, to outsourcing and consolidation by our customers; |
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Our ability to complete our previously announced strategic
actions as contemplated, including the divestiture of our
non-core engine hard parts, fluid products and pump products
businesses; the operational restructuring in our Automotive
Systems Group and our Commercial Vehicle business; the
dissolution of our Mexican joint venture with DESC, and the
establishment of our Chinese joint venture, Dongfeng Dana Axle
Co., Ltd.; |
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The ability of our suppliers to maintain their projected
production levels and furnish critical components for our
products, as well as other necessary goods and services; |
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Our success in implementing our cost-savings, lean manufacturing
and VA/ VE (value added/value engineering) programs; |
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The strength of other currencies in the overseas countries in
which we do business relative to the U.S. dollar; and |
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Potential adverse effects on our operations and business from
terrorism or hostilities. |
2
PART I
(Dollars in millions, except per share amounts)
General
Dana Corporation (Dana, the Company, we), headquartered in
Toledo, Ohio, is a leading supplier of axle, driveshaft, frame,
and sealing and thermal management products for global vehicle
manufacturers. Our people design and manufacture products for
every major vehicle producer in the world. We employ
approximately 44,000 people and operate 116 major facilities in
28 countries.
Reorganization Proceedings under Chapter 11 of the
Bankruptcy Code
On March 3, 2006 (the Filing Date), Dana Corporation and
forty of its wholly-owned domestic subsidiaries (collectively,
the Debtors) filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code) in the United States Bankruptcy Court for the
Southern District of New York (the Bankruptcy Court). These
Chapter 11 cases are collectively referred to as the
“Bankruptcy Cases.” Neither Dana Credit Corporation
(DCC) nor any of our
non-U.S. affiliates
commenced any bankruptcy proceedings. The wholly-owned
subsidiaries included in the Bankruptcy Cases are Dakota New
York Corp., Brake Systems, Inc., BWDAC, Inc., Coupled Products,
Inc., Dana Atlantic LLC f/k/a Glacier Daido America, LLC, Dana
Automotive Aftermarket, Inc., Dana Brazil Holdings I LLC
f/k/a Wix Filtron LLC, Dana Brazil Holdings LLC f/k/a/ Dana
Realty Funding LLC, Dana Information Technology LLC, Dana
International Finance, Inc., Dana International Holdings, Inc.,
Dana Risk Management Services, Inc., Dana Technology Inc., Dana
World Trade Corporation, Dandorr L.L.C., Dorr Leasing
Corporation, DTF Trucking, Inc., Echlin-Ponce, Inc., EFMG LLC,
EPE, Inc., ERS LLC, Flight Operations, Inc., Friction Inc.,
Friction Materials, Inc., Glacier Vandervell Inc.,
Hose & Tubing Products, Inc., Lipe Corporation, Long
Automotive LLC, Long Cooling LLC, Long USA LLC, Midland Brake,
Inc., Prattville Mfg., Inc., Reinz Wisconsin Gasket LLC, Spicer
Heavy Axle & Brake, Inc., Spicer Heavy Axle Holdings,
Inc., Spicer Outdoor Power Equipment Components LLC,
Torque-Traction Integration Technologies, LLC, Torque-Traction
Manufacturing Technologies, LLC, Torque-Traction Technologies,
LLC and United Brake Systems Inc.
The Bankruptcy Cases are being jointly administered, with the
Debtors managing their business in the ordinary course as
debtors in possession subject to the supervision of the
Bankruptcy Court. We intend to continue normal business
operations during the Bankruptcy Cases while we evaluate our
businesses both financially and operationally and implement
comprehensive improvements as appropriate to enhance
performance. We intend to proceed with previously announced
divestiture and restructuring plans, which include the sale of
several non-core businesses, the closure of certain facilities
and the shift of production to lower-cost locations. In
addition, we intend to take steps to reduce costs, increase
efficiency and enhance productivity so that we emerge from
bankruptcy as a stronger, more viable company. We intend to
effect fundamental, not incremental, change to our business.
While we cannot predict with precision how long the
reorganization process will take, it could take upwards of 18 to
24 months.
Several factors have severely impacted our operations and
financial performance and ultimately prompted liquidity
pressures that necessitated the filing of the Bankruptcy Cases.
Among other things, we have faced a continued decline in the
market share of our largest customers —
U.S.-based original
equipment manufacturers (OEMs) — which has resulted in
increased pricing pressures from the OEMs; continued high
commodity prices, including costs of steel and other raw
materials; rising energy costs; the tightening of available
trade credit; the increased cost of capital and global economic
factors. These factors have not affected us in isolation, but
are a symptom of a much broader downturn in the U.S. auto
market.
In March 2006, the Bankruptcy Court granted final approval of
our
debtor-in-possession
(DIP) credit facility (DIP facility or DIP Credit
Agreement) under which we may borrow up to $1,450. This facility
provides funding to continue our operations without disruption
to our obligations to suppliers, customers
3
and employees during the Chapter 11 reorganization process.
The Bankruptcy Court has also entered a variety of orders
designed to permit us to continue to operate on a normal basis
post-petition (i.e., after the Filing Date). These
include orders authorizing us to continue our consolidated cash
management system, pay employees their accrued pre-petition
(i.e., pre-Filing Date) wages and salaries, honor our
obligations to our customers and pay some or all of the
pre-petition claims of foreign vendors and certain suppliers
that are critical to our continued operation, subject to certain
restrictions.
An official committee of the Debtors’ unsecured creditors
has been appointed in the Bankruptcy Cases and, in accordance
with the provisions of the Bankruptcy Code, will have the right
to be heard on all matters that come before the Bankruptcy
Court. The Debtors are required to bear certain of the
committee’s costs and expenses, including those of their
counsel and financial advisors.
While we continue our reorganization under Chapter 11,
investments in our securities will be highly speculative. Shares
of our common stock may have little or no value and there can be
no assurance that they will not be cancelled pursuant to our
reorganization plan. Since March 3, 2006, our common stock
has been traded on the Over The Counter Bulletin Board
(OTCBB) under the symbol “DCNAQ.”
Under the Bankruptcy Code, the Debtors have the right to assume
or reject executory contracts (i.e., contracts that are
to be performed by the contract parties after the Filing Date)
and unexpired leases, subject to Bankruptcy Court approval and
other limitations. In this context, “assuming” an
executory contract or unexpired lease means that the Debtors
will agree to perform their obligations and cure certain
existing defaults under the contract or lease and
“rejecting” them means that the Debtors will be
relieved of their obligations to perform further under the
contract or lease, which will give rise to a pre-petition claim
for damages for the breach thereof. In March and April 2006, the
Bankruptcy Court authorized the Debtors to reject certain
unexpired leases and subleases.
We anticipate that substantially all of the Debtors’
liabilities as of the Filing Date will be resolved under, and
treated in accordance with, a plan of reorganization to be
proposed to and voted on by their creditors in accordance with
the provisions of the Bankruptcy Code. Although we intend to
file and seek confirmation of such a plan, there can be no
assurance as to when we will file the plan or that the plan will
be confirmed by the Bankruptcy Court and consummated. Nor can
there be any assurance that we will be successful in achieving
our reorganization goals, or that any measures that are
achievable will result in sufficient improvement to our
financial position. Accordingly, until the time that the Debtors
emerge from bankruptcy there will be no certainty about our
ability to continue as a going concern. If a reorganization is
not completed, we could be forced to sell a significant portion
of our assets to retire outstanding debt or, under certain
circumstances, to cease operations.
Our Business
We have two primary business units: the Automotive Systems Group
(ASG) and the Heavy Vehicle Technologies and Systems Group
(HVTSG). ASG recorded sales of $5,941 in 2005. Its largest
customers were Ford Motor Company (Ford), General Motors
Corporation (GM) and DaimlerChrysler AG
(DaimlerChrysler). At December 31, 2005, this group
employed 35,200 people and had 91 facilities in 19 countries.
HVTSG generated sales of $2,640 in 2005. Its largest commercial
vehicle customers were PACCAR Inc, Volvo Group and International
Truck & Engine Corp. Its largest off-highway customers
included Deere & Company, AGCO Corporation and the
MANITOU Group. At December 31, 2005, the group employed
7,400 people and had 20 facilities in 8 countries.
Our business units serve three primary markets with the
following products:
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Automotive market — We make axles; driveshafts;
structural products; chassis, steering, and suspension
components; engine sealing and thermal management products; and
related service parts for light vehicles, including light trucks
(pickup trucks, sport-utility vehicles or SUVs, vans, and
crossover vehicles or CUVs) and passenger cars. |
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Commercial vehicle market — We make axles;
driveshafts; chassis and suspension modules; ride controls and
related modules and systems; engine sealing and thermal
management products; and |
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related service parts for Class 5-8 medium- and heavy-duty
trucks, recreational vehicles, specialty market vehicles, buses
and motor coaches. |
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Off-highway market — We make axles; transaxles;
driveshafts; brakes; suspension components; transmissions;
electronic controls; related modules and systems; engine sealing
and thermal management products; and related service parts for
construction machinery; leisure/utility vehicles; and outdoor
power, agricultural, mining, forestry and material handling
equipment for use in a variety of non-vehicular, industrial
applications. |
Dana has several strategic alliances and joint venture partners
that strengthen its marketing, manufacturing and
product-development capabilities and broaden its product
portfolio. These partners help Dana to better serve its diverse
and global customer base. Among them are:
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Bendix Commercial Vehicle Systems LLC (Bendix) —
Bendix Spicer Foundation Brake LLC, a joint venture formed
by Bendix and Dana, integrates the braking systems expertise
from Bendix and its parent, the Knorr-Bremse Group, with the
axle and brake integration capability of Dana to offer a full
portfolio of advanced wheel-end braking systems components and
technologies. |
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Eaton Corporation — Eaton and Dana together
offer the
Roadranger®
solution, an industry-leading combination of drivetrain, chassis
and safety components and services backed by sales, service and
technical consultants called the Roadrangers. |
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GETRAG GmbH & Cie KG — Dana has a 30%
equity stake in GETRAG GmbH & Cie KG, the parent
company of the GETRAG group of companies and a 49% share of
GETRAG’s North American operations. In 2004 the two
companies bought a 60% share of Volvo Car Corporation’s
operations in Koping, Sweden to form GETRAG All Wheel Drive
AB. Most recently, Dana and GETRAG expanded their strategic
alliance to jointly develop electronically controlled
limited-slip differentials and electronic torque couplings. |
In October 2005, three businesses (engine hard parts, fluid
products and pump products) were approved for divestiture by our
Board. These businesses employ approximately 9,800 people in 44
operations worldwide with annual revenues exceeding $1,200 in
2005. These businesses are presented in our financial statements
as discontinued operations.
We have long served as one of the largest suppliers to the North
American aftermarket. Nearly all of our automotive aftermarket
operations were conducted through our Automotive Aftermarket
Group (AAG). The sale of substantially all of AAG was completed
in November 2004. Those businesses are presented in our
financial statements as discontinued operations. See
Note 15 to our consolidated financial statements for
additional information.
We were also a leading provider of lease financing services in
selected markets through DCC. However, in 2001, we determined
that the sale of DCC’s businesses would enable us to more
sharply focus on our core businesses. Over the last four years,
we have sold significant portions of DCC’s portfolio
assets, reducing this portfolio from $2,200 in December 2001 to
approximately $560 at the end of 2005.
5
Geographic
We maintain administrative organizations in four
regions — North America, Europe, South America and
Asia Pacific to facilitate financial and statutory reporting and
tax compliance on a worldwide basis and to support our business
units. Our operations are located in the following countries:
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North America |
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Europe |
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South America |
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Asia Pacific |
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Canada
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Austria |
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Slovakia |
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Argentina |
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Australia |
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Mexico
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Belgium |
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South Africa |
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Brazil |
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China |
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United States
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France |
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Spain |
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Colombia |
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India |
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Germany |
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Sweden |
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Uruguay |
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Japan |
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Hungary |
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Switzerland |
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Venezuela |
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South Korea |
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Italy |
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United Kingdom |
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Taiwan |
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Thailand |
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Turkey |
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Our international subsidiaries and affiliates manufacture and
sell a number of products similar to those we produce in the
U.S. Operations outside the U.S. may be subject to a
greater risk of changing political, economic and social
environments, changing governmental laws and regulations,
currency revaluations and market fluctuations. See additional
risk factors in Item 1A.
Non-U.S. sales
were $4,190 of our 2005 consolidated sales.
Non-U.S. net
income was $180, as compared to a consolidated net loss of
$1,605 in 2005. These amounts include $14 of equity in earnings
of international affiliates. More information can be found in
Note 16 to our consolidated financial statements.
Customer Dependence
We have thousands of customers around the world and have
developed long-standing business relationships with many of
them. Ford and General Motors were the only individual customers
accounting for 10% or more of our consolidated sales in 2005. We
have been supplying products to these companies and their
subsidiaries for many years. As a percentage of total sales from
continuing operations, sales to Ford were approximately 26% in
2005, 2004 and 2003; sales to General Motors were 11%, 11% and
10% in 2005, 2004 and 2003 while sales to Daimler Chrysler were
6%, 9% and 12% in 2005, 2004 and 2003. PACCAR, Navistar,
Renault-Nissan, Volvo Truck and Toyota represent our next five
largest customers and in the aggregate accounted for
approximately 20% and 18% of our 2005 and 2004 revenues.
Loss of all or a substantial portion of our sales to Ford,
General Motors or other large volume customers would have a
significant adverse effect on our financial results until such
lost sales volume could be replaced. There would be no assurance
that the lost volume would be replaced. We continue to work to
diversify our customer base and geographic footprint.
6
Products
Sales of our business units by class of product for the last
three years are as follows:
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Percentage of | |
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Consolidated Sales | |
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2005 | |
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2004 | |
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2003 | |
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ASG
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Traction (Axle)
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28.3 |
% |
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29.4 |
% |
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30.2 |
% |
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Torque (Driveshaft)
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13.1 |
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13.4 |
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13.3 |
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Structures
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14.6 |
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13.8 |
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12.7 |
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Sealing
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7.8 |
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8.1 |
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8.3 |
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Thermal
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3.6 |
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4.0 |
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5.3 |
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Other
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1.5 |
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0.5 |
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0.6 |
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Total ASG
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68.9 |
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69.2 |
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70.4 |
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HVTSG
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Traction (Axle)
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23.5 |
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22.4 |
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19.5 |
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Torque (Driveshaft)
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3.4 |
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3.4 |
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3.5 |
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Other
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3.8 |
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3.8 |
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5.4 |
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Total HVTSG
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30.7 |
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29.6 |
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28.4 |
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Other
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0.4 |
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1.2 |
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1.2 |
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TOTAL
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100.0 |
% |
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100.0 |
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100.0 |
% |
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Sources and Availability of Raw Materials
We use a variety of raw materials in the production of our
products, including steel and products containing steel,
forgings, castings and bearings. Other commodity purchases
include aluminum, brass, copper and plastics. Our operating
units purchase most of the raw materials they require from
suppliers located within their local geographic regions.
Generally, these materials are available from multiple qualified
sources in quantities sufficient for our needs. However, some of
our operations are dependent on single sources for some raw
materials as a result of the consolidations we have been making
in our supply base in an effort to manage and reduce our
production costs. While our suppliers have generally been able
to support our needs, our operations may experience shortages
and delays in the supply of raw material, from time to time, due
to strong demand, capacity limitations and other problems
experienced by the suppliers. A significant or prolonged
shortage of critical components from any of our suppliers could
adversely impact our ability to meet our production schedules
and to deliver our products to our customers when they have
requested them.
We face supplier issues related to our bankruptcy regarding our
suppliers’ concern over non-payment of pre-petition
services and products and the uncertainty created by a
bankruptcy filing. This could affect our ability to negotiate
new contracts and terms with our suppliers on an ongoing basis.
High steel and other raw material costs, primarily resulting
from limited capacity and high demand had a major adverse effect
on our results of operations during 2005, as discussed in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Seasonality
Our businesses are generally not seasonal. However, our sales
are closely related to the production schedules of our OEM
customers and historically those schedules have been weakest in
the third quarter of the year. Additionally, international
customers typically shut down production during portions of the
second and fourth quarters of each year.
7
Backlog
A substantial amount of the business we are awarded by OEMs is
granted well in advance of the program launch. These awards
typically extend through the life of the given platform. Our
backlog, which reflects estimated future revenues from signed
contracts, is based on the projected remaining volume under
these programs. See New Business in Item 7 for additional
comments related to the awarding of business.
Competition
Within each of our market segments, we compete with a variety of
independent suppliers and distributors, as well as the in-house
operations of certain OEMs. We compete primarily on the basis of
price, product quality, technology, delivery and service. A
summary by operating segment is set forth below:
Automotive Systems Group — We are one of the primary
independent suppliers in torque and traction technologies
(axles, driveshafts and drivelines), structural solutions
(frames) and system integration technologies (including
advanced modularity concepts and systems). Our primary
competitors include American Axle, in-house operations of
DaimlerChrysler, GKN, Magna, Tower Automotive, ThyssenKrupp,
Visteon and ZF Group. We are also one of the leading independent
suppliers of sealing systems (gaskets and cam covers) and
thermal management (thermal acoustical shields, heat exchangers
and small radiators). On a global basis, our primary competitors
in sealing systems are ElringKlinger, Federal-Mogul and
Freudenberg NOK. Competitors in thermal management include Behr,
Delphi, Modine and Valeo.
Heavy Vehicle Technologies and Systems Group — We are
one of the primary independent suppliers of axles, driveshafts
and other products for both the medium- and heavy-truck markets,
as well as various off-highway segments. We also specialize in
the manufacturing of off-highway transmissions. Our primary
competition in North America includes ArvinMeritor in the
medium- and heavy-truck markets. Major competitors in Europe
include OEMs’ vertically integrated operations in the
heavy-truck markets, as well as Carraro, ZF Group and OEMs’
vertically integrated operations in the off-highway markets.
Patents and Trademarks
Our proprietary drivetrain, engine parts, chassis, structural
components, fluid power systems and industrial power
transmission product lines have strong identities in the markets
we serve. Throughout these product lines, we manufacture and
sell our products under a number of patents that have been
obtained over a period of years and expire at various times. We
consider each of these patents to be of value and aggressively
protect our rights throughout the world against infringement. We
are involved with many product lines and the loss or expiration
of any particular patent would not materially affect our sales
and profits.
We own or have licensed numerous trademarks that are registered
in many countries, enabling us to market our products worldwide.
For example, our
Spicer®,
Victor
Reinz®
and
Long®
trademarks are widely recognized in their respective industries.
Research and Development
From the company’s introduction of the automotive universal
joint in 1904, Dana has been focused on technological
innovation. Our objective is to be an essential partner to our
customers and remain highly focused on offering superior product
quality and technologically advanced products competitive
prices. To enhance quality and reduce costs, we use statistical
process control, cellular manufacturing, flexible regional
production and assembly, global sourcing and extensive employee
training.
We engage in ongoing engineering, research and development
activities to improve the reliability, performance and
cost-effectiveness of our existing products and to design and
develop innovative products that meet customer requirements for
new applications. We are integrating related operations to
create a more innovative environment, speed product development,
maximize efficiency and improve communication and information
sharing among our research and development operations. At
December 31, 2005,
8
ASG had six technical centers and HVTSG had two. Our spending on
engineering, research and development and quality control
programs was $275 in 2005, $269 in 2004 and $252 in 2003.
Our engineers are helping to develop and commercialize is fuel
cell components and sub-systems by working with a number of
leading light-vehicle manufacturers in this area. Specifically,
we are developing fuel-cell stack components, such as metallic
and composite bipolar plates;
balance-of-plant
technologies, particularly thermal management sub-systems with
heat exchangers and electric pumps; and fuel-processor
components and sub-systems.
Employment
Our worldwide employment (including consolidated subsidiaries)
was approximately 44,000 people at December 31, 2005. This
includes approximately 9,800 employees in the three businesses
(engine hard parts, fluid products and pump products) to be
divested, which are classified as discontinued operations, as
well as 1,000 employees that could be affected by workforce
reductions and plant closures in 2006.
Environmental Compliance
We make capital expenditures in the normal course of business as
necessary to ensure that our facilities are in compliance with
applicable environmental laws and regulations. The cost of
environmental compliance was not a material part of our capital
expenditures and did not have a materially adverse effect on our
earnings or competitive position in 2005. We do not anticipate
that future environmental compliance costs will be material. See
Notes 1 and 13 to our consolidated financial statements for
additional information.
Executive Officers
The following table contains information about our current
executive officers. Messrs. Burns, DeBacker, Hiltz, Miller
and Stanage are members of Dana’s Executive Committee,
which is responsible for our corporate strategies and
partnership relations and for the development of our people,
policies and philosophies.
|
|
|
|
|
|
|
Name |
|
Age | |
|
Title |
|
|
| |
|
|
Michael J. Burns
|
|
|
54 |
|
|
Chairman of the Board, Chief Executive Officer, President and
Chief Operating Officer |
Michael L. DeBacker
|
|
|
59 |
|
|
Vice President, General Counsel and Secretary |
Richard J. Dyer
|
|
|
50 |
|
|
Vice President and Chief Accounting Officer |
Kenneth A. Hiltz
|
|
|
53 |
|
|
Chief Financial Officer |
Paul E. Miller
|
|
|
54 |
|
|
Vice President — Purchasing |
Nick L. Stanage
|
|
|
47 |
|
|
President — Heavy Vehicle Products |
Mr. Burns has been our Chief Executive Officer (CEO),
President and a director of the company since March 2004 and our
Chairman of the Board and Chief Operating Officer since April
2004. He was previously President of General Motors Europe from
1998 to 2004.
Mr. DeBacker has been a Vice President of Dana since 1994
and our General Counsel and Secretary since 2000. He is also our
Chief Compliance Officer.
Mr. Dyer has been a Vice President since December 2005 and
our Chief Accounting Officer since March 2005. He was Director
of Corporate Accounting from 2002 to 2005 and Manager, Corporate
Accounting from 1997 to 2002.
Mr. Hiltz has been our Chief Financial Officer
(CFO) since March 2006. He served as CFO at Foster Wheeler
Ltd. (a global provider of engineering services and products)
from 2003 to 2004 and as Chief Restructuring Officer and CFO of
Hayes Lemmerz International, Inc. (a global supplier of
automotive and commercial wheels, brakes, powertrain,
suspension, structural and other lightweight components) from
2001 to 2003. Mr. Hiltz has been a Managing Director of
AlixPartners LLC (a financial advisory firm specializing in
performance improvement and corporate turnarounds) since 1991.
9
Mr. Miller has been our Vice President —
Purchasing since joining Dana in May 2004. He was formerly
employed by Delphi Corporation (a global supplier of vehicle
electronics, transportation components, integrated systems and
modules and other electronic technology) where he was employed
at Delphi Packard Electric Systems as Business Line Executive,
Electrical/ Electronic Distribution Systems from 2002 to 2004,
and at Delphi Delco Electronics Systems as General
Director — Sales, Marketing and Service from 2001 to
2002 and Executive Director International Regions —
Sales and Marketing from 1998 to 2001.
Mr. Stanage has been President, Heavy Vehicle Products
since December 2005. He joined Dana in August 2005 as Vice
President and General Manager of our Commercial Vehicle Group.
He was formerly employed by Honeywell International (a
diversified technology and manufacturing leader, serving
customers worldwide with aerospace products and services;
control technologies for buildings, homes and industry;
automotive products; turbochargers; and specialty materials),
where he served as Vice President and General Manager of the
Engine Systems & Accessories Division during 2005, and
in the Customer Products Group as Vice President, Integrated
Supply Chain & Technology from 2003 to 2005 and Vice
President, Operations from 2001 to 2003.
All of our executive officers were re-appointed to their
positions by our Board at its annual organizational meeting in
April 2006 and serve at the Board’s pleasure.
Available Information
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K and
amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (Exchange Act) are available on or through our Internet
website (http://www.dana.com/investors) as soon as
reasonably practicable after we electronically file such
materials with, or furnish them to, the Securities and Exchange
Commission (SEC). We also post our Board Governance
Principles, Directors’ Code of Conduct, Board Committee
membership lists and charters, Standards of Business Conduct
and other corporate governance materials at this website
address. Copies of these posted materials are available in
print, free of charge, to any shareholder upon request from:
Investor Relations Department, P.O. Box 1000, Toledo, Ohio
43697; or via telephone at 419-535-4635 or
e-mail at
InvestorRelations@dana.com.
Item 1A. Risk Factors
General
We may be impacted by events and conditions that affect the
automotive, commercial vehicle and off-highway industries that
we serve, as well as by factors specific to our company. Some
risks are interrelated and it is possible that some risks could
trigger other risks described below. Among the risks that could
materially adversely affect our business, financial condition or
results of operations are the following.
Dana Corporation and forty of its wholly-owned subsidiaries
filed for reorganization under Chapter 11 of the Bankruptcy
Code on March 3, 2006 and are subject to the risks and
uncertainties associated with the Bankruptcy Cases. For the
duration of the Bankruptcy Cases, our operations and our ability
to execute our business strategy will be subject to the risks
and uncertainties associated with bankruptcy. These risks
include our ability to continue as a going concern; operate
within the restrictions and the liquidity limitations of the DIP
facility; obtain Bankruptcy Court approval with respect to
motions filed in the Bankruptcy Cases from time to time;
develop, prosecute, confirm and consummate a plan of
reorganization; obtain and maintain normal terms with suppliers
and service providers and maintain contracts that are critical
to our operations; attract, motivate and retain key employees;
attract and retain customers; and fund and execute our business
plan. We will also be subject to risks and uncertainties with
respect to the actions and decisions of the creditors and other
third parties who have interests in the Bankruptcy Cases that
may be inconsistent with our plans.
10
These risks and uncertainties could affect our businesses and
operations in various ways. For example, negative events or
publicity associated with the Bankruptcy Cases could adversely
affect our sales and relationships with our customers, as well
as with suppliers and employees, which in turn could adversely
affect our operations and financial condition. Also, pursuant to
the Bankruptcy Code, we need Bankruptcy Court approval for
transactions outside the ordinary course of business, which may
limit our ability to respond timely to certain events or take
advantage of certain opportunities. Because of the risks and
uncertainties associated with the Bankruptcy Cases, we cannot
predict or quantify the ultimate impact that events occurring
during the reorganization process will have on our business,
financial condition and results of operations and there is no
certainty about our ability to continue as a going concern.
As a result of the Chapter 11 filing, realization of assets and
liquidation of liabilities are subject to uncertainty. While
operating under the protection of Chapter 11 of the
Bankruptcy Code, and subject to Bankruptcy Court approval or
otherwise as permitted in the normal course of business, we may
sell or otherwise dispose of assets and liquidate or settle
liabilities for amounts other than those reflected in the
consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and
classifications reported in the consolidated historical
financial statements, which do not give effect to any
adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of
confirmation of a plan of reorganization.
The DIP facility includes financial and other covenants that
impose substantial restrictions on the Debtors’ financial
and business operations. The DIP facility includes financial
covenants that, among other things, require us to achieve
certain levels of EBITDAR (earnings before interest, taxes,
depreciation, amortization and restructuring and reorganization
related costs, as defined in the facility). For additional
information about the financial covenants, see Note 17 to
our consolidated financial statements. If we are unable to
achieve the results that are contemplated in our business plan,
we may be unable to comply with the EBITDAR covenant.
Furthermore, the DIP facility restricts our ability, among other
things, to contract or incur additional indebtedness, pay
dividends, make investments (including acquisitions) or sell
assets. If we fail to comply with the covenants in the DIP
facility and are unable to obtain a waiver or amendment of the
DIP facility, an event of default will occur thereunder. The DIP
facility contains other events of defaults customary for DIP
financings, including a change of control.
Our business is subject to being adversely affected by the
cyclical nature of the vehicular markets we serve. Our
financial performance depends, in large part, on the varying
conditions in the global automotive and commercial vehicle OE
markets that we serve. Demand in these global automotive,
commercial vehicle and off-highway OE markets fluctuates in
response to overall economic conditions and is particularly
sensitive to changes in interest rate levels and changes in fuel
costs.
Changes in national and international economic conditions
that affect our markets may adversely impact our sales.
Higher gasoline prices in 2005 have contributed to weaker demand
for certain vehicles for which we supply components, especially
full-size sport utility vehicles (SUVs). Continued increases in
the price of gasoline could weaken further the demand for such
vehicles and accelerate recent consumer interest in crossover
utility vehicles (CUVs) in preference to SUVs. This would have
an adverse effect on our business, as our content on CUVs is
less significant than our content on SUVs.
Our sales may be adversely affected by the change in emission
standards for commercial vehicles in the U.S. in 2007.
More stringent heavy-truck emissions regulations will take
effect in 2007 in the U.S. commercial truck market. We
believe that 2006 will again be a strong year for the
heavy-truck sales in advance of the new standards, which will
add cost to the vehicles, but we are projecting that demand will
decline significantly in 2007 after the pre-buying, and this
decline could have a material adverse effect on our business.
We are reliant upon sales to a few significant customers.
Sales to Ford, GM and DaimlerChrysler were 43% of our overall
revenue in 2005, while sales to PACCAR (Kenworth/ Peterbuilt),
International (Navistar), Renault-Nissan, Volvo Truck and Toyota
accounted for another 20%. Changes in our business
11
relationships with these customers and in the timing, size and
continuation of their various programs could have an adverse
impact on us. The loss of any of these customers, the loss of
business with respect to one or more of their vehicle models
that use our products, or a significant decline in the
production levels of such vehicles could have an adverse effect
on our business, results of operations and financial condition.
We are faced with continued price reduction pressure from our
OEM customers. A challenge that we and other suppliers to
the vehicular markets face is the effect of continued price
reduction pressure from our customers. Our largest customers,
the U.S.-based light
vehicle OEMs, in particular have experienced market share
erosion to
non-U.S.-based light
vehicle manufacturers over the past few years, which has put
pressure on their profitability. In response, they continue to
seek price reductions from their suppliers.
We could be adversely impacted by changes in the volume and
mix of vehicles containing our products. Our results depend
not only on the volume of products we sell, but the overall
product mix. Certain products are more profitable than others.
Shifts in demand away from our higher margin products could
adversely affect our business. While we are continually bidding
and quoting on new business opportunities to add to our book of
new business and are focused on profitable, revenue growth that
will generate targeted returns, there can be no assurance that
our efforts will be successful.
Further automotive supplier bankruptcies or labor unrest may
disrupt the supply of components to our OEM customers, adversely
affecting their demand for our products. The bankruptcy or
insolvency of other automotive suppliers or work stoppages or
slowdowns due to labor unrest that may affect these suppliers or
our OEM customers could lead to supply disruptions that could
have an adverse effect on our business.
The evolving nature of the competitive environment in the OE
automotive and commercial vehicle sectors could adversely affect
us. In recent years, the competitive environment among
suppliers to the global OE manufacturers has changed
significantly as these manufacturers have sought to outsource
more vehicular components, modules and systems and to develop
suppliers outside the U.S. In addition, these sectors have
experienced substantial consolidation. There is no assurance
that new or larger competitors will not significantly impact our
business, results of operations and financial condition.
We continue to face high commodity costs (including steel,
other raw materials, and energy) that we cannot recoup in our
product pricing. Increasing commodity costs continued to
have a significant impact on our results, and those of others in
our industry, in 2005. Steel surcharges and higher steel prices
resulting from ongoing limited steel production capacity and
high demand reduced our pre-tax income in our continuing
operations by $196 in 2005.
We may not be able to complete the divestiture of our
non-core engine hard parts, fluid products and pump products
businesses in the current market atmosphere. We announced in
late 2005 that three businesses (engine hard parts, fluid
products and pump products) would be divested and classified
them as discontinued operations in our financial statements
during the fourth quarter. The abundance of assets currently
available for sale in the automotive industry could affect our
ability to complete these divestitures and/or the proceeds that
we are ultimately able to derive from these transactions.
Moreover, while we are in Chapter 11, there may be limitations
on the terms and conditions that we can offer to potential
purchasers of these operations. Failure to complete these
strategic transactions could place further pressure on our
profitability and cash flow as well as our ability to focus on
our core businesses.
We may be unable to complete the operational restructuring in
our Automotive Systems Group and our Commercial Vehicle business
and the dissolution of our Mexican joint venture with DESC, or
to achieve projected cost savings and improved operational
efficiencies. The operational restructuring in ASG and the
dissolution of our Mexican joint venture are designed to balance
capacity, enhance manufacturing efficiencies, and take advantage
of lower cost locations. We are also implementing a number of
cost savings programs and productivity improvement initiatives,
such as lean manufacturing and VA/ VE (value-added/value
engineering programs) in our operations. Successful
implementation of these initiatives is critical to our future
competitiveness and ability to improve our profitability.
However, there can no assurances that these efforts will be
successful in this regard.
12
We could be adversely affected if we experience shortages of
components from our suppliers. We spend approximately $4,500
annually for purchased goods and services. To manage and reduce
these costs, we have been consolidating our supply base. As a
result, we are dependent on single sources of supply for some
components of our products. We select our suppliers based on
total value (including price, delivery and quality), taking into
consideration their production capacities and financial
condition, and we expect that they will be able to support our
needs. However, there can be no assurance that strong demand,
capacity limitations or other problems experienced by our
suppliers will not result in occasional shortages or delays in
their supply of components to us. If we were to experience a
significant or prolonged shortage of critical components from
any of our suppliers, particularly those who are sole sources,
and were unable to procure the components from other sources, we
would be unable to meet our production schedules for some of our
key products and to ship such products to our customers in
timely fashion, which would adversely affect our revenues,
margins and customer relations.
We could be adversely affected by our asbestos-related
product liability claims. We have exposure to
asbestos-related claims and litigation because, in the past,
some of our automotive products contained asbestos. At the end
of 2005, we had approximately 77,000 active pending
asbestos-related product liability claims, including 10,000 that
were settled and awaiting documentation and payment. A
substantial increase in the costs to resolve these claims or
changes in the amount of available insurance could adversely
impact us, as could the enactment of proposed U.S. federal
legislation relating to asbestos personal injury claims.
We could be adversely impacted by environmental laws and
regulations. Our operations are subject to U.S. and
non-U.S. environmental
laws and regulations governing emissions to air; discharges to
water; the generation, handling, storage, transportation,
treatment and disposal of waste materials; and the cleanup of
contaminated properties. Currently, environmental costs with
respect to our former and existing operations are not material,
but there is no assurance that we will not be adversely impacted
by such costs, liabilities or claims in the future, either under
present laws and regulations or those that may be adopted or
imposed in the future.
|
|
Item 1B. |
Unresolved Staff Comments |
-None-
Facilities by Geographic Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North | |
|
|
|
South | |
|
Asia/ | |
|
|
Type of Facility |
|
America | |
|
Europe | |
|
America | |
|
Pacific | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offices
|
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
ASG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing/ Distribution
|
|
|
46 |
|
|
|
12 |
|
|
|
12 |
|
|
|
15 |
|
|
|
85 |
|
|
Engineering Centers
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
HVTSG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing/ Distribution
|
|
|
12 |
|
|
|
4 |
|
|
|
1 |
|
|
|
1 |
|
|
|
18 |
|
|
Engineering Centers
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
69 |
|
|
|
18 |
|
|
|
13 |
|
|
|
16 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, we had 116 major
manufacturing/distribution, engineering and technical centers
and office facilities in 28 countries worldwide. While we lease
certain manufacturing/distribution operations, we own the
majority of our facilities. We believe that all of our property
and equipment is properly maintained and that we have sufficient
capacity to meet our current manufacturing and distribution
needs.
13
Our corporate headquarters are located in Toledo, Ohio and
currently are comprised of three office facilities housing
functions that have global responsibility for finance and
accounting, treasury, risk management, legal, human resources,
procurement and supply chain management and information
technology. Our obligations under the DIP facility are secured
by, among other things, mortgages on our domestic plants.
|
|
Item 3. |
Legal Proceedings |
On March 3, 2006, Dana Corporation and forty of its
wholly-owned subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code, as
discussed in Item 1. Under the Bankruptcy Code, the filing
of a petition automatically stays most actions against the
Debtors, including most actions to collect pre-petition
indebtedness or to exercise control over the property of our
bankruptcy estates. Substantially all of our pre-petition
liabilities will be resolved under our plan of reorganization if
not otherwise satisfied pursuant to orders of the Bankruptcy
Court.
We are a party to the pre-petition shareholder lawsuits and
derivative actions described below, as well as various pending
judicial and administrative proceedings arising in the ordinary
course of business, including both pre-petition and subsequent
proceedings. After reviewing the currently pending lawsuits and
proceedings (including the probable outcomes, reasonably
anticipated costs and expenses, availability and limits of our
insurance coverage and surety bonds and our established reserves
for uninsured liabilities), we do not believe that any
liabilities that may result are reasonably likely to have a
materially adverse effect on our liquidity, financial condition
or results of operations.
Shareholder Class Action and Derivative
Actions — Dana and certain of our current and
former officers are defendants in five purported class actions
filed in the U.S. District Court for the Northern District
of Ohio (the District Court) in the fourth quarter of 2005 which
have now been consolidated under the caption Howard
Frank v. Dana Corporation, et al. The plaintiffs
in the consolidated case allege violations of the
U.S. securities laws arising from the issuance of false and
misleading statements about Dana’s financial performance
and failures to disclose material facts necessary to make these
statements not misleading, the issuance of financial statements
in violation of generally accepted accounting principles and SEC
rules and the issuance of earnings guidance that had no
reasonable basis. The plaintiffs’ claim that the price at
which Dana’s shares traded at various times was
artificially inflated as a result of the defendants’
alleged wrongdoing. The defendants believe the allegations in
this case are without merit. We have advised the District Court
that the claims in this case cannot proceed against Dana because
of the automatic stay provisions of the Bankruptcy Code. On
March 27, 2006, the District Court appointed the City of
Philadelphia Board of Pensions & Retirement as lead
plaintiff in this case. The appointment is subject to a pending
motion for reconsideration subsequently filed by another
plaintiff.
Certain of our directors and current and former officers are
also defendants in three derivative actions filed in the
District Court in 2006: Qun James Wang v. Benjamin F.
Bailar, et al., (filed on January 31) and
Roberta Casden v. Michael J. Burns, et al. and
Staehr v. Michael J. Burns, et al. (both filed
on March 2). The plaintiffs in these actions allege breaches of
the defendants’ fiduciary duties to Dana arising from the
same facts as those on which the above consolidated shareholder
class action is based. The plaintiffs also assert a common law
claim for unjust enrichment and a claim against the current and
former officers under Section 304 of the Sarbanes-Oxley Act
of 2002. In addition, in an amended complaint filed in the
Casden action, additional claims were asserted that,
among other things, characterized Dana’s bankruptcy filing
as having been made in bad faith. Dana and the defendants in
these actions have advised the District Court that the claims in
these actions are the property of the company’s bankruptcy
estate and that further efforts by the plaintiffs to exercise
control over such claims are stayed under the Bankruptcy Code.
By order filed April 11, 2006, the District Court has
directed the plaintiffs to show cause by May 1, 2006 why
these actions should not be stayed.
SEC Investigation — In September 2005, we
reported that management was investigating accounting matters
arising out of incorrect entries related to a customer agreement
in our Commercial Vehicle business unit and that our Audit
Committee had engaged outside counsel to conduct an independent
investigation
14
of these matters as well. Outside counsel informed the SEC of
the commencement, nature and scope of the independent
investigation and volunteered full cooperation with the Staff of
the SEC. During October and November 2005, we reported the
preliminary findings of the ongoing investigations and the
determination that we would restate our financial statements for
the first two quarters of 2005 and for the years 2002 through
2004. On December 30, 2005, we filed amended reports
containing restated financial statements for these periods. The
Audit Committee’s investigation concluded at about the same
time. Throughout the period of the Audit Committee’s
investigation, its outside counsel cooperated with the SEC
Staff, supplied information requested by the Staff and met or
spoke with the Staff periodically. In January 2006, we learned
that the SEC had issued a formal order of investigation with
respect to matters related to our restatements. The SEC’s
investigation is a non-public, fact-finding inquiry to determine
whether any violations of the law have occurred. This
investigation has not been suspended as a result of our
bankruptcy filing. We will continue to cooperate fully with the
SEC in the investigation.
Environmental Proceedings — We previously
reported an environmental proceeding in which the
U.S. Department of Justice (DOJ) proposed a consent
order and a fine in connection with alleged violations of the
U.S. Clean Water Act at our Harvey Street facility in
Muskegon, Michigan. We have agreed to undertake certain
supplemental environmental projects to reduce or offset the
amount of the proposed fine and the DOJ has reduced the fine to
a de minimus amount, taking into account some of these
projects and other mitigating factors. We have signed the
consent order and are waiting for the DOJ to finalize it.
Other Information — You can find more
information about our legal proceedings in Item 7 and in
Note 13 to our consolidated financial statements.
|
|
Item 4. |
Submission of Matters to A Vote of Security Holders |
-None-
15
PART II
|
|
Item 5. |
Market For Registrants’ Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Effective March 3, 2006, Dana’s common stock has been
traded on the Over The Counter Bulletin Board (OTCBB) under
the symbol “DCNAQ.” Our stock was formerly listed on
the New York and Pacific Stock Exchanges.
While we continue our reorganization under Chapter 11,
investments in our securities will be highly speculative. Shares
of our common stock may have little or no value and there can be
no assurance that they will not be cancelled pursuant to our
reorganization plan.
Information regarding the quarterly ranges of our stock price
and dividends declared and paid during 2005 and 2004 is
presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Price | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cash Dividends | |
|
|
2005 | |
|
2004 | |
|
Declared and Paid | |
|
|
| |
|
| |
|
| |
Quarter Ended |
|
High | |
|
Low | |
|
Close | |
|
High | |
|
Low | |
|
Close | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
March 31
|
|
$ |
17.56 |
|
|
$ |
12.23 |
|
|
$ |
12.79 |
|
|
$ |
23.20 |
|
|
$ |
17.65 |
|
|
$ |
19.86 |
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
June 30
|
|
|
15.45 |
|
|
|
10.90 |
|
|
|
15.01 |
|
|
|
22.00 |
|
|
|
17.32 |
|
|
|
19.60 |
|
|
|
0.12 |
|
|
|
0.12 |
|
September 30
|
|
|
17.03 |
|
|
|
8.86 |
|
|
|
9.41 |
|
|
|
19.75 |
|
|
|
16.50 |
|
|
|
17.69 |
|
|
|
0.12 |
|
|
|
0.12 |
|
December 31
|
|
|
9.53 |
|
|
|
5.50 |
|
|
|
7.18 |
|
|
|
18.59 |
|
|
|
13.86 |
|
|
|
17.33 |
|
|
|
0.01 |
|
|
|
0.12 |
|
The following table provides information about our purchases of
equity securities during the quarter ended December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
Total Number of | |
|
Average Price | |
|
|
Shares | |
|
Paid per | |
Month Ended |
|
Purchased | |
|
Share | |
|
|
| |
|
| |
October 31, 2005
|
|
|
— |
|
|
$ |
— |
|
November 30, 2005
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
154 |
|
|
|
6.96 |
|
|
|
|
|
|
|
|
|
|
|
154 |
|
|
$ |
6.96 |
|
|
|
|
|
|
|
|
16
|
|
Item 6. |
Selected Financial Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net sales
|
|
$ |
8,611 |
|
|
$ |
7,775 |
|
|
$ |
6,714 |
|
|
$ |
6,276 |
|
|
$ |
6,207 |
|
Cost of sales
|
|
|
8,205 |
|
|
|
7,189 |
|
|
|
6,123 |
|
|
|
5,690 |
|
|
|
5,634 |
|
Pre-tax income (loss) of continuing operations
|
|
|
(285 |
) |
|
|
(165 |
) |
|
|
62 |
|
|
|
(85 |
) |
|
|
(233 |
) |
Income (loss) from continuing operations
|
|
|
(1,175 |
) |
|
|
72 |
|
|
|
155 |
|
|
|
18 |
|
|
|
(125 |
) |
Income (loss) from discontinued operations
|
|
|
(434 |
) |
|
|
(10 |
) |
|
|
73 |
|
|
|
49 |
|
|
|
(136 |
) |
Effect of change in accounting
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
(220 |
) |
|
|
|
|
Net income (loss)
|
|
|
(1,605 |
) |
|
|
62 |
|
|
|
228 |
|
|
|
(153 |
) |
|
|
(261 |
) |
Earnings (loss) per common share — basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
(7.86 |
) |
|
$ |
0.48 |
|
|
$ |
1.05 |
|
|
$ |
0.12 |
|
|
$ |
(0.85 |
) |
|
Discontinued operations
|
|
|
(2.90 |
) |
|
|
(0.07 |
) |
|
|
0.49 |
|
|
|
0.33 |
|
|
|
(0.92 |
) |
|
Effect of change in accounting
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
(1.49 |
) |
|
|
|
|
|
Net income (loss)
|
|
|
(10.73 |
) |
|
|
0.41 |
|
|
|
1.54 |
|
|
|
(1.04 |
) |
|
|
(1.77 |
) |
Earnings (loss) per common share — diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
(7.86 |
) |
|
$ |
0.48 |
|
|
$ |
1.04 |
|
|
$ |
0.12 |
|
|
$ |
(0.85 |
) |
|
Discontinued operations
|
|
|
(2.90 |
) |
|
|
(0.07 |
) |
|
|
0.49 |
|
|
|
0.33 |
|
|
|
(0.92 |
) |
|
Effect of change in accounting
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
(1.48 |
) |
|
|
|
|
|
Net income (loss)
|
|
|
(10.73 |
) |
|
|
0.41 |
|
|
|
1.53 |
|
|
|
(1.03 |
) |
|
|
(1.77 |
) |
Cash dividends per common share
|
|
$ |
0.37 |
|
|
$ |
0.48 |
|
|
$ |
0.09 |
|
|
$ |
0.04 |
|
|
$ |
0.94 |
|
Common Stock Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of shares outstanding (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
150 |
|
|
|
149 |
|
|
|
148 |
|
|
|
148 |
|
|
|
148 |
|
|
Diluted
|
|
|
151 |
|
|
|
151 |
|
|
|
149 |
|
|
|
149 |
|
|
|
148 |
|
Stock price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
17.56 |
|
|
$ |
23.20 |
|
|
$ |
18.40 |
|
|
$ |
23.22 |
|
|
$ |
26.90 |
|
|
Low
|
|
|
5.50 |
|
|
|
13.86 |
|
|
|
6.15 |
|
|
|
9.28 |
|
|
|
10.25 |
|
|
Close
|
|
|
7.18 |
|
|
|
17.33 |
|
|
|
18.35 |
|
|
|
11.76 |
|
|
|
13.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Summary of Financial Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
7,386 |
|
|
$ |
9,019 |
|
|
$ |
9,485 |
|
|
|
9,515 |
|
|
$ |
10,124 |
|
Short-term debt
|
|
|
2,578 |
|
|
|
155 |
|
|
|
493 |
|
|
|
287 |
|
|
|
1,120 |
|
Long-term debt
|
|
|
67 |
|
|
|
2,054 |
|
|
|
2,605 |
|
|
|
3,215 |
|
|
|
3,008 |
|
Total shareholders’ equity
|
|
|
545 |
|
|
|
2,411 |
|
|
|
2,050 |
|
|
|
1,450 |
|
|
|
1,913 |
|
Book value per share
|
|
|
3.63 |
|
|
|
16.19 |
|
|
|
13.85 |
|
|
|
9.79 |
|
|
|
12.93 |
|
We reported a change in accounting for warranty expense in 2005
and also adopted new accounting guidance related to recognition
of asset retirement obligations. See Note 1 for additional
information related to these changes in accounting, as well as a
discussion regarding our ability to continue as a going concern.
17
|
|
Item 7. |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations (in millions) |
Overview
General
We are a leading supplier of axle, driveshaft, frame, sealing
and thermal products. Our people design and manufacture products
for every major vehicle producer in the world. We are focused on
being an essential partner to light automotive, commercial truck
and off-highway vehicle customers. We employ 44,000 people in 28
countries with world headquarters in Toledo, Ohio. Our Internet
address is: www.dana.com.
Reorganization Proceedings under Chapter 11 of the
Bankruptcy Code
In March 2006, Dana Corporation and forty of its wholly-owned
domestic subsidiaries (the Debtors) filed voluntary petitions
for relief under Chapter 11 of the Bankruptcy Code. We intend to
continue normal business operations during the Bankruptcy Cases
while we evaluate our business both financially and
operationally and implement comprehensive improvements as
appropriate to enhance performance. We intend to proceed with
previously announced divestiture and restructuring plans, which
include the sale of several non-core businesses, the closure of
certain facilities and the shift of production to lower-cost
locations. In addition, we intend to take steps to reduce costs,
increase efficiency and enhance productivity so that we emerge
from bankruptcy as a stronger, more viable company. We intend to
effect fundamental, not incremental, change to our business.
While we cannot predict with precision how long the
reorganization process will take, it could take upwards of 18 to
24 months.
Several external factors have severely impacted our operations
and financial performance and ultimately prompted liquidity
pressures that necessitated the filing of the Bankruptcy Cases.
Among other things, we have faced a continued decline in the
market share of our largest customers —
U.S.-based OEMs,
including Ford and GM — which has resulted in
declining sales volumes and increased pricing pressures from the
OEMs; continued high commodity prices, including costs of steel
and other raw materials; rising energy costs; the tightening of
available trade credit; the increased cost of capital and global
economic factors. These factors have not affected us in
isolation, but are a symptom of a much broader downturn in the
U.S. automotive market.
The Bankruptcy Court has granted final approval to our
debtor-in-possession
(DIP) credit facility, under which we may borrow up to
$1,450. This facility provides us funding to continue our
operations without disruption and meet our obligations to
suppliers, customers and employees during the Chapter 11
reorganization process. The Bankruptcy Court has also entered a
variety of orders designed to permit us to continue to operate
on a normal basis post-petition. These include orders
authorizing us to continue our consolidated cash management
system, pay employees their accrued pre-petition wages and
salaries, honor our obligations to our customers and pay some or
all of the pre-petition claims of
non-U.S. vendors
and certain suppliers that are critical to our continued
operation, subject to certain restrictions.
An official committee of unsecured creditors has been appointed
in the Bankruptcy Cases and, in accordance with the provisions
of the Bankruptcy Code, will have the right to be heard on all
matters that come before the Bankruptcy Court.
While we continue our reorganization under Chapter 11,
investments in our securities will be highly speculative. Shares
of our common stock may have little or no value and there can be
no assurance that they will not be cancelled pursuant to the
reorganization plan.
We anticipate that substantially all of the Debtor’s
liabilities as of the Filing Date will be resolved under, and
treated in accordance with, a plan of reorganization to be
proposed to and voted on by their creditors in accordance with
the provisions of the Bankruptcy Code. Although we intend to
file and seek confirmation of such a plan, there can be no
assurance as to when we will make such a filing or that such
plan will
18
be confirmed by the Bankruptcy Court and consummated. Nor can
there be any assurance that we will be successful in achieving
our restructuring goals, or that any measures that are
achievable will result in sufficient improvement to our
financial position. Accordingly, until the time that the Debtors
emerge from bankruptcy, there will be no certainty about our
ability to continue as a going concern. If a restructuring is
not completed, we could be forced to sell a significant portion
of our assets to retire debt outstanding or, under certain
circumstances, to cease operations.
Business
Our products are managed globally through two market-focused
business units — the Automotive Systems Group (ASG)
and Heavy Vehicle Technologies and Systems Group (HVTSG). ASG
primarily supports the OEMs of light vehicles, including light
trucks (sport utility vehicles, pickup trucks, crossover
vehicles and vans) and passenger cars, and manufactures
driveshafts for the commercial vehicle market. HVTSG supports
the medium-duty and heavy-duty commercial truck (Class 5
through Class 8), bus and off-highway vehicle markets, with
more than 90% of its sales in North America and Europe. The
primary markets for off-highway vehicles are construction and
agriculture.
Our products are designed and manufactured to surpass our
customers’ needs and help improve overall vehicle
performance in areas such as ride and handling, safety,
emissions, fuel economy and controlled noise, vibration and
harshness.
This management discussion and analysis (MD&A) should be
read in conjunction with our consolidated financial statements
and the accompanying notes appearing in Item 8.
Market Outlook
Our industry is prone to fluctuations in demand over the
business cycle. Production levels in our key markets for the
past three years, along with our outlook for 2006, are shown
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production in Units | |
|
|
| |
|
|
Dana’s | |
|
Actual | |
|
|
Outlook | |
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Light vehicle (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
15.6 |
|
|
|
15.8 |
|
|
|
15.8 |
|
|
|
15.9 |
|
|
Europe
|
|
|
22.1 |
|
|
|
21.8 |
|
|
|
21.7 |
|
|
|
19.6 |
|
|
Asia Pacific
|
|
|
25.3 |
|
|
|
23.7 |
|
|
|
22.2 |
|
|
|
20.5 |
|
|
South America
|
|
|
3.0 |
|
|
|
2.8 |
|
|
|
2.5 |
|
|
|
1.9 |
|
North American commercial vehicle (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medium-duty (Class 5-7)
|
|
|
231 |
|
|
|
251 |
|
|
|
225 |
|
|
|
196 |
|
|
Heavy-duty (Class 8)
|
|
|
338 |
|
|
|
333 |
|
|
|
263 |
|
|
|
177 |
|
Off-Highway (in thousands)*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
361 |
|
|
|
353 |
|
|
|
325 |
|
|
|
281 |
|
|
Western Europe
|
|
|
447 |
|
|
|
453 |
|
|
|
450 |
|
|
|
452 |
|
|
Asia-Pacific
|
|
|
564 |
|
|
|
549 |
|
|
|
526 |
|
|
|
480 |
|
|
South America
|
|
|
73 |
|
|
|
69 |
|
|
|
65 |
|
|
|
61 |
|
|
|
* |
Wheeled vehicles in construction, agriculture, mining, material
handling and forestry applications. |
Trends in Our Markets
Production, Inventory, and Overall Market Share Decline of
the “Big Three” in North American
Market — North American light-vehicle production
levels for 2005 were comparable to those of 2004 at
15.8 million units. The mix of passenger cars and light
trucks demonstrated a recent trend as light-truck production
declined 1.9% and passenger car production increased 2.8% when
compared to 2004 levels.
19
This trend continued in the first quarter of 2006. North
American light-vehicle production levels were up about 4.2%
overall with light truck production down about 2.7% and
passenger car production up about 14% when compared to the same
period in 2005.
Negatively impacting us as well has been a continuing market
share decline experienced by our two largest customers - Ford
Motor Company (Ford) and General Motors Corporation (General
Motors). While overall light-truck production was down 1.9% in
2005, production of both Ford and General Motors light trucks
was down about 10%. During the first quarter of 2006, GM
production was up 7.1% owing in part to the accelerated launch
of the new GMT 900 program, while Ford light truck production
was down 14.1% year over year.
Throughout most of the first half of 2005, inventories of light
vehicles and passenger cars were higher than historic levels.
Ford, General Motors and DaimlerChrysler AG (DaimlerChrysler)
continued using incentive programs to stimulate sales during the
second half of 2005, resulting in a reduction of inventory
levels. At December 31, 2005, inventories of overall U.S.
light-duty vehicles stood at 65 days of supply, 3% above the
five-year average, although light vehicle inventories at Ford,
GM and DaimlerChrysler remained higher than average. At
March 31, 2006, light vehicle inventories were in line with
production, about 4.5% above the seasonal average of 69 days.
Inventory of light trucks, however, was at 78 days while that of
passenger cars was at 57 days.
Changing Consumer Preferences — Light trucks
comprise our primary business within the light vehicle market.
In recent years, light truck sales have generally been stronger
than those of passenger cars as consumer interest in SUVs and
CUVs increased. More recently, however, the higher price of
gasoline has negatively impacted the traditional light truck
market. The SUVs have experienced a significant drop in demand,
largely attributable to rising fuel prices and an increased
interest in CUVs and to a lesser extent in passenger cars.
OEM Pricing Pressures — As light trucks have
been important to the profitability of companies like Ford and
General Motors, the decline in production and recent use of
incentives have exerted increased pressure on their financial
performance. As a result, we and other suppliers in the light
vehicle market face the challenge of continued price reduction
pressure from these customers.
High Commodity Prices — The increased cost of
steel, other raw materials and energy has had a significant
adverse impact on our results and those of others in our
industry for the past two years. With steel in particular,
suppliers began assessing price surcharges and increasing base
prices during the first quarter of 2004 and these have continued
throughout 2005. While leverage is clearly on the side of the
steel suppliers at the present time, we have taken actions to
mitigate the impact by consolidating purchases, taking advantage
of OEMs’ resale programs where possible, finding new global
steel sources, identifying alternative materials and
re-designing our products to be less dependent on steel. We are
also working with our customers to recover the increases in the
cost of steel, either in the form of increased selling prices or
reductions in price-downs that they expect from us.
Steel cost surcharges and base price increases, net of
recoveries from our customers, reduced our before-tax profit by
approximately $209 and $114 in 2005 and 2004. These impacts were
determined by comparing current pricing to base steel prices in
effect at the beginning of 2004. The higher impact of steel
costs during 2005 also included the cost of finalizing contract
settlements with certain suppliers that applied to 2004
purchases.
2007 Heavy-Duty Truck Emissions Regulations —
Unlike the light vehicle market, the commercial vehicle
market is relatively strong. In North America - our biggest
market - Class 8 production in 2005 increased approximately
27% over 2004 levels and medium-duty production was up 12% on a
similar basis. During the first quarter of 2006, medium-duty and
heavy-duty production levels were up approximately 2% and 11%,
respectively, when compared to the same period in 2005.
Inventories of commercial vehicles have been relatively stable
and there is a strong order backlog.
More stringent heavy-truck emissions regulations will take
effect in 2007 in the U.S. We expect 2006 will again be a strong
year in the heavy-truck market. Our annual production outlook is
338,000 Class 8
20
units, due to pre-buying in advance of the effective date of the
new emissions regulations. The expectation is that production
will decline in 2007 as a result.
Customer and Supplier Bankruptcies — Another
issue facing our markets is both supplier and customer
bankruptcies. Bankruptcies in our industry can be very
disruptive to pricing patterns and can create a potential for
supply disruptions or credit exposures.
New Business
A continuing major focus for us is growing our revenue through
new business. In the OEM vehicular business, new business
programs are generally awarded to suppliers well in advance of
the expected start of production of a new model/platform. The
amount of lead-time varies based on the nature of the product,
size of the program and required
start-up investment.
The awarding of new business usually coincides with model
changes on the part of vehicle manufacturers. Given the
OEMs’ cost and service concerns associated with changing
suppliers, we expect to retain any awarded business over the
model/platform life, typically several years.
In our markets, concentration of business with certain customers
in certain geographic regions is common, so our efforts to
achieve additional diversification are important. In the light
vehicle market, we have been successful in gaining new business
with several manufacturers based outside of the U.S. over
the past several years. We expect greater customer diversity as
more of this business comes on stream and we gain additional
business with such customers. Overall, broadening our global
presence is increasingly important.
Net new business contributed approximately $500 to our 2005
sales and is expected to contribute another $400, $440 and $95
in 2006, 2007 and 2008. The majority of this net new business is
outside North America with customers other than the traditional
Detroit-based Big Three. We are pursuing a number of additional
opportunities that could further increase our new business for
2006 and beyond.
United States Profitability
The decline in our profit outlook became apparent in the third
quarter of 2005 with the convergence of the external factors
discussed above, as well as internal factors. We were not able
to achieve the expected level of cost reductions or improvements
in manufacturing efficiencies during 2005. Continuing
higher-than-expected costs for steel and other materials, as
well as energy, were also factors. Although less significant,
ASG’s results have been impacted by lower-than-anticipated
light vehicle production volumes on vehicles with significant
Dana content.
During 2005, we recorded a valuation allowance against our net
deferred U.S. tax assets, resulting in an $817 reduction to
net income. Given the losses we have generated in recent years
in the U.S. and the near-term prospects for continued losses, we
concluded that it was not considered “more likely than
not” that some portion or all of the recorded deferred tax
assets would be realized in future periods. Until such time as
we are able to sustain profitability in the U.S., any loss or
profits attributable to the U.S. will not be
“tax-effected,” meaning that the before-tax profit or
loss amount will flow through to net income.
Business Strategy
Our strategy is to operate efficiently as one integrated company
focused on growing our core light- and heavy-duty drivetrain
products (axles and driveshafts), structures, sealing and
thermal businesses. This refocused product array will help us to
better support our global automotive, commercial vehicle and
off-highway markets. Our strategy also includes achieving much
stronger cost and operating levels.
Our short-term strategy for 2006 is to continue normal business
operations during the Bankruptcy Cases while we evaluate our
business both financially and operationally and implement
comprehensive improvements as appropriate to enhance
performance. We have retained a third-party financial advisor
and an investment banker to assist us in developing a Chapter 11
reorganization plan. We will utilize the reorganization process
to help drive necessary change in our U.S. operations in
furtherance of our
21
corporate strategy. We intend to effect fundamental, not
incremental, change to our business. While we cannot predict
with precision how long the reorganization process will take, it
could take upwards of 18 to 24 months.
During 2006, we will continue to pursue the following strategies:
|
|
|
|
• |
Restructuring and consolidating manufacturing operations; |
|
|
• |
Shifting more production to low-cost countries; |
|
|
• |
Increasing the efficiency of production and non-production
processes; |
|
|
• |
Expanding sales with customers, particularly Asian and European
light-vehicle manufacturers, non-NAFTA commercial vehicle
customers and off-highway vehicle manufacturers to achieve a
more balanced sales mix across our customer base; |
|
|
• |
Narrowing our business and product focus by divesting non-core
businesses. |
These strategies will be evaluated periodically against the
objectives of our reorganization goals, which are to improve
near-term liquidity, conduct a thorough review of our business
and implement changes to improve our operating and financial
profile and modify our capital structure to match our profit and
cash generating abilities.
More detail on each of our current corporate strategies follows:
|
|
|
Restructuring and consolidating manufacturing operations. |
We will close two facilities in our Automotive Systems Group and
shift production in several other operations to balance capacity
and take advantage of lower cost locations:
|
|
|
|
• |
The Buena Vista, Virginia axle facility will be closed and its
production consolidated into an existing facility in Dry Ridge,
Kentucky. |
|
|
• |
The Bristol, Virginia driveshaft facility will be closed and its
production consolidated into our operations in Mexico. |
|
|
• |
The assembly and component lines that support the steering shaft
business in the Lima, Ohio driveshaft facility will also be
moved to our operations in Mexico. |
To enhance efficiency, logistics and throughput in our
Commercial Vehicle business, we will undertake the following
actions to balance capacity and enhance manufacturing
efficiencies:
|
|
|
|
• |
Service parts activities at our principal commercial vehicle
parts assembly facility in Henderson, Kentucky will be moved to
our service parts operation in Crossville, Tennessee. |
|
|
• |
Assembly activity will be increased at our facility in
Monterrey, Mexico to improve throughput at the Henderson plant. |
|
|
• |
Gear production will be increased at our operation in Toluca,
Mexico to relieve constraints at our principal commercial
vehicle gear plant in Glasgow, Kentucky. |
|
|
|
Shifting production to low-cost countries such as Mexico,
China and Hungary. |
We signed a letter of intent in December of 2005 with DESC S.A.
de C.V. under which we will acquire full ownership of several
core operations based in Mexico. Under terms of the letter, Dana
and DESC will dissolve their existing joint venture partnership,
Spicer S.A. de C.V., with Dana assuming full ownership of
operations that manufacture and assemble axles and driveshafts,
as well as forging and foundry operations in which we currently
hold an indirect 49% interest. DESC, in turn, will assume full
ownership of the transmission and aftermarket gasket operations
in which it currently holds a 51% interest. This transaction is
subject to execution of a definitive purchase agreement and
Bankruptcy Court approval.
22
In March 2005, Dana and Dongfeng Motor Co. Ltd. signed an
agreement to form a joint-venture company to develop and produce
commercial vehicle axles in China. This transaction is also
subject to Bankruptcy Court approval.
We recently began assembling off-highway axles and transmissions
in Gyor, Hungary. This new facility currently employs about 50
people in the assembly, testing, painting and packaging of axles
and transmissions for agricultural and construction vehicles.
These products are supporting both European customers and export
markets.
|
|
|
Increasing the efficiency of production and non-production
processes. |
We will continue to focus on the
day-to-day execution of
our productivity and efficiency processes, which are critical to
strengthening our performance. Lean manufacturing and Six Sigma
teams are focused on increasing efficiencies and reducing costs
in our production facilities. Value analysis/value engineering
(VA/ VE) teams will continue to remove cost from products
already being manufactured as well as those still in development.
Our support functions, including purchasing, information
technology, finance and human resources, will continue their
respective efficiency and cost-reduction efforts. These efforts
have gained momentum as the support functions continue to shift
to a centralized structure from the previously decentralized
organizations. During 2005, we moved many of our administrative
human resource functions to IBM under an outsourcing agreement.
In a separate initiative, we have begun moving our purchasing
resources to corporate shared service centers that are staffed
internally.
Streamlining administrative processes and reducing headcount
through attrition is expected to account for much of the
targeted reduction in our salaried workforce of at least five
percent in 2006. This reduction, coupled with changes to
employee benefit plans, is expected to generate cost savings of
more than $40 in 2006.
|
|
|
Expanding sales with certain customers to achieve a more
balanced sales mix across our customer base. |
While continuing to support Ford, General Motors and
DaimlerChrysler, we will strive to further diversify our sales
across our customer base. The opportunity here is illustrated by
the fact that we already serve every major vehicle maker in the
world — in the light, commercial and off-highway
vehicle markets.
We have achieved double-digit sales growth with European and
Asian light-vehicle manufacturers for the past several years.
And these customers will account for six of the top ten product
launches for our Automotive Systems Group in 2006. Our success
on this front has been achieved in part through our expanding
global operations and affiliates. Our people and facilities in
Brazil, Argentina, Venezuela, Colombia, Uruguay, Thailand,
Taiwan, Japan, India, China, Australia, South Africa, United
Kingdom and Spain are actively supporting the global platforms
of our foreign-based customers today.
Approximately 80 percent of our current book of net new
business involves customers other than the traditional Big
Three. Approximately 70 percent of these wins are outside
North America.
For our Commercial Vehicle Systems business, which predominantly
operates in North America, our proposed joint venture with
Dongfeng would provide a great opportunity to grow its
international sales.
Approximately two-thirds of our Off-Highway Systems Group’s
sales already occur outside North America and we will continue
to aggressively pursue new business in this market.
|
|
|
Narrowing our business and product focus by divesting
non-core businesses. |
In order to more fully leverage our strengths and to secure
acceptable profit levels, we intend to narrow the breadth of our
product lines through the divestiture of three businesses:
engine hard parts, fluid products and pump products.
Collectively, these businesses employ approximately 9,800 people
world-
23
wide and represent annual sales of approximately $1,200. These
businesses were classified as discontinued operations during the
fourth quarter of 2005.
Results of Operations — Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
|
|
2005 to 2004 | |
|
2004 to 2003 | |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Net sales
|
|
$ |
8,611 |
|
|
$ |
7,775 |
|
|
$ |
6,714 |
|
|
$ |
836 |
|
|
$ |
1,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$ |
8,205 |
|
|
$ |
7,189 |
|
|
$ |
6,123 |
|
|
$ |
1,016 |
|
|
$ |
1,066 |
|
|
Selling, general and administrative expenses
|
|
|
500 |
|
|
|
416 |
|
|
|
452 |
|
|
|
84 |
|
|
|
(36 |
) |
|
Realignment charges
|
|
|
58 |
|
|
|
44 |
|
|
|
|
|
|
|
14 |
|
|
|
44 |
|
|
Goodwill impairment
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
Interest expense
|
|
|
168 |
|
|
|
206 |
|
|
|
223 |
|
|
|
(38 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$ |
8,984 |
|
|
$ |
7,855 |
|
|
$ |
6,798 |
|
|
$ |
1,129 |
|
|
$ |
1,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$ |
406 |
|
|
$ |
586 |
|
|
$ |
591 |
|
|
$ |
(180 |
) |
|
$ |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin less SG&A*
|
|
$ |
(94 |
) |
|
$ |
170 |
|
|
$ |
139 |
|
|
$ |
(264 |
) |
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
(1,175 |
) |
|
$ |
72 |
|
|
$ |
155 |
|
|
$ |
(1,247 |
) |
|
$ |
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$ |
(434 |
) |
|
$ |
(10 |
) |
|
$ |
73 |
|
|
$ |
(424 |
) |
|
$ |
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(1,605 |
) |
|
$ |
62 |
|
|
$ |
228 |
|
|
$ |
(1,667 |
) |
|
$ |
(166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Net sales less cost of sales and selling, general and
administration expenses (SG&A). |
Results of Operations (2005 versus 2004)
Our 2005 net loss was significantly impacted by the
following after-tax charges:
|
|
|
|
|
Valuation allowance against deferred tax assets
|
|
$ |
817 |
|
Impairment charges associated with businesses held for sale
|
|
|
398 |
|
Goodwill impairment
|
|
|
53 |
|
Realignment charges
|
|
|
45 |
|
Net divestiture losses and other items
|
|
|
25 |
|
|
|
|
|
|
|
$ |
1,338 |
|
|
|
|
|
As discussed in Note 12 to our consolidated financial
statements, during the third quarter of 2005, we determined that
it was no longer more likely than not that future taxable income
in the U.S. and U.K. would be sufficient to ensure realization
of recorded net deferred tax assets. Accordingly, we provided a
valuation allowance of $817 against the applicable net deferred
tax assets in the U.S. and U.K. as of the beginning of 2005 and
we have discontinued recognition of tax benefits from losses in
these jurisdictions until such time that the U.S. and U.K.
return to sustained profitability.
During the fourth quarter of 2005, we announced plans to sell
our engine hard parts, fluid products and pump products
businesses. These “held for sale” operations are now
classified in the 2005 and prior-year financial statements as
discontinued operations. The net effect of adjusting the net
book value of these businesses to their expected net realizable
value upon sale resulted in after-tax charges of $398.
Goodwill impairment charges of $53 were recorded during the
fourth quarter of 2005 as part of our annual assessment of
impairment. The realignment charges of $45, after tax, relate
primarily to various facility closures announced during the
fourth quarter of 2005. Divestiture losses and other charges of
$25
24
resulted primarily from the third-quarter sale of a fuel rail
business and dissolution of an engine bearings joint venture.
Our 2004 results also included significant after-tax charges
that totaled $151, mostly relating to the sale of our AAG
businesses in 2004. Discontinued operations in 2004 reflect a
net loss of $43 on the sale of these businesses. In connection
with the sale, we used a portion of the proceeds to repurchase
certain outstanding notes that resulted in an after-tax charge
of $96 reported in continuing operations. Sales of DCC assets
and other divestitures produced net gains of $42, while
realignment and other charges pertaining mostly to facility
closures amounted to $54, of which $15 related to operations now
classified as discontinued.
The above-mentioned charges were significant factors in the
income (loss) from continuing operations and from discontinued
operations in 2005 and 2004. Also contributing to the $1,247
reduction in income from continuing operations in 2005 as
compared to 2004 was a $264 decline due to lower gross margins
less SG&A. The remaining decline in income from continuing
operations came principally from higher tax expense in 2005.
Factors impacting gross margins less SG&A and taxes are
discussed in the following sections.
Business Unit and Geographic Sales and Gross Margin Analysis
(2005 versus 2004)
Net sales by our segments and geographic regions for 2005 and
2004 are presented in the following tables:
Geographical Sales Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Change Due To | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Change | |
|
Currency | |
|
Acquisitions/ | |
|
Organic | |
|
|
2005 | |
|
2004 | |
|
Amount | |
|
Effects | |
|
Divestitures | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
North America
|
|
$ |
5,410 |
|
|
$ |
5,218 |
|
|
$ |
192 |
|
|
$ |
63 |
|
|
$ |
(19 |
) |
|
$ |
148 |
|
Europe
|
|
|
1,595 |
|
|
|
1,322 |
|
|
|
273 |
|
|
|
(3 |
) |
|
|
|
|
|
|
276 |
|
South America
|
|
|
835 |
|
|
|
542 |
|
|
|
293 |
|
|
|
86 |
|
|
|
(6 |
) |
|
|
213 |
|
Asia Pacific
|
|
|
771 |
|
|
|
693 |
|
|
|
78 |
|
|
|
21 |
|
|
|
41 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8,611 |
|
|
$ |
7,775 |
|
|
$ |
836 |
|
|
$ |
167 |
|
|
$ |
16 |
|
|
$ |
653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Unit Sales Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Change Due To | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Change | |
|
Currency | |
|
Acquisitions/ | |
|
Organic | |
|
|
2005 | |
|
2004 | |
|
Amount | |
|
Effects | |
|
Divestitures | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
ASG
|
|
$ |
5,941 |
|
|
$ |
5,384 |
|
|
$ |
557 |
|
|
$ |
152 |
|
|
$ |
16 |
|
|
$ |
389 |
|
HVTSG
|
|
|
2,640 |
|
|
|
2,299 |
|
|
|
341 |
|
|
|
15 |
|
|
|
|
|
|
|
326 |
|
Other
|
|
|
30 |
|
|
|
92 |
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8,611 |
|
|
$ |
7,775 |
|
|
$ |
836 |
|
|
$ |
167 |
|
|
$ |
16 |
|
|
$ |
653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Organic sales in 2005 increased $653, or 8%, primarily as a
result of new business that came on stream in 2005 and a
stronger heavy vehicle market. Net new business increased 2005
sales by approximately $320 in ASG and $180 in HVTSG. The
remaining increase in 2005 was driven primarily by increased
production levels in the heavy vehicle market. In commercial
vehicles, most of our sales are to the North American market.
Production levels of class 8 commercial trucks increased
27% in 2005, while medium duty class 5-7 truck production
was up about 12%. The other heavy vehicle market we serve is the
off-highway market where, unlike commercial vehicles, our sales
are more globally dispersed. Global production of vehicles in
our primary off-highway markets was higher by about 4% in 2005.
25
In our biggest market, the light vehicle market serviced by ASG,
overall production levels were relatively flat. Our sales are
mostly to the light truck segment of this market where 2005
production in North America declined about 2%, with the vehicles
having larger Dana content being down even more. Light vehicle
production levels in Europe were flat, with South America and
Asia Pacific both being somewhat stronger.
Regionally, the North American sales increase is due to stronger
commercial vehicle production levels in 2005 with some
contributions from net new business. The currency related
increase is due to a stronger Canadian dollar. The sales
increase in Europe was due to net new business, principally in
the off-highway market. Sales growth in South America resulted
from higher production levels and net new business gains. A
stronger Brazilian real was the primary factor in the currency
related sales increase.
By business segment, the organic sales increase in ASG was
almost entirely due to net new business of $320 that came on
stream in 2005. Although ASG benefited by selling certain of its
product into a stronger commercial vehicle market, its principal
market — the North American light truck
market — experienced lower production levels in 2005.
In combination with the customary price reductions in this
market, without the contribution of net new business in 2005,
sales in the light vehicle market were lower. The HVTSG group,
on the other hand, benefited from both net new business,
principally in the off-highway business and the previously
mentioned stronger overall production levels in 2005.
The chart below shows our business unit margin analysis:
Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a | |
|
|
|
|
Percentage | |
|
|
|
|
of Sales | |
|
|
|
|
| |
|
Increase/ | |
|
|
2005 | |
|
2004 | |
|
(Decrease) | |
|
|
| |
|
| |
|
| |
Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
6.0 |
% |
|
|
8.2 |
% |
|
|
(2.2 |
)% |
|
HVTSG
|
|
|
7.3 |
% |
|
|
12.1 |
% |
|
|
(4.8 |
)% |
|
|
Consolidated
|
|
|
4.7 |
% |
|
|
7.5 |
% |
|
|
(2.8 |
)% |
Selling, general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
3.6 |
% |
|
|
3.4 |
% |
|
|
0.2 |
% |
|
HVTSG
|
|
|
4.8 |
% |
|
|
5.3 |
% |
|
|
(0.5 |
)% |
|
|
Consolidated
|
|
|
5.8 |
% |
|
|
5.4 |
% |
|
|
0.4 |
% |
Gross margin less SG&A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
2.4 |
% |
|
|
4.8 |
% |
|
|
(2.4 |
)% |
|
HVTSG
|
|
|
2.5 |
% |
|
|
6.8 |
% |
|
|
(4.3 |
)% |
|
|
Consolidated
|
|
|
(1.1 |
)% |
|
|
2.2 |
% |
|
|
(3.3 |
)% |
In ASG, despite higher sales in 2005, gross margins less
SG&A declined 2.4%. Higher costs of steel and other metals
were a principal factor. Higher steel costs, net of customer
recoveries, alone reduced 2005 before-tax profit in ASG as
compared to 2004 by approximately $67 — accounting for
1.1% of the margin decline from the previous year. In addition
to higher raw material prices, increased energy costs also
negatively impacted ASG margins. In the automotive market, we
have had very limited success passing these higher costs on to
customers. In fact, margins continue to be adversely affected by
price reductions to customers. Also negatively impacting ASG
2005 margins were
start-up and launch
costs associated with a new Slovakian actuation systems
operation. This operation reduced margins in 2005 by
approximately $16. Quality and warranty related issues resulted
in higher warranty expense which reduced year-over-year margins
by about $30, with the fourth quarter of 2005 including charges
of $19 for two specific recall programs. While ASG margins
continue to benefit from cost savings from programs like lean
manufacturing and value engineering, production inefficiencies
associated with overtime and freight continue to dampen margins.
26
Margins in the Heavy Vehicle group were 4.3% lower in 2005
despite stronger sales. As with ASG, higher steel costs
significantly impacted HVTSG performance in 2005. Steel costs,
net of customer recoveries, reduced this group’s before-tax
profit by an additional $45 — accounting for 2.0% of
the 4.3% margin decline. Raw material prices other than steel
and higher energy costs also negatively impacted this business
in 2005. While higher sales in the commercial vehicle market
would normally benefit margins, the stronger sales volume
actually created production inefficiencies as our principal
assembly facility in Henderson, Kentucky experienced capacity
constraints. With the production inefficiencies, to meet
customer demand, we incurred premium freight, higher overtime,
additional warehousing and outsourced certain activities
previously handled internally — all of which resulted
in higher costs. Commercial vehicle margins during the first six
months of 2005 were also negatively impacted by component
shortages. Additional costs resulted from alternative sourcing
as well as production inefficiencies. Margins in the off-highway
operations in 2005 were negatively impacted by restructuring
actions associated with the closure of the Statesville, North
Carolina manufacturing facility, the downsizing of the Brugge,
Belgium operation and the relocation of certain production
activities to operations in Mexico.
Corporate expenses and other costs not allocated to the business
units reduced gross margins less SG&A by 3.6% in 2005 and
2.8% in 2004. One factor contributing to the higher costs in
2005 was higher professional fees and related costs associated
with an independent investigation surrounding the restatement of
our financial statements for the first half of 2005 and prior
years. Other factors included a pension settlement charge in the
fourth quarter triggered by higher lump sum distributions from
one of our pension plans, higher insurance premiums and higher
costs associated with our long-term disability and workers
compensation programs.
Other income (expense) was $88 and $(85) in 2005 and
2004. Other income in 2005 was generated primarily through lease
financing revenue, interest income and other miscellaneous
income. Other expense in 2004 included a $157 before tax charge
associated with the repurchase of approximately $900 of debt
during the fourth quarter of 2004 at a premium to face value.
Realignment and impairment charges were $111 and $44 in
2005 and 2004. The 2005 realignment and impairment costs include
$53 for goodwill impairment taken in the fourth quarter. The
remaining cost in 2005 and the cost in 2004 relates primarily to
facility closures or program discontinuance.
Interest expense was $168 and $206 in 2005 and 2004.
Interest expense in 2005 was lower due to lower average debt
levels.
Income tax (expense) benefit for continuing operations
was $(924) and $205 in 2005 and 2004. Income tax expense in 2005
includes a charge of $817 for a valuation allowance against
deferred tax assets at the beginning of the year in the U.S. and
U.K. where future taxable income was determined to no longer be
sufficient to ensure asset realization. The valuation allowance
above was the predominant factor in tax expense of $924 being
higher than the $100 tax benefit that would normally be expected
at the customary U.S. federal tax rate of 35%. The 2005
provision for income taxes continues to include expense related
to countries where a valuation allowance is not considered
necessary and where operating results continue to be
tax-effected. Other factors contributing to the variance were
goodwill impairment charges that are not deductible for tax
purposes and a write-off of deferred tax assets for net
operating losses in the State of Ohio in connection with the
enactment of a new gross receipts tax system.
In 2004, we experienced income tax benefits that resulted in a
net tax benefit significantly greater than the tax provision
normally expected at a customary tax rate equal to the
U.S. federal rate of 35%. Tax benefits exceeded the amount
expected by applying 35% to the loss before income taxes by
$147. During 2004, income tax benefits of $85 were recognized
through release of valuation allowances against capital loss
carryforwards as a result of certain DCC sale transactions.
Additionally, tax benefits of $37 were recognized through
release of valuation allowances previously recorded against net
operating losses in certain jurisdictions where future
profitability no longer required such allowances.
Losses from discontinued operations were $434 and $10 in 2005
and 2004. Discontinued operations in 2005 in both years include
the results relating to the engine hard parts, fluid products
and pump
27
products businesses held for sale at the end of 2005. The
2005 net loss of $434 includes impairment charges of $398
that were required to reduce the net book value of these
businesses to expected realizable value. In 2004, discontinued
operations also included the AAG business that we sold in
November 2004. The AAG operation accounted for $5 of the
discontinued operations loss, including a $43 charge recognized
at the time of the sale.
Results of Operations (2004 versus 2003)
Business Unit and Geographic Sales and Gross Margin Analysis
(2004 verses 2003)
Net sales by our segments and geographic regions for 2004 and
2003 are presented in the following tables:
Geographical Sales Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Change Due To | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Change | |
|
Currency | |
|
Acquisitions/ | |
|
Organic | |
|
|
2004 | |
|
2003 | |
|
Amount | |
|
Effects | |
|
Divestitures | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
North America
|
|
$ |
5,218 |
|
|
$ |
4,664 |
|
|
$ |
554 |
|
|
$ |
53 |
|
|
$ |
— |
|
|
$ |
501 |
|
Europe
|
|
|
1,322 |
|
|
|
1,052 |
|
|
|
270 |
|
|
|
120 |
|
|
|
(6 |
) |
|
|
156 |
|
South America
|
|
|
542 |
|
|
|
417 |
|
|
|
125 |
|
|
|
25 |
|
|
|
|
|
|
|
100 |
|
Asia Pacific
|
|
|
693 |
|
|
|
581 |
|
|
|
112 |
|
|
|
58 |
|
|
|
(8 |
) |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,775 |
|
|
$ |
6,714 |
|
|
$ |
1,061 |
|
|
$ |
256 |
|
|
$ |
(14 |
) |
|
$ |
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Unit Sales Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Change Due To | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Change | |
|
Currency | |
|
Acquisitions/ | |
|
Organic | |
|
|
2004 | |
|
2003 | |
|
Amount | |
|
Effects | |
|
Divestitures | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
ASG
|
|
$ |
5,384 |
|
|
$ |
4,723 |
|
|
$ |
661 |
|
|
$ |
187 |
|
|
$ |
(10 |
) |
|
$ |
484 |
|
HVTSG
|
|
|
2,299 |
|
|
|
1,908 |
|
|
|
391 |
|
|
|
65 |
|
|
|
(5 |
) |
|
|
331 |
|
Other
|
|
|
92 |
|
|
|
83 |
|
|
|
9 |
|
|
|
5 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,775 |
|
|
$ |
6,714 |
|
|
$ |
1,061 |
|
|
$ |
257 |
|
|
$ |
(15 |
) |
|
$ |
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The strengthening of certain international currencies against
the U.S. dollar played a significant role in increasing our
sales in 2004. In North America, the stronger Canadian dollar
was the primary factor. In Europe, the euro and the British
pound strengthened, while in Asia Pacific the increase was led
by the Australian dollar.
Overall light vehicle production in North America was flat
compared to 2003. In commercial vehicles and off-highway,
however, the North American markets were up
significantly — 46% in Class 8 trucks, 18% in
medium-duty (Class 5-7) trucks and 16% in off-highway
vehicles. The higher production levels in these markets along
with new business coming on stream in ASG produced the 9%
organic sales increase in North America.
In Europe, the organic sales increase of 15% resulted primarily
from new off-highway business in HVTSG and new ASG business.
Slightly stronger light vehicle production also contributed to
the increase. In South America, the organic increase was due to
stronger light vehicle production results and new ASG business.
The organic sales growth in Asia Pacific was primarily due to
overall higher production levels in the region.
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 the other business
units, but excludes discontinued operations.
28
ASG principally serves the light vehicle market, with some sales
of driveshaft business to the OEM vehicle market. As previously
mentioned, production levels in ASG’s largest
market — the North American light-duty
market — were flat compared to 2003. ASG’s sales
did benefit from the stronger commercial vehicle market in North
America. In addition to driveshafts, ASG’s sealing products
and other engine parts are sold to commercial vehicle customers.
Stronger light duty production levels elsewhere in the world
helped increase sales in ASG. Net new business growth added
approximately $350 to ASG’s organic sales increase. New
programs included driveline products for Nissan’s Titan
pickup and BMW’s X3/ X5 sport utility vehicles and
structural products for the Ford F-150 and GM Colorado/ Canyon
pick-ups.
HVTSG focuses on the commercial vehicle and off-highway markets.
More than 90% of HVTSG’s sales are in North America and
Europe. The organic sales growth in this group was due mostly to
the previously mentioned stronger production levels in both the
commercial vehicle and off-highway. This also contributes to
HVTSG’s higher sales.
Other income (expense) was $(85) and $146 in 2004 and 2003.
Included in other expense in 2004 is $157 of net expense
associated with the repurchase of approximately $900 of debt
during the fourth quarter of 2004 at a premium to face value.
Also impacting the changes from 2003 is lower leasing revenues
from our DCC operation resulting from our continued divestment
of assets in its portfolio.
Margin Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a | |
|
|
|
|
Percentage | |
|
|
|
|
of Sales | |
|
|
|
|
| |
|
Increase/ | |
|
|
2004 | |
|
2003 | |
|
(Decrease) | |
|
|
| |
|
| |
|
| |
Gross margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
8.2 |
% |
|
|
9.4 |
% |
|
|
(1.2 |
)% |
|
HVTSG
|
|
|
12.1 |
% |
|
|
12.4 |
% |
|
|
(0.3 |
)% |
|
|
Consolidated
|
|
|
7.5 |
% |
|
|
8.8 |
% |
|
|
(1.3 |
)% |
Selling, general and administrative expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
3.4 |
% |
|
|
3.9 |
% |
|
|
(0.5 |
)% |
|
HVTSG
|
|
|
5.3 |
% |
|
|
6.1 |
% |
|
|
(0.8 |
)% |
|
|
Consolidated
|
|
|
5.4 |
% |
|
|
6.7 |
% |
|
|
(1.3 |
)% |
Gross margin less SG&A:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
4.8 |
% |
|
|
5.6 |
% |
|
|
(0.8 |
)% |
|
HVTSG
|
|
|
6.8 |
% |
|
|
6.3 |
% |
|
|
0.5 |
% |
|
|
Consolidated
|
|
|
2.2 |
% |
|
|
2.1 |
% |
|
|
0.1 |
% |
Gross margins and gross margins less SG&A were significantly
impacted in 2004 by higher steel costs net of amounts recovered
from customers.
In ASG, our ability to recoup higher steel cost from our
customers is limited; consequently, the impact on margins has
been greater in that business unit. Removing the impact of
higher steel costs from ASG’s gross margin in 2004 would
increase gross margin by 1% of sales. Adjusting for steel costs,
gross margin is up slightly. Margins were favorably impacted by
the higher sales volume and cost reductions. Partially
offsetting these positive factors were price reductions to
customers, production inefficiencies leading to higher premium
freight and overtime cost and the loss of higher-margin axle
business on the
Jeep®
Grand Cherokee.
Higher steel costs also impacted HVTSG. Although customer
recoveries in this business unit are higher than in ASG, the
steel consumption is also higher. Removing the higher net steel
costs from HVTSG’s gross margin in 2004 would have
approximately been 13%, up about 1% over 2003. The gross margin
improvement here is due to the higher sales levels, although
this group also experienced higher premium freight and overtime
cost as production levels remained up during the year.
29
Selling, general and administrative expenses were $416
and $452 in 2004 and 2003. The decline in SG&A expenses is
due to lower expense in our DCC operation as we continue to
divest assets. Exclusive of DCC, SG&A expenses are up $25
but lower as a percent of sales. A portion of the absolute
dollar increase in SG&A expense is due to currency effects
as the international expenses were generally translated at
higher rates against the US dollar.
Realignment charges were $44 and zero in 2004 and 2003.
As discussed in Note 15, additional charges were recognized
in connection with additional facility closures and workforce
reductions announced in 2004.
Interest expense was $206 and $223 in 2004 and 2003.
Lower interest expense resulted from overall lower levels of
debt outstanding in 2004. Partially offsetting the effect of
lower debt levels were higher short-term interest rates in 2004.
Income tax benefits were $205 and $52 in 2004 and 2003.
We experienced income tax benefits in both 2004 and 2003 that
resulted in a net tax benefit significantly greater than the tax
provision normally expected at a customary effective tax rate
equal to the U.S. federal rate of 35%. Tax benefits
exceeded the amount expected by applying a 35% rate to income
(loss) before taxes by $(165) in 2004 and $62 in 2003.
A capital loss was generated in 2002 in connection with the sale
of one of our subsidiaries. Since the benefit of these losses
can only be realized by generating capital gains, a valuation
allowance is recorded against the deferred tax asset
representing the unused capital loss benefit. The valuation
allowance is released upon the occurrence of transactions
generating capital gains, or the determination that the
occurrence of such an occurrence is probable. During 2004 and
2003, income tax benefits of $85 and $49 were recognized through
release of valuation allowances against capital loss
carryforwards as a result of the DCC sale transactions.
Similarly, we have also provided valuation allowance against
deferred tax assets relating to ordinary operating, not capital,
losses generated in certain jurisdictions where realization is
not assured. As income is generated in these jurisdictions,
income tax benefit is recognized through the release of all or a
portion of the valuation allowances.
Realignment of Operations
During the fourth quarter of 2005, our Board of Directors
approved a number of operational initiatives to enhance the
company’s financial performance. The primary actions
described below, along with other items, resulted in total
realignment charges of $58 in 2005.
In October 2005, we announced that ASG will close two facilities
in Virginia and shift production in several other locations,
affecting approximately 650 employees. The Commercial Vehicle
operation of HTVSG will increase gear production and assembly
activity at its Toluca, Mexico facility to relieve constraints
at its principal gear plant in Glasgow, Kentucky and improve
throughput at a Henderson, Kentucky assembly plant. We recorded
a charge of $8 and anticipate additional costs in 2006 and 2007
of $21 in association with these actions. We expect to make
additional cash investments of $7 over the next 12 months
for the expansion of facilities in Mexico. In November 2005, we
signed a letter of intent with DESC S.A. de C.V.
(DESC) under which Dana and DESC will, subject to
Bankruptcy Court approval, dissolve our existing Mexican joint
venture, Spicer S.A. de C.V. (Spicer). We will assume 100%
ownership of the Mexican subsidiaries of Spicer that manufacture
and assemble axles and driveshafts, as well as related forging
and foundry operations, in which we currently have an indirect
49% interest and 33% interest, respectively, through our
ownership in Spicer. These operations had combined sales to Dana
and to third parties of $296 in 2005. DESC, in turn, will assume
full ownership of Spicer and its remaining subsidiaries that
operate transmission and aftermarket gasket businesses in which
DESC currently holds an indirect 51% interest through its
ownership in Spicer. This transaction is subject to Bankruptcy
Court approval.
In December 2005, we announced plans to consolidate our North
American Thermal Products operations by mid-2006 to reduce
operating and overhead costs and strengthen our competitiveness.
30
Three facilities located in North America employing 200 people,
will be closed. In connection with the expiration of supply
agreements for truck frames and rear axle modules, we announced
work force reductions of approximately 500 and 300 people at our
Structural Products plant in Thorold, Ontario and at three
Traction Products facilities in Australia. We recorded charges
totaling $31 related to these facility closures and work force
reductions.
During the fourth quarter, we recorded impairment charges
relating to our actuator systems operation investment and assets
associated with other discontinued programs that accounted for
most of the remaining $19 in realignment charges recorded during
the year.
Continuing operations realignment charges of $44 in 2004 related
primarily to activities with off-highway operation in HVTSG
where we announced the closure of the Statesville, North
Carolina manufacturing facility and work force reductions in our
Brugge, Belgium operations.
For additional information of these realignment actions and the
related costs see Note 15 to our consolidated financial
statements.
Discontinued Operations
In October 2005, three businesses (engine hard parts products,
fluid products and pump products) with approximately 9,800
people in 44 operations worldwide, representing annual revenues
of more than $1,200, were approved for divestiture by our Board.
Charges during the third and fourth quarters of 2005 have
reduced the carrying value of these businesses to net realizable
value. An impairment charge of $275 after-tax relating to
long-lived assets and goodwill was recorded in the third quarter
of 2005. Other after-tax charges of $123 to reduce the
businesses to net realizable value were recognized in the fourth
quarter when the commitment to the plans was made.
Other discontinued operations in 2004 and 2003 included the
following businesses. In December 2003, we elected to divest
substantially all of AAG. The sale of these businesses was
completed in November 2004. The Engine Management business was
sold in the second quarter of 2003, and one remaining plant of
the Boston Weatherhead Division, which was sold in the fourth
quarter of 2002.
31
An analysis of the net sales and the income (loss) from
discontinued operations of these businesses, grouped by business
segment, follows in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine hard parts products
|
|
|
671 |
|
|
|
723 |
|
|
|
706 |
|
|
Fluid products
|
|
|
454 |
|
|
|
469 |
|
|
|
452 |
|
|
Pump products
|
|
|
96 |
|
|
|
81 |
|
|
|
46 |
|
|
Boston Weatherhead
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
Total ASG
|
|
|
1,221 |
|
|
|
1,273 |
|
|
|
1,217 |
|
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive Aftermarket
|
|
|
— |
|
|
|
1,943 |
|
|
|
1,996 |
|
|
Engine Management
|
|
|
— |
|
|
|
— |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
Total AAG
|
|
|
— |
|
|
|
1,943 |
|
|
|
2,138 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales from discontinued operations
|
|
$ |
1,221 |
|
|
$ |
3,216 |
|
|
$ |
3,355 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engine hard parts products
|
|
|
(234 |
) |
|
|
(14 |
) |
|
|
(12 |
) |
|
Fluid products
|
|
|
(150 |
) |
|
|
4 |
|
|
|
22 |
|
|
Pump products
|
|
|
(50 |
) |
|
|
5 |
|
|
|
6 |
|
|
Boston Weatherhead
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
Total ASG
|
|
|
(434 |
) |
|
|
(5 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
AAG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive Aftermarket
|
|
|
— |
|
|
|
(5 |
) |
|
|
69 |
|
|
Engine Management
|
|
|
— |
|
|
|
— |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Total AAG
|
|
|
— |
|
|
|
(5 |
) |
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) from discontinued operations
|
|
$ |
(434 |
) |
|
$ |
(10 |
) |
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
|
The loss from discontinued operations relating to ASG in 2005
includes the above mentioned $398 after-tax charge to reduce the
net book values of the businesses currently held for sale to
realizable values.
The Automotive Aftermarket business component was included in
discontinued operations for only eleven months of 2004,
accounting for most of the decline in sales compared to 2003.
The AAG results include $43 of after-tax losses recognized in
connection with the sale. Gross margin for the Automotive
Aftermarket business component was 15.5% in 2004 and 17.7% in
2003. The lower gross margin in 2004 was partially due to higher
steel costs that reduced gross margin by approximately $25 or
1.3%.
32
Cash Flow
Cash and cash equivalents for the years ended December 31,
2005, 2004 and 2003 are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flow — summary
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
$ |
634 |
|
|
$ |
731 |
|
|
$ |
571 |
|
|
|
|
|
|
|
|
|
|
|
Cash from (used in) operating activities
|
|
|
(216 |
) |
|
|
73 |
|
|
|
350 |
|
Cash from (used in) investing activities
|
|
|
(54 |
) |
|
|
916 |
|
|
|
194 |
|
Cash from (used in) financing activities
|
|
|
398 |
|
|
|
(1,090 |
) |
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
128 |
|
|
|
(101 |
) |
|
|
162 |
|
Net change in cash of discontinued operations
|
|
|
|
|
|
|
4 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
762 |
|
|
$ |
634 |
|
|
$ |
731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows — operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
(1,605 |
) |
|
$ |
62 |
|
|
$ |
228 |
|
Depreciation and amortization
|
|
|
310 |
|
|
|
358 |
|
|
|
394 |
|
Loss (gain) on note repurchases
|
|
|
|
|
|
|
96 |
|
|
|
(9 |
) |
Deferred income taxes
|
|
|
751 |
|
|
|
(125 |
) |
|
|
(35 |
) |
Unremitted earnings of affiliates
|
|
|
(40 |
) |
|
|
(36 |
) |
|
|
(49 |
) |
Losses (gains) on divestitures and asset sales
|
|
|
29 |
|
|
|
18 |
|
|
|
(38 |
) |
Asset impairment and other related charges
|
|
|
486 |
|
|
|
37 |
|
|
|
21 |
|
Minority interest
|
|
|
(16 |
) |
|
|
13 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85 |
) |
|
|
423 |
|
|
|
521 |
|
Increase in working capital
|
|
|
(170 |
) |
|
|
(294 |
) |
|
|
(143 |
) |
Other
|
|
|
39 |
|
|
|
(56 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) operating activities
|
|
$ |
(216 |
) |
|
$ |
73 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
|
The $216 of cash used in operating activities in 2005 is
primarily due to the decline in results from continuing
operations in 2005 compared to 2004. There were significant
non-cash transactions and developments in both 2005 and 2004
that impacted net income.
In 2005, we announced the planned sale of our engine hard parts,
fluid products and pumps products businesses. Accordingly we
provided for an after-tax loss on the expected sales of $398,
which is included in loss from discontinued operations. We also
established a $817 valuation allowance against net deferred tax
assets because we determined that future taxable income in the
U.S. would not be sufficient to ensure realization of the
net deferred tax assets based on a “more likely than
not” standard in SFAS No. 109.
Net income in 2004 was impacted by the divestiture of our
automotive aftermarket businesses that we completed in November
2004. Including the related expenses incurred throughout 2004,
the net loss associated with this divestiture was $43 after-tax.
The proceeds from the divestiture and the issuance of $450 of
5.85% notes due in January 2015 were used to repurchase
nearly $900 of our notes. The notes, which were issued in 2001
and 2002 when we had fallen below an investment grade rating,
were repurchased at a substantial premium. After considering
valuation adjustments, unamortized issuance costs and other
related balance sheet items, we recognized an after-tax loss of
$96 on the transaction. Deferred income tax benefits, which do
not impact cash, are also a significant element of the net
charges related to the note repurchase, divestitures and asset
sales and impairments, which are presented net of
33
the related tax benefits. Other deferred tax benefits,
recognized in 2004 but not impacting cash flow, totaled $125.
Our working capital increased in 2005 but at a lesser rate than
in 2004. Combined accounts receivable and inventory decreased by
$227 after increasing $430 and $127 in 2004 and 2003. Other
operating assets and liabilities increased $397 in 2005 after
decreasing $136 in 2004. Other receivables at the end of 2004
included a higher amount recoverable from insurers as a result
of the settlement agreement entered in December 2004 with a
number of our carriers.
Also, working capital in 2005, 2004 and 2003 was negatively
affected by payments against restructuring accruals of $23, $27
and $83.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows — investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
$ |
(297 |
) |
|
$ |
(329 |
) |
|
$ |
(323 |
) |
Divestitures
|
|
|
|
|
|
|
968 |
|
|
|
145 |
|
Proceeds from sales of leasing subsidiary assets
|
|
|
161 |
|
|
|
289 |
|
|
|
193 |
|
Proceeds from sales of other assets
|
|
|
22 |
|
|
|
61 |
|
|
|
89 |
|
Other
|
|
|
60 |
|
|
|
(73 |
) |
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) investing activities
|
|
$ |
(54 |
) |
|
$ |
916 |
|
|
$ |
194 |
|
|
|
|
|
|
|
|
|
|
|
Capital spending declined in 2005 and has remained below
depreciation expense for the past 3 years. The 2005 outlays
were again focused on opportunities to leverage technology and
support new customer programs. Capital spending in 2006 is
expected to increase approximately 10%.
We continued to reduce our lease investment portfolio at DCC,
generating $161 and $289 from sales of those assets in 2005 and
2004.
The sale of the automotive aftermarket businesses in November
2004 generated cash proceeds of $968 at closing. Supplementing
those proceeds was the $61 of cash generated on asset sales
within the manufacturing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Cash flows — financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in short-term debt
|
|
$ |
492 |
|
|
$ |
(31 |
) |
|
$ |
(113 |
) |
Issuance of long-term debt
|
|
|
16 |
|
|
|
455 |
|
|
|
— |
|
Payments on and repurchases of long-term debt
|
|
|
(61 |
) |
|
|
(1,457 |
) |
|
|
(272 |
) |
Dividends paid
|
|
|
(55 |
) |
|
|
(73 |
) |
|
|
(14 |
) |
Other
|
|
|
6 |
|
|
|
16 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from (used in) financing activities
|
|
$ |
398 |
|
|
$ |
(1,090 |
) |
|
$ |
(382 |
) |
|
|
|
|
|
|
|
|
|
|
We made draws on the accounts receivable securitization program
and the five-year revolving credit facility to meet our working
capital needs during 2005.
During 2005, we refinanced a secured note due in 2007 related to
a DCC investment to a non-recourse note due in August 2010 and
increased the principal outstanding from $40 to $55. The
remainder of our debt transactions in 2005 was generally limited
to $61 of debt repayments, including a $50 scheduled payment at
DCC.
In December 2004, we used $1,086 of cash, including a portion of
the proceeds from the sale of the AAG businesses and the
issuance of $450 of new notes, to repurchase $891 face value of
our March 2010 and August 2011 notes. Prior to the fourth
quarter, we had used available cash to meet scheduled maturities
of long-term debt of $239 on the manufacturing side and $166
within DCC.
34
In 2003, we spent $140 to repurchase notes having a face amount
of $158, generating a pre-tax gain of $15 after considering the
unamortized issuance costs and original issuance discount.
We maintained a quarterly dividend rate of $.12 per share
during the first three quarters of 2005 and all of 2004 before
decreasing the fourth quarter 2005 dividend to $.01. The annual
dividend in 2003 was $.09.
Pre-Petition Financing— Before the Filing Date, we
had a five-year bank facility, maturing on March 4, 2010,
which provided $400 of borrowing capacity. At December 31,
2005, we (excluding DCC) had committed borrowing lines of $942
and uncommitted lines of $241, and our outstanding borrowings
consisted of $377 under the bank facility, $185 under our
accounts receivable securitization program and $25 drawn by
non-U.S. subsidiaries.
Our accounts receivable securitization program provided up to a
maximum of $275 at December 31, 2005 to meet periodic
demand for short-term financing.
We announced in September and October 2005, that we had lowered
our 2005 earnings estimate and that we would establish a
valuation allowance against our U.S. deferred tax assets
and restate our financial statements for the first and second
quarters of 2005 and the years 2002 through 2004. In connection
with those announcements, we obtained waivers under our bank and
accounts receivable agreements of certain covenants, including a
waiver of the financial covenants in the bank facility for the
end of the third quarter of 2005. In the fourth quarter of 2005,
we amended the bank and accounts receivable agreements and
obtained extensions of the existing waivers under these
agreements to May 31, 2006 and certain additional waivers.
We continued working with our bank group during January and
February 2006, with the intention of negotiating a modified or
new credit facility. The failure to reach an agreement on
acceptable terms created liquidity problems that, among other
factors, caused us to file our bankruptcy petition and commence
work on the DIP Credit Agreement described below.
DIP Credit Agreement — On March 3, 2006,
Dana, as borrower, and our debtor U.S. subsidiaries, as
guarantors, entered into a Senior Secured Superpriority
Debtor-in-Possession
Credit Agreement (the DIP facility or the DIP Credit Agreement)
with Citicorp North America, Inc., Bank of America, N.A. and
JPMorgan Chase Bank, N.A., as lenders. The DIP Credit Agreement,
as amended, was approved by the Bankruptcy Court on
March 29, 2006.
The DIP Credit Agreement, as amended, provides for a revolving
credit facility and a term loan facility in an aggregate amount
up to $1,450. We can borrow up to $750 under the revolving
credit facility, of which $400 is available for the issuance of
letters of credit, and $700 under the term loan facility.
Availability under the revolving credit facility is subject to a
borrowing base that includes advance rates relating to the value
of our inventory and accounts receivable. All of the loans and
other obligations under the DIP Credit Agreement will be due and
payable on the earlier of (i) 24 months after the
effective date of the DIP Credit Agreement or (ii) the
consummation of our plan of reorganization under the Bankruptcy
Code. Prior to maturity, we will be required to make mandatory
prepayments under the DIP Credit Agreement in the event that
loans and letters of credit exceed the available commitments,
and from the proceeds of certain asset sales and the issuance of
additional indebtedness. Such prepayments, if required, must be
applied, first, to the term loan facility and, second, to the
revolving credit facility with a permanent reduction in the
amount of the commitments thereunder.
Interest under the DIP Credit Agreement will accrue, at our
option, either at (i) the London interbank offered rate
(LIBOR) plus a per annum margin of 2.25% for both the term
loan facility and the revolving credit facility or (ii) the
prime rate plus a per annum margin of 1.25% for both the term
loan facility and the revolving credit facility. We will pay a
fee for issued and undrawn letters of credit in an amount per
annum equal to the LIBOR margin applicable to the revolving
credit facility. We will also pay a commitment fee of
0.375% per annum for unused committed amounts under the
revolving credit facility.
The DIP Credit Agreement is guaranteed by substantially all of
Dana’s domestic subsidiaries, excluding DCC. As collateral,
Dana and each of its guarantor subsidiaries has granted a
security interest in and
35
lien on effectively all of its assets, including a pledge of 66%
of the equity interests of each material direct foreign
subsidiary owned by Dana and each guarantor subsidiary.
Under the DIP Credit Agreement, Dana Corporation and each of our
subsidiaries (other than certain excluded subsidiaries) are
required to comply with customary covenants for facilities of
this type. These include (i) affirmative covenants as to
corporate existence, compliance with laws, insurance, payment of
taxes, access to books and records, use of proceeds, retention
of a restructuring advisor and financial advisor, maintenance of
cash management systems, use of proceeds, priority of liens in
favor of the lenders, maintenance of properties and monthly,
quarterly, annual and other reporting obligations and
(ii) negative covenants, including limitations on liens,
additional indebtedness, guaranties, dividends, transactions
with affiliates, claims in our bankruptcy proceedings,
investments, asset dispositions, nature of business, payment of
pre-petition obligations, capital expenditures, mergers and
consolidations, amendments to constituent documents, accounting
changes, limitations on restrictions affecting subsidiaries and
sale and lease-backs. Additionally, the DIP Credit Agreement
requires us to maintain, as of the end of each calendar month, a
minimum amount of consolidated earnings before interest, taxes,
depreciation, amortization, restructuring and reorganization
costs and to maintain at all times minimum availability under
the DIP Credit Agreement.
The DIP Credit Agreement includes customary events of default
for facilities of this type, including failure to pay the
principal or other amounts, breach of representations and
warranties, breach of any covenant under the DIP Credit
Agreement, cross-default to other indebtedness, judgment
default, invalidity of any loan document, failure of liens to be
perfected, the occurrence of certain ERISA events, conversion of
our bankruptcy case to a proceeding under Chapter 7 of the
Bankruptcy Code, relief from stay, failure of the financing
order in our bankruptcy case to be in effect, or the occurrence
of a change of control. Upon the occurrence and continuance of
an event of default, our lenders have the right, among other
things, to terminate their commitments under the DIP Credit
Agreement, accelerate the repayment of all of our obligations
under the DIP Credit Agreement and foreclose on the collateral
granted to them.
We expect our cash flows from operations and proceeds from
divestitures, combined with funding available under the DIP
Credit Agreement, to provide sufficient liquidity for the next
twelve months. This includes funding any debt service
obligations under the DIP facility, projected working capital
requirements, realignment obligations, costs associated with the
bankruptcy filing and capital spending.
DCC Notes — Following Dana’s bankruptcy
filing, the holders of a majority of the issued and outstanding
medium term and private placement notes of DCC (the DCC Notes)
formed an Ad Hoc Committee of Noteholders.
Effective April 10, 2006, DCC and the Ad Hoc Committee
entered into a Forbearance Agreement under which members of the
Ad Hoc Committee holding over 70% of the outstanding principal
amount of DCC Notes agreed to work with DCC toward a
restructuring of the DCC Notes and to forbear from exercising
rights and remedies with respect to any default or event of
default that may now exist or may hereafter occur under such
notes. The Forbearance Agreement will terminate 30 days
from its effective date, or sooner upon the occurrence of
certain events specified therein, including the commencement by
DCC of a voluntary Chapter 11 bankruptcy case or the filing
by any party of an involuntary petition for relief against DCC.
As a condition precedent to the effectiveness of the Forbearance
Agreement, DCC agreed not to make any payments of principal or
interest that were due and payable to the holders of certain DCC
Notes as of April 10, 2006. By letter dated as of
April 11, 2006, counsel to Great-West Life &
Annuity Insurance Company and The Great-West Life Assurance
Company, which are noteholders not part of the Ad Hoc Committee,
advised DCC that events of default had occurred under their
respective Note Agreements as a result of DCC’s
failure to pay the principal due as of April 10, 2006 on
the notes issued thereunder and demanded payment of the entire
principal of $7 and interest accrued on such notes.
DCC intends to continue to cooperate with the Ad Hoc Committee
and its other noteholders to complete a restructuring of the DCC
Notes.
36
Debt Reclassification — Our bankruptcy filing
triggered the immediate acceleration of certain of our direct
financial obligations, including, among others, the principal
amounts outstanding (including interest) of the non-secured
notes issued under our Indentures dated as of December 15,
1997; August 8, 2001; March 11, 2002; and
December 10, 2004. Such amounts are characterized as
unsecured debt for purposes of the reorganization proceedings in
the Bankruptcy Court and the related obligations have been
classified as current liabilities in our consolidated balance
sheet as of December 31, 2005. Only the $55 of certain
non-recourse debt and $12 of certain international borrowings
continue to be classified as non-current liabilities.
Swap Agreements — We were a party to two
interest rate swap agreements, expiring in August 2011, under
which we had agreed to exchange the difference between fixed
rate and floating rate interest amounts on notional amounts
corresponding with the amount and term of our August 2011 notes.
Converting the fixed interest rate to a variable rate was
intended to provide a better balance of fixed and variable rate
debt. Both swap agreements had been designated as fair value
hedges of the August 2011 notes. Based on the aggregate fair
value of these agreements, we recorded a $4 non-current
liability at December 31, 2005, which was offset by a
decrease in the carrying value of long-term debt. Additional
adjustments to the carrying value of long-term debt resulted
from the modification or replacement of swap agreements that
generated cash receipts prior to 2004. These valuation
adjustments, which were being amortized as a reduction of
interest expense over the remaining life of the notes, totaled
$5 at December 31, 2005.
As of December 31, 2005, the interest rate swap agreements
provided for us to receive a fixed rate of 9.0% on a notional
amount of $114 and pay variable rates based on LIBOR, plus a
spread; the average variable rate under these contracts
approximated 9.4% at the end of 2005. As a result of our
bankruptcy filing, the two swap agreements were terminated,
resulting in a termination payment of $6 on March 30, 2006.
Cash Obligations — Under various agreements, we
are obligated to make future cash payments in fixed amounts.
These include payments under our long-term debt agreements, rent
payments required under operating lease agreements and payments
for equipment, other fixed assets and certain raw materials. The
following table summarizes our fixed cash obligations over
various future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
|
|
| |
|
|
|
|
Less than | |
|
1-3 | |
|
4-5 | |
|
After | |
Contractual Cash Obligations |
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Principal of long-term debt
|
|
$ |
2,058 |
|
|
$ |
93 |
|
|
$ |
468 |
|
|
$ |
485 |
|
|
$ |
1,012 |
|
Operating leases
|
|
|
521 |
|
|
|
90 |
|
|
|
131 |
|
|
|
90 |
|
|
|
210 |
|
Unconditional purchase obligations
|
|
|
254 |
|
|
|
203 |
|
|
|
39 |
|
|
|
10 |
|
|
|
2 |
|
Other long-term liabilities
|
|
|
1,603 |
|
|
|
374 |
|
|
|
299 |
|
|
|
282 |
|
|
|
648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
4,436 |
|
|
$ |
760 |
|
|
$ |
937 |
|
|
$ |
867 |
|
|
$ |
1,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With our filing under Chapter 11 of the Bankruptcy Code we
are not able to determine the amounts and timing of our
contractual cash obligations. Accordingly, the preceding table
reflects the scheduled maturities based on the original payment
terms specified in the underlying agreement or contract. Future
payment timing and amounts are expected to be modified as a
result of the reorganization under Chapter 11.
The unconditional purchase obligations presented are comprised
principally of commitments for procurement of fixed assets and
the purchase of raw materials.
We have a number of sourcing arrangements with suppliers for
various component parts used in the assembly of certain of our
products. These arrangements include agreements to procure
certain outsourced components that we had manufactured ourselves
in earlier years. These agreements do not contain any specific
minimum quantities that we must order in any given year, but
generally require that we purchase the specific component
exclusively from the supplier over the term of the agreement.
Accord-
37
ingly, our cash obligation under these agreements is not fixed.
However, if we were to estimate volumes to be purchased under
these agreements based on our forecasts for 2006 and assume that
the volumes were constant over the respective contract periods,
the annual purchases from those agreements where we estimate the
annual volume would exceed $20 would be as follows: $529, $371,
$369, $332 and $589 in 2006, 2007, 2008, 2009 and 2010
thereafter.
Other long-term liabilities include estimated obligations under
our retiree healthcare programs, estimated 2006 contribution to
our U.S. defined benefit pension plans and payments under
the long-term agreement with IBM for the outsourcing of certain
human resource services that began in June of 2005. Obligations
under the retiree healthcare programs are not fixed commitments
and will vary depending on various factors, including the level
of participant utilization and inflation. Our estimates of the
payments to be made through 2010 considered recent payment
trends and certain of our actuarial assumptions. We have not
estimated pension contributions beyond 2006 due to the
significant impact that return on plan assets and changes in
discount rates might have on such amounts.
We procure tooling from a variety of suppliers. In certain
instances, in lieu of making progress payments on the tooling,
we may guarantee a tooling supplier’s obligations under its
credit facility secured by the specific tooling purchase order.
Our Board authorization permits us to issue tooling guarantees
up to $80 for these programs. At December 31, 2005, there
was $2 of guarantees outstanding under this program.
We have guaranteed the performance of a wholly-owned
consolidated subsidiary under several operating leases. The
operating leases require the subsidiary to make monthly payments
at specified amounts and guarantee, up to a stated amount, the
residual value of the assets at the end of the lease. The
guarantees are for periods of from five to seven years or until
termination of the lease. We have recorded a liability and
corresponding prepaid amount of $3 relating to these guarantees.
In the event of a default by our subsidiary the parent would be
required to fulfill the obligations under the operating lease.
In the first quarter of 2006, these leases were terminated and
we were released from these guarantees.
At December 31, 2005, we maintained cash balances of $109
on deposit with financial institutions, which may not be
withdrawn, to support surety bonds and provide credit
enhancements for certain lease agreements. These surety bonds
enable us to self-insure our workers compensation obligations.
We accrue the estimated liability for workers compensation
claims, including incurred but not reported claims. Accordingly,
no significant impact on our financial condition would result if
the surety bonds were called.
In connection with certain of our divestitures, there may be
future claims and proceedings instituted or asserted against us
relative to the period of our ownership or pursuant to
indemnifications or guarantees provided in connection with the
respective transactions. The estimated maximum potential amount
of payments under these obligations is not determinable due to
the significant number of divestitures and lack of a stated
maximum liability for certain matters. In some cases, we have
insurance coverage available to satisfy claims related to the
divested businesses. We believe that payments, if any, in excess
of amounts provided or insured related to such matters are not
reasonably likely to have a material adverse effect on our
liquidity, financial condition or results of operations.
Contingencies
Impact of Bankruptcy Filing. On March 3, 2006, the
Debtors filed voluntary petitions for reorganization under
Chapter 11 of the Bankruptcy Code, as discussed in
Item 1. Under the Bankruptcy Code, the filing of the
petitions automatically stays most actions against us.
Substantially all of our pre-petition liabilities will be
resolved under our plan of reorganization unless otherwise
satisfied pursuant to orders of the Bankruptcy Court.
Class Action Lawsuit and Derivative Actions —
Dana and certain of our current and former officers are
defendants in a consolidated class action pending in the
U.S. District Court for the Northern District of Ohio. The
plaintiffs in this action allege violations of the
U.S. securities laws and claim that the price at which
Dana’s shares traded at various times between February 2004
and November 2005 was artificially
38
inflated as a result of the defendants’ alleged wrongdoing.
Three derivative actions are also pending in the same court
naming certain of our directors and current and former officers
as defendants. Among other things, the plaintiffs in these
actions allege breaches of the defendants’ fiduciary duties
to Dana arising from the same facts on which the consolidated
class action is based. Due to the preliminary nature of these
lawsuits, at this time we cannot predict their outcome or
estimate Dana’s potential exposure related thereto. While
we have insurance coverage with respect to these matters and do
not currently believe that any liabilities that may result from
these proceedings are reasonably likely to have a material
adverse effect on our liquidity, financial condition or results
of operations, there can be no assurance that the impact of any
loss not covered by insurance would not be material.
SEC Investigation — In September 2005, we
reported that management was investigating accounting matters
arising out of incorrect entries related to a customer agreement
in our Commercial Vehicle business unit and that our Audit
Committee had engaged outside counsel to conduct an independent
investigation of these matters as well. Outside counsel informed
the SEC of the investigation, which ended in December 2005,
about when we filed restated financial statements for the first
two quarters of 2005 and the years 2002 through 2004. In January
2006, we learned that the SEC had issued a formal order of
investigation with respect to matters related to our
restatements. The SEC’s investigation is a non-public,
fact-finding inquiry to determine whether any violations of the
law have occurred. This investigation has not been suspended as
a result of our bankruptcy filing. We will continue to cooperate
fully with the SEC in the investigation.
Legal Proceedings Arising in the Ordinary Course of
Business — 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
environmental laws. We have reviewed these pending legal
proceedings, including the probable outcomes, our reasonably
anticipated costs and expenses, the availability and limits of
our insurance coverage and surety bonds 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 adverse effect on our
liquidity, financial condition or results of operations.
Asbestos-Related Product Liabilities — Under
the Bankruptcy Code, pending asbestos-related product liability
lawsuits are stayed during our reorganization process, and
claimants may not commence new lawsuits against us on account of
pre-petition claims. However, proofs of additional asbestos
claims may be filed in the Bankruptcy Cases either voluntarily
by claimants or if a bar date is established for asbestos
claims. Our obligations with respect to asbestos claims will be
resolved pursuant to our plan of reorganization or otherwise
resolved pursuant to order(s) of the Bankruptcy Court.
We had approximately 77,000 active pending asbestos-related
product liability claims at December 31, 2005, compared to
116,000 at December 31, 2004, including at both dates
10,000 claims that were settled but awaiting final documentation
and payment. The reduced number of active pending claims at
December 31, 2005, was due primarily to the effect of tort
reform legislation or medical criteria orders entered in various
courts. During the year, these factors resulted in a reduction
of approximately 20,000 claims in Texas, 12,000 claims in
Mississippi and 9,000 claims in Ohio. We had accrued $98 for
indemnity and defense costs for pending asbestos-related product
liability claims at December 31, 2005, compared to $139 at
December 31, 2004. We accrue for pending claims based on
our claims settlement and dismissal history.
In the past, we accrued only for pending asbestos-related
product liability claims because we did not believe our
historical trend data was sufficient to provide us with a
reasonable basis to estimate potential costs for future demands.
However, more recently, our claims activity has become more
stable following the dissolution of the Center for Claims
Resolution (CCR), as described below, the implementation of our
post-CCR legal and settlement strategy and legislative actions
that have reduced the volume of claims in the legal system. In
the third quarter of 2005, we concluded that our historical
claims activity had stabilized over a sufficient duration of
time to enable us to project possible future demands and related
costs. Therefore, in consultation with Navigant Consulting, Inc.
(a specialized consulting firm providing dispute,
39
financial, regulatory and operational advisory services), we
analyzed our potential future costs for such claims. Based on
this analysis, we estimated our potential liability for the next
fifteen years to be within a range of $70 to $120. Since the
outcomes within that range are equally probable, we accrued the
lower end of the range at December 31, 2005. Beyond fifteen
years, we believe there are reasonable scenarios in which our
expenditures related to asbestos-related product liability
claims would be de minimis; however, the process of estimating
future demands is highly uncertain. The effect on earnings of
recording the $70 was offset by our estimate of the portion of
this liability that we expect to recover under our insurance
policies and through amounts received from insurance settlements
that had been deferred. During the third quarter, we also
reduced our estimated liability for pending claims, and our
expected insurance recovery, for the decrease in active claims
outstanding. These items resulted in an increase in pre-tax
income of approximately $3 during the third quarter.
Generally accepted methods of projecting future asbestos-related
product claims and costs require a complex modeling of data and
assumptions about occupational exposures, disease incidence,
mortality, litigation patterns and strategy and settlement
values. Although we do not believe that our products have ever
caused any asbestos-related diseases, for modeling purposes we
combined historical data relating to claims filed against us
with labor force data in an epidemiological model, in order to
project past and future disease incidence and resulting claims
propensity. Then we compared our claims history to historical
incidence estimates and applied these relationships to the
projected future incidence patterns, in order to estimate future
compensable claims. We then established a cost for such claims,
based on historical trends in claim settlement amounts. In
applying this methodology, we made a number of key assumptions,
including labor force exposure, the calibration period, the
nature of the diseases and the resulting claims that might be
made, the number of claims that might be settled, the settlement
amounts and the defense costs we might incur. Given the inherent
variability of our key assumptions, the methodology produced the
range of estimated potential values described above.
At December 31, 2005, we had recorded $78 as an asset for
probable recovery from our insurers for both the pending and
projected claims, compared to $118 recorded at December 31,
2004, solely for pending claims. During the second quarter of
2005, we received the final payment due us under an insurance
settlement agreement that we had entered into with some of our
carriers in December 2004. The asset recorded at
December 31, 2005 reflects our assessment of the capacity
of our remaining insurance agreements to provide for the payment
of anticipated defense and indemnity costs for pending claims
and future demands, assuming elections under our existing
coverage, which we intend to adopt in order to maximize our
insurance recovery.
Proceeds from insurance commutations are first applied to reduce
any recorded recoverable amount. Any excess over the recoverable
amount will be evaluated to assess whether any portion of the
excess represents payments by the insurer for potential future
liability. In October 2005, we signed a settlement agreement
with another of our insurers providing for us to receive cash
payments of $8 in 2006 in exchange for the release of all rights
to coverage for asbestos-related bodily injury claims under the
settled insurance policies. We recorded a receivable for this
amount at December 31, 2005, of which $2 was used to reduce
receivables related to pending and unasserted claims and the
balance was recorded as deferred income available for potential
future liabilities.
In addition, we had a net amount recoverable from our insurers
and others of $15 at December 31, 2005, compared to $26 at
December 31, 2004. This recoverable represents
reimbursements for settled asbestos-related product liability
claims, including billings in progress and amounts subject to
alternate dispute resolution proceedings with some of our
insurers. During the reorganization process, all asbestos
litigation is stayed. As a result, we do not expect to make any
asbestos payments in the near term. However, we are continuing
to pursue insurance collections with respect to asbestos-related
amounts paid prior to the Filing Date.
Other Product Liabilities — We had accrued $13
for contingent non-asbestos product liability costs at
December 31, 2005, compared to $11 at December 31,
2004, with no recovery expected from third parties at either
date. We estimate these liabilities based on assumptions about
the value of the claims and
40
about the likelihood of recoveries against us, derived from our
historical experience and current information. If there is a
range of equally probable outcomes, we accrue the lower end of
the range. The difference between our minimum and maximum
estimates for these liabilities was $10 at both dates.
Environmental Liabilities — We had accrued $63
for contingent environmental liabilities at December 31,
2005, compared to $73 at December 31, 2004. We estimate
these liabilities 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, we accrue the lower
end of the range. The difference between our minimum and maximum
estimates for these liabilities was $1 at both dates.
Included in these accruals are amounts relating to the Hamilton
Avenue Industrial Park Superfund site in New Jersey, where we
are presently one of four potentially responsible parties
(PRPs). We estimate our liability for this site quarterly. There
have been no material changes in the facts underlying these
estimates since December 31, 2004 and, accordingly, our
estimated liabilities for the three Operable Units at this site
at December 31, 2005 remained unchanged and were as follows:
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Unit 1 — $1 for future remedial work and past costs
incurred by the United States Environmental Protection Agency
(EPA) relating to off-site soil contamination, based on the
remediation performed at this Unit to date and our assessment of
the likely allocation of costs among the PRPs; |
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• |
Unit 2 — $14 for future remedial work relating to
on-site soil
contamination, taking into consideration the $69 remedy proposed
by the EPA in a Record of Decision issued in September 2004 and
our assessment of the most likely remedial activities and
allocation of costs among the PRPs; and |
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• |
Unit 3 — less than $1 for the costs of a remedial
investigation and feasibility study pertaining to groundwater
contamination, based on our expectations about the study that is
likely to be performed and the likely allocation of costs among
the PRPs. |
Other Liabilities Related to Asbestos Claims —
Until 2001, most of our asbestos-related claims were
administered, defended and settled by the CCR, which settled
claims for its member companies on a shared settlement cost
basis. In that year, the CCR was reorganized and discontinued
negotiating shared settlements. Since then, we have
independently controlled our legal strategy and settlements,
using Peterson Asbestos Consulting Enterprise (PACE), a unit of
Navigant Consulting, Inc., to administer our claims, bill our
insurance carriers and assist us in claims negotiation and
resolution. Some former CCR members defaulted on the payment of
their shares of some of the CCR-negotiated settlements and some
of the settling claimants have sought payment of the unpaid
shares from Dana and the other companies that were members of
the CCR at the time of the settlements. We have been working
with the CCR, other former CCR members, our insurers and the
claimants over a period of several years in an effort to resolve
these issues. Through December 31, 2005, we had paid $47 to
claimants and collected $29 from our insurance carriers with
respect to these claims. At December 31, 2005, we had a net
receivable of $13 that we expect to recover from available
insurance and surety bonds relating to these claims. We are
continuing to pursue insurance collections with respect to
asbestos-related amounts paid prior to the filing of our
bankruptcy petition.
Assumptions — The amounts we have recorded for
contingent asbestos-related liabilities and recoveries are based
on assumptions and estimates reasonably derived from our
historical experience and current information. The actual amount
of our liability for asbestos-related claims and the effect on
us could differ materially from our current expectations if our
assumptions about the outcome of the pending unresolved bodily
injury claims, the volume and outcome of projected future bodily
injury claims, the outcome of claims relating to the
CCR-negotiated settlements, the costs to resolve these claims
and the amount of available insurance and surety bonds prove to
be incorrect, or if currently proposed U.S. federal
legislation impacting asbestos personal injury claims is
enacted. In particular, although we have projected our liability
for asbestos-related product liability claims that may be
brought against us in the future based upon historical trend
data that we deem to be reliable, there can be no assurance that
our actual liability will not differ significantly from what we
currently project.
41
Critical Accounting Estimates
The following discussion of accounting estimates is intended to
supplement the Summary of Significant Accounting Policies
presented as Note 1 to the consolidated financial
statements. These estimates were selected because they are
broadly applicable within our operating units. In addition,
these estimates are subject to a range of amounts because of
inherent imprecision that may result from applying judgment to
the estimation process. The expenses and accrued liabilities or
allowances related to certain of these policies are initially
based on our best estimates at the time of original entry in our
accounting records. Adjustments are recorded when our actual
experience differs from the expected experience underlying the
estimates. These adjustments could be material if our experience
were to change significantly in a short period of time. We make
frequent comparisons of actual experience and expected
experience in order to mitigate the likelihood of material
adjustments.
Asset Impairment — We perform periodic
impairment analyses on our long-lived assets such as property,
plant and equipment, carrying amount of investments and
goodwill. We also evaluate the carrying amount of our
inventories on a recurring basis for impairment due to lower of
cost or market issues and for excess or obsolete quantities.
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” we perform impairment
analyses of our recorded long-lived assets whenever events and
circumstances indicate that the carrying amount of such assets
may not be recoverable. Recoverability of these assets is
determined by comparing the forecasted undiscounted net cash
flows of the operation to which the assets relate to their
carrying amount. If the operation is determined to be unable to
recover the carrying amount of its assets, the long-lived assets
of the operation (excluding goodwill), are written down to fair
value. Fair value is determined based on discounted cash flows,
or other methods providing best estimates of value. During 2005,
2004 and 2003 we recorded long-lived tangible asset impairment
provisions in continuing operations of $23, $14 and $2 which
resulted in part from excess capacity caused by the downturn in
our markets and the resulting restructuring of our operations.
With respect to discontinued operations, we recorded additional
long-lived asset provisions of $207, $15 and $6 in 2005, 2004
and 2003. See Note 15 to our consolidated financial
statements for additional information.
In March 2005, the Financial Accounting Standards Board
(FASB) issued Financial Interpretation No. 47
(FIN 47), “Accounting for Conditional Asset Retirement
Obligations.” FIN 47 is an interpretation of
SFAS No. 143, “Accounting for Asset Retirement
Obligations,” and clarifies that liabilities associated
with asset retirement obligations whose timing or settlement
method are conditional upon future events should be recognized
at fair value as soon as fair value is reasonably estimable.
FIN 47 also provides guidance on the information required
to reasonably estimate the fair value of the liability. Our
adoption of FIN 47 during the fourth quarter of 2005
resulted in an after tax charge of $2 recorded as a Change in
accounting on our Consolidated Statement of Income. A
conditional asset retirement obligation of $3 and an associated
asset of $1, net of accumulated depreciation of less than $1
were recorded at December 31, 2005. If the provisions of
FIN 47 had been applied retrospectively to
December 31, 2004 and 2003, a liability of $3 would have
been recorded at both dates. An asset of less than $1, net of
accumulated depreciation, would have been recorded at both
December 31, 2004 and 2003. Accretion and depreciation
expense, on an after-tax basis, for years ending
December 31, 2005, 2004 and 2003 would have been less than
$1 during each period.
Goodwill and Other Intangible Assets — In
assessing the recoverability of goodwill, projections regarding
estimated future cash flows and other factors are made to
determine the fair value of the respective assets. If these
estimates or related projections change in the future, we may be
required to record additional charges to reflect impairment of
the associated goodwill. In 2005, we recorded goodwill
impairment charges of $83 and $53 in discontinued and continuing
operations. There was no goodwill impairment in 2004 or 2003.
See Note 15 for additional information.
SFAS No. 142 also applies to other intangible assets.
We did not have a significant amount of intangible assets other
than goodwill at December 31, 2005 and 2004.
42
Inventories — Inventories are valued at the
lower of cost or market. Cost is generally determined on the
last-in, first-out
basis for U.S. inventories and on the
first-in, first-out or
average cost basis for
non-U.S. inventories.
Where appropriate, standard cost systems are utilized for
purposes of determining cost; the standards are adjusted as
necessary to ensure they approximate actual costs. Estimates of
lower of cost or market value of inventory are determined at the
plant level and are based upon the inventory at that location
taken as a whole. These estimates are based upon current
economic conditions, historical sales quantities and patterns
and, in some cases, the specific risk of loss on specifically
identified inventories.
We also evaluate inventories on a regular basis to identify
inventory on hand that may be obsolete or in excess of current
and future projected market demand. For inventory deemed to be
obsolete, we provide a reserve on the full value of the
inventory. Inventory that is in excess of current and projected
use is reduced by an allowance to a level that approximates our
estimate of future demand.
Warranty — In June 2005, we changed our method
of accounting for warranty liabilities from estimating the
liability based on the credit issued to the customer, to
accounting for the warranty liabilities based on our costs to
settle the claim. Management believes that this is a change to a
preferable method in that it more accurately reflects the cost
of settling the warranty liability. In accordance with GAAP, the
$6 pre-tax cumulative effect of the change was effective as of
January 1, 2005 and was reflected in the financial
statements for the three months ended March 31, 2005. In
the third quarter of 2005, the previously recorded tax expense
of $2 was offset by the valuation allowance established against
our U.S. net deferred tax assets.
Estimated costs related to product warranty are accrued at the
time of sale and included in cost of sales. These costs are then
adjusted, as required, to reflect subsequent experience.
Warranty expense totaled $64, $35 and $31 in 2005, 2004 and
2003. No warranty expense was incurred in discontinued
operations in 2005. Warranty charges in discontinued operations
amounted to $1 in 2004 and $3 in 2003. Accrued liabilities for
warranty obligations were $91 and $80 at December 31, 2005
and 2004.
Pension and Postretirement Benefits Other Than
Pensions — Annual net periodic expense and benefit
liabilities under our defined benefit plans are determined on an
actuarial basis. Each year, we compare the actual experience to
the more significant assumptions used; if warranted, we make
adjustments to the assumptions. The healthcare trend rates are
reviewed with our actuaries based upon the results of their
review of claims experience. Discount rates are based upon
amounts determined by matching expected benefit payments to a
yield curve for high-quality fixed-income investments. Pension
benefits are funded through deposits with trustees and satisfy,
at a minimum, the applicable funding regulations. The expected
long-term rates of return on fund assets are based upon actual
historical returns modified for known changes in the markets and
any expected changes in investment policy. Postretirement
benefits are not funded, with our policy being to pay these
benefits as they become due.
Certain accounting guidance, including the guidance applicable
to pensions, does not require immediate recognition of the
effects of a deviation between actual and assumed experience or
the revision of an estimate. This approach allows the favorable
and unfavorable effects that fall within an acceptable range to
be netted. Although this netting occurs outside the basic
financial statements, the net amount is disclosed as an
unrecognized gain or loss in the notes to our financial
statements. We had unrecognized losses related to our pension
plans of $746 and $593 in 2005 and 2004. The increase in the
unrecognized actuarial loss for the past two years is primarily
attributed to changing the discount rate, as discussed below. A
portion of the December 31, 2005 unrecognized loss will be
amortized into earnings in 2006. The effect on years after 2006
will depend in large part on the actual experience of the plans
in 2006 and beyond.
Our pension plan discount rate assumption is evaluated annually.
Long-term interest rates on high quality debt instruments, which
are used to determine the discount rate, were down slightly in
2005 after declining more significantly in 2004. Accordingly, we
reduced the discount rate used to determine our pension benefit
obligation on our U.S. plans 10 basis points in 2005
and 50 basis points in 2004. We utilized a composite
discount rate of 5.65% at December 31, 2005 compared to a
rate of 5.75% at
43
December 31, 2004 and 2003. In addition, the weighted
average discount rate utilized by our
non-U.S. plans was
also reduced, moving to 4.7% at December 31, 2005 from 5.5%
and 5.6% at December 31, 2004 and 2003. Overall, a change
in the discount rate of 25 basis points would result in a
change in our obligation of approximately $57 and a change in
pension expense of approximately $3.
Besides evaluating the discount rate used to determine our
pension obligation, we also evaluate our assumption relating to
the expected return on U.S. plan assets annually. The rate
of return assumption for U.S. plans as of December 31,
2005 and 2004 was 8.5% and 8.8%. The weighted average expected
rate of return assumption used for determining pension expense
of our
non-U.S. plans in
2005 and 2004 was 6.4% and 6.7%. The weighted average expected
rate of return assumption as of December 31, 2005 will be
used to determine pension expense for
non-U.S. plans in
2006. A 25 basis point change in the rate of return would
change pension expense by approximately $5.
We expect that the 2006 pension expense of U.S. plans,
after considering all relevant assumptions, will decrease by
approximately $8 to $20 when compared to the amount of $12
recognized in 2005, which included $13 of curtailment and
settlement charges.
The minimum pension liability increased by $161 during 2005,
principally in the U.S., Germany and the U.K. primarily as a
result of the decline in the discount rates used to determine
our pension obligations at December 31, 2005. The $222
decrease in the minimum pension liability in 2004 is primarily
due to increases in investment returns, primarily in the U.S.,
Canada and the U.K., and an additional $198 contributed to our
plans following the completion of the AAG divestiture. We made
contributions of $80 and $289 to our pension plans in 2005 and
2004, including $41 and $196 to U.S. plans.
Assumptions are also a key determinant in the amount of the
obligation and expense recorded for postretirement benefits
other than pension (OPEB). Nearly 94% of the total obligation
for these postretirement benefits relates to U.S. plans.
The discount rate used to determine the obligation for these
benefits decreased to 5.6% at December 31, 2005 from 5.8%
at December 31, 2004. If there were a 25 basis point
change in the discount rate, our OPEB expense would change by $2
and our obligation would change by $40. The healthcare costs
trend rate is an important assumption in determining the amount
of the OPEB obligation. We decreased the initial weighted
healthcare cost trend rate to 9.0% at December 31, 2005
from 10.3% and 11.8% at December 31, 2004 and 2003. Similar
to the accounting for pension plans, actuarial gains and losses
related to OPEB liabilities may be deferred. Unrecognized OPEB
losses totaled $758 and $802 at the end of 2005 and 2004.
The OPEB obligation decreased to $1,669 at December 31,
2005 from $1,746 and $1,759 at December 31, 2004 and 2003.
Plan amendments reduced our obligation by $35 in 2005 and $121
in 2003. Also, in January 2005, the Center for Medicare and
Medicaid Services released final regulations to implement the
new prescription drug benefits under Part D of Medicare.
The effect of final regulations was a further reduction of $5 in
2005 expense and a further reduction in the accumulated pension
benefit obligation (APBO) by $43. The initial effect of the
subsidy was a $68 reduction in our APBO at January 1, 2004
and a corresponding actuarial gain, which we deferred in
accordance with our accounting policy related to retiree benefit
plans. Amortization of the actuarial gain, along with a
reduction in service and interest costs, increased net income by
$8 in 2004.
OPEB expense was $131, $143 and $158 in 2005, 2004 and 2003. If
there were a 100 basis point increase in the assumed
healthcare trend rates, our OPEB expense would increase by $7
and our obligation would increase by $110. If there were a
100 basis point decrease in the trend rates, our OPEB
expense would decrease by $6 and our obligation would decrease
by $93.
Income Taxes — Accounting for income taxes
involves matters that require estimates and the application of
judgment. These include an evaluation of the realization of the
recorded deferred tax benefits and assessment of potential tax
liability relating to areas of potential dispute with various
taxing regulatory agencies. We have operations in numerous
jurisdictions around the world, each with its own unique tax
laws and regulations. This adds further complexity to the
process of accounting for income taxes. Our
44
income tax estimates are adjusted in light of changing
circumstances, such as the progress of our tax audits and our
evaluations of the realization of our tax assets.
During the third quarter of 2005, Dana recorded a non-cash
charge of $918 to establish a full valuation allowance against
our net deferred tax assets in the U.S. and U.K. This charge
included $817 of net deferred tax assets of continuing
operations and $8 of deferred tax assets of discontinued
operations as of the beginning of the year. Dana’s income
tax expense for 2005 includes $100 of income tax expense
primarily related to foreign countries whose results continue to
be tax-effected due to their ongoing profitability.
In assessing the need for additional valuation allowances during
the third quarter of 2005, we considered the impact of the
revised outlook of our profitability in the U.S. on our
2005 operating results. The revised outlook of profitability was
due in part to the lower than previously anticipated levels of
performance, resulting from manufacturing inefficiencies and our
failure to achieve projected cost reductions, as well as
higher-than-expected costs for steel, other raw materials and
energy which we have not been able to recover fully. In light of
these developments, there was sufficient negative evidence and
uncertainty as to our ability to generate the necessary level of
U.S. taxable earnings to realize our deferred tax assets in
the U.S. for us to conclude, in accordance with the
requirements of SFAS No. 109 and our accounting
policies, that a full valuation allowance against the net
deferred tax asset was required. Additionally, we concluded that
an additional valuation allowance was required for deferred tax
assets in the U.K. where recoverability was also considered
uncertain. In reviewing our results for the fourth quarter of
2005 and beyond, we concluded that there were no further changes
to our previous assessments as to the realization of our other
deferred tax assets.
Our deferred tax assets include benefits expected from the
utilization of net operating loss, capital loss and credit
carryforwards in the future. Due to time limitations on the
ability to realize the benefit of the carryforwards, additional
portions of these deferred tax assets may become unrealizable in
the future. See additional discussion of our deferred tax assets
and liabilities in Note 12 to our consolidated financial
statements.
Contingency Reserves — We have numerous other
loss exposures, such as environmental claims, product liability
and litigation. Establishing loss reserves for these matters
requires the use of estimates and judgment in regards to risk
exposure and ultimate liability. We estimate losses under the
programs using consistent and appropriate methods; however,
changes to our assumptions could materially affect our recorded
liabilities for loss.
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Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
We are exposed to various types of market risks including
fluctuations in foreign currency exchange rates, adverse
movements in commodity prices for products we use in our
manufacturing and adverse changes in interest rates. To reduce
our exposure to these risks, we maintain risk management
controls to monitor these risks and take appropriate actions to
attempt to mitigate such forms of market risks.
Foreign currency exchange rate risks — Our
operating results may be impacted by buying, selling and
financing in currencies other than the functional currency of
our operating companies. We focus on natural hedging techniques
which include the following: 1) structuring foreign
subsidiary balance sheets with appropriate levels of debt to
reduce subsidiary net investments and subsidiary cash flow
subject to conversion risk, 2) avoidance of risk by
denominating contracts in the appropriate functional currency
and 3) managing cash flows on a net basis (both in timing
and currency) to minimize the exposure to foreign currency
exchange rates.
After considering natural hedging techniques, some portions of
remaining exposure, especially for anticipated inter-company and
third party commercial transaction exposure in the short term,
are considered for hedging using financial derivatives, such as
foreign currency exchange rate forwards. We were party to
foreign currency contracts for short-term anticipated
transactions in U.S. dollars, British pounds, Slovakian
krona and euros at the end of 2005.
45
In addition to the transactional exposure discussed above, our
operating results are impacted by the translation of our foreign
operating income into U.S. dollars (“translation
exposure”). We do not enter into foreign exchange contracts
to mitigate translation exposure.
Interest Rate Risk — We manage interest rate
exposure by using a combination of fixed- and variable-rate debt
and interest rate swaps. At December 31, 2005, we were
party to two interest rate swap agreements related to our
remaining August 2001 U.S. dollar notes. These agreements
effectively convert the fixed interest rates of those notes to a
variable interest rate in order to provide a better balance of
fixed and variable rate debt. Further disclosures are provided
in Note 9 to our consolidated financial statements.
Risk From Adverse Movements In Commodity
Prices — The company purchases certain raw
materials, including steel and other metals, which are subject
to price volatility caused by unpredictable factors. Higher
costs of raw materials and other commodities used in the
production process have had a significant adverse impact on our
operating results in 2005, with steel prices reducing profit by
$209, as measured against 2003 year-end price levels. We
have taken actions to mitigate the impact, which include
cost-reduction programs, consolidation of our supply base and
negotiating fixed price supply contracts with our commodity
suppliers. In addition, the sharing of increased raw material
costs has been, and will continue to be, the subject of
negotiations with our customers. No assurances can be given that
the magnitude and duration of these increased costs will not
have a material impact on our future operating results. We were
not party to any financial derivative transactions at
December 31, 2005 to hedge commodity price movements.
46
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Item 8. |
Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Dana Corporation
We have completed integrated audits of Dana Corporation’s
2005 and 2004 consolidated financial statements, and of its
internal control over financial reporting as of
December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
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Consolidated financial statements and financial statement
schedule |
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Dana
Corporation and its subsidiaries at December 31, 2005 and
2004, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements 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.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 17 to the consolidated
financial statements, the Company voluntarily filed for
Chapter 11 bankruptcy protection on March 3, 2006.
This action, which was taken primarily as a result of liquidity
issues as discussed in Note 17 to the consolidated
financial statements, raises substantial doubt about the
Company’s ability to continue as a going concern.
Management’s plan in regard to this matter is also
described in Note 17. The consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 14 to the consolidated financial
statements, the Company changed its method of accounting for
warranty liabilities effective January 1, 2005. As
discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
asset retirement obligations in 2005.
|
|
|
Internal control over financial reporting |
Also, we have audited management’s assessment, included in
Management’s Report on Internal Control Over Financial
Reporting appearing under Item 9A, that Dana Corporation
did not maintain effective internal control over financial
reporting as of December 31, 2005 because of the effect of
the material weaknesses relating to: (1) the lack of an
effective control environment at its Commercial Vehicle business
unit, (2) the financial and accounting organization not
being adequate to support its financial accounting and reporting
needs, (3) the lack of effective controls over the
completeness and accuracy of certain revenue and expense
accruals, (4) the lack of effective controls over
reconciliations of certain financial statement accounts,
(5) the lack of effective controls over the valuation and
accuracy of long-lived assets
47
and goodwill, and (6) the lack of effective segregation of
duties over automated and manual transaction processes, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions
on management’s assessment and on the effectiveness of the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in management’s assessment as of December 31, 2005:
(1) The Company did not maintain an effective control
environment at the Commercial Vehicle business unit.
Specifically, there were inadequate controls to prevent,
identify and respond to improper intervention or override of
established policies, procedures and controls by management
within the Commercial Vehicle business unit. This improper
management intervention and override at this business unit
allowed the improper recording of certain transactions with
respect to asset sale contracts, supplier cost recovery
arrangements and contract pricing changes to achieve accounting
results that were not in accordance with GAAP and journal
entries which were not appropriately supported or documented.
Additionally, financial personnel in the unit failed to report
instances of inappropriate conduct and potential financial
impropriety to senior financial management outside the unit.
This control deficiency primarily affected accounts receivable,
accounts payable, accrued liabilities, revenue, other income,
and other direct expenses.
(2) The Company’s financial and accounting
organization was not adequate to support its financial
accounting and reporting needs. Specifically, lines of
communication between the Company’s operations, accounting
and finance personnel were not adequate to raise issues to the
appropriate level of
48
accounting personnel and the Company did not maintain a
sufficient complement of personnel with an appropriate level of
accounting knowledge, experience and training in the application
of GAAP commensurate with the Company’s financial reporting
requirements. This control deficiency resulted in ineffective
controls over the accurate and complete recording of certain
customer contract pricing changes and asset sale contracts (both
within and outside of the Commercial Vehicle business unit) to
ensure they were accounted for in accordance with GAAP. The lack
of a sufficient complement of personnel with an appropriate
level of accounting knowledge, experience and training
contributed to the control deficiencies discussed in items 3
through 6 below.
(3) The Company did not maintain effective controls over
the completeness and accuracy of certain revenue and expense
accruals. Specifically, the Company failed to identify,
analyze, and review certain accruals at period end relating to
certain accounts receivable, accounts payable, accrued
liabilities, revenue, and other direct expenses to ensure that
they were accurately, completely and properly recorded.
(4) The Company did not maintain effective controls over
reconciliations of certain financial statement accounts.
Specifically, the Company’s controls over the preparation,
review and monitoring of account reconciliations primarily
related to certain inventory, accounts payable, accrued expenses
and the related income statement accounts and certain
inter-company balances were ineffective to ensure that account
balances were accurate and supported with appropriate underlying
detail, calculations or other documentation, and that
inter-company balances appropriately eliminate.
(5) The Company did not maintain effective controls over
the valuation and accuracy of long lived assets and
goodwill. Specifically, the Company did not maintain
effective controls to identify the deterioration in fourth
quarter operating results as a condition that triggered a
requirement to assess long-lived assets for impairment. Also,
certain plants did not maintain effective controls to identify
impairment of idle assets in a timely manner. Further, the
Company did not maintain effective controls to ensure goodwill
impairment calculations were accurate and supported with
appropriate underlying documentation, including the
determination of net book value and fair value of reporting
units.
(6) The Company did not maintain effective segregation
of duties over automated and manual transaction processes.
Specifically, certain information technology personnel had
unrestricted access to financial applications, programs and data
beyond that needed to perform their individual job
responsibilities and without adequate independent monitoring. In
addition, certain personnel with financial responsibilities for
purchasing, payables and sales had incompatible duties that
allowed for the creation, review and processing of certain
financial data without adequate independent review and
authorization. This control deficiency primarily affects
revenue, accounts receivable and accounts payable.
Each of the control deficiencies described in 1 through 4 above
resulted in the restatement of the Company’s annual
consolidated financial statements for 2004, each of the interim
periods in 2004 and the first and second quarters of 2005, as
well as adjustments, including audit adjustments, to the
Company’s third quarter 2005 consolidated financial
statements. Each of the control deficiencies described in 2
through 4 above resulted in the restatement of the
Company’s annual consolidated financial statements for 2003
and 2002. The control deficiency described in 5 above resulted
in audit adjustments to the 2005 annual consolidated financial
statements. Additionally, each of the control deficiencies
described in 1 through 6 above could result in a misstatement of
the aforementioned accounts or disclosures that would result in
a material misstatement in the Company’s annual or interim
consolidated financial statements that would not be prevented or
detected.
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the 2005 consolidated financial statements, and our opinion
regarding the effectiveness of the Company’s internal
control over financial reporting does not affect our opinion on
those consolidated financial statements.
49
In our opinion, management’s assessment that Dana
Corporation did not maintain effective internal control over
financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on criteria established
in Internal Control — Integrated Framework
issued by the COSO. Also, in our opinion, because of the
effects of the material weaknesses described above on the
achievement of the objectives of the control criteria, Dana
Corporation has not maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control —
Integrated Framework issued by the COSO.
/s/ PricewaterhouseCoopers LLP
Toledo, Ohio
April 27, 2006
50
Dana Corporation Consolidated Statement of Income
For the years ended December 31, 2005, 2004 and 2003
(In millions except per-share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
$ |
8,611 |
|
|
$ |
7,775 |
|
|
$ |
6,714 |
|
Revenue from lease financing
|
|
|
15 |
|
|
|
18 |
|
|
|
42 |
|
Other income (expense), net
|
|
|
73 |
|
|
|
(103 |
) |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
8,699 |
|
|
|
7,690 |
|
|
|
6,860 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
8,205 |
|
|
|
7,189 |
|
|
|
6,123 |
|
|
|
Selling, general and administrative expenses
|
|
|
500 |
|
|
|
416 |
|
|
|
452 |
|
|
|
Realignment charges
|
|
|
58 |
|
|
|
44 |
|
|
|
|
|
|
|
Goodwill Impairment
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
168 |
|
|
|
206 |
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
8,984 |
|
|
|
7,855 |
|
|
|
6,798 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(285 |
) |
|
|
(165 |
) |
|
|
62 |
|
Income tax (expense) benefit
|
|
|
(924 |
) |
|
|
205 |
|
|
|
52 |
|
Minority interest
|
|
|
(6 |
) |
|
|
(5 |
) |
|
|
(7 |
) |
Equity in earnings of affiliates
|
|
|
40 |
|
|
|
37 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(1,175 |
) |
|
|
72 |
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
|
|
(441 |
) |
|
|
17 |
|
|
|
117 |
|
Income tax benefit (expense)
|
|
|
7 |
|
|
|
(27 |
) |
|
|
(44 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
(434 |
) |
|
|
(10 |
) |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before effect of change in accounting
|
|
|
(1,609 |
) |
|
|
62 |
|
|
|
228 |
|
Effect of change in accounting
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(1,605 |
) |
|
$ |
62 |
|
|
$ |
228 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before effect of change
in accounting
|
|
$ |
(7.86 |
) |
|
$ |
0.48 |
|
|
$ |
1.05 |
|
Income (loss) from discontinued operations
|
|
|
(2.90 |
) |
|
|
(0.07 |
) |
|
|
0.49 |
|
Effect of change in accounting
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(10.73 |
) |
|
$ |
0.41 |
|
|
$ |
1.54 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before effect of change
in accounting
|
|
$ |
(7.86 |
) |
|
$ |
0.48 |
|
|
$ |
1.04 |
|
Income (loss) from discontinued operations
|
|
|
(2.90 |
) |
|
|
(0.07 |
) |
|
|
0.49 |
|
Effect of change in accounting
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(10.73 |
) |
|
$ |
0.41 |
|
|
$ |
1.53 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared and paid per common share
|
|
$ |
0.37 |
|
|
$ |
0.48 |
|
|
$ |
0.09 |
|
Average shares outstanding — basic
|
|
|
150 |
|
|
|
149 |
|
|
|
148 |
|
Average shares outstanding — diluted
|
|
|
151 |
|
|
|
151 |
|
|
|
149 |
|
The accompanying notes are an integral part of the consolidated
financial statements.
51
Dana Corporation Consolidated Balance Sheet
December 31, 2005 and 2004
(In millions, except par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Assets |
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
762 |
|
|
$ |
634 |
|
Accounts receivable
|
|
|
|
|
|
|
|
|
|
Trade, less allowance for doubtful accounts of $22 —
2005 and $39 — 2004
|
|
|
1,064 |
|
|
|
1,254 |
|
|
Other
|
|
|
244 |
|
|
|
437 |
|
Inventories
|
|
|
664 |
|
|
|
898 |
|
Assets of discontinued operations
|
|
|
549 |
|
|
|
|
|
Other current assets
|
|
|
141 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
3,424 |
|
|
|
3,408 |
|
Goodwill
|
|
|
439 |
|
|
|
593 |
|
Investments and other assets
|
|
|
1,077 |
|
|
|
1,857 |
|
Investments in equity affiliates
|
|
|
818 |
|
|
|
990 |
|
Property, plant and equipment, net
|
|
|
1,628 |
|
|
|
2,171 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
7,386 |
|
|
$ |
9,019 |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
Current liabilities
|
|
|
|
|
|
|
|
|
Notes payable, including current portion of long-term debt
|
|
$ |
2,578 |
|
|
$ |
155 |
|
Accounts payable
|
|
|
948 |
|
|
|
1,330 |
|
Accrued payroll and employee benefits
|
|
|
378 |
|
|
|
378 |
|
Liabilities of discontinued operations
|
|
|
229 |
|
|
|
|
|
Other accrued liabilities
|
|
|
475 |
|
|
|
611 |
|
Taxes on income
|
|
|
284 |
|
|
|
199 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,892 |
|
|
|
2,673 |
|
Deferred employee benefits and other noncurrent liabilities
|
|
|
1,798 |
|
|
|
1,759 |
|
Long-term debt
|
|
|
67 |
|
|
|
2,054 |
|
Minority interest in consolidated subsidiaries
|
|
|
84 |
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,841 |
|
|
|
6,608 |
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, shares authorized, 350; shares
issued, 150 — 2005 and 150 — 2004
|
|
|
150 |
|
|
|
150 |
|
|
Additional paid-in-capital
|
|
|
194 |
|
|
|
190 |
|
|
Retained earnings
|
|
|
819 |
|
|
|
2,479 |
|
|
Accumulated other comprehensive loss
|
|
|
(618 |
) |
|
|
(408 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders’ equity
|
|
|
545 |
|
|
|
2,411 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$ |
7,386 |
|
|
$ |
9,019 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
52
Dana Corporation Consolidated Statement of Cash Flows
For the years ended December 31, 2005, 2004 and 2003
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net cash flows from (used in) operating activities
|
|
$ |
(216 |
) |
|
$ |
73 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows — investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(297 |
) |
|
|
(329 |
) |
|
|
(323 |
) |
|
Divestitures
|
|
|
|
|
|
|
968 |
|
|
|
145 |
|
|
Proceeds from sales of leasing subsidiary assets
|
|
|
161 |
|
|
|
289 |
|
|
|
193 |
|
|
Proceeds from sales of other assets
|
|
|
22 |
|
|
|
61 |
|
|
|
89 |
|
|
Changes in investments and other assets
|
|
|
11 |
|
|
|
(80 |
) |
|
|
60 |
|
|
Payments received on leases and loans
|
|
|
68 |
|
|
|
13 |
|
|
|
40 |
|
|
Acquisitions
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
Other
|
|
|
(19 |
) |
|
|
(1 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows from (used in) investing activities
|
|
|
(54 |
) |
|
|
916 |
|
|
|
194 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows — financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on and repurchases of long-term debt
|
|
|
(61 |
) |
|
|
(1,457 |
) |
|
|
(272 |
) |
|
Issuance of long-term debt
|
|
|
16 |
|
|
|
455 |
|
|
|
|
|
|
Net change in short-term debt
|
|
|
492 |
|
|
|
(31 |
) |
|
|
(113 |
) |
|
Dividends paid
|
|
|
(55 |
) |
|
|
(73 |
) |
|
|
(14 |
) |
|
Other
|
|
|
6 |
|
|
|
16 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from (used in) financing activities
|
|
|
398 |
|
|
|
(1,090 |
) |
|
|
(382 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
128 |
|
|
|
(101 |
) |
|
|
162 |
|
Net change in cash of discontinued operations
|
|
|
|
|
|
|
4 |
|
|
|
(2 |
) |
Cash and cash equivalents — beginning of year
|
|
|
634 |
|
|
|
731 |
|
|
|
571 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents — end of year
|
|
$ |
762 |
|
|
$ |
634 |
|
|
$ |
731 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income (loss) to net cash
flows — operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(1,605 |
) |
|
$ |
62 |
|
|
$ |
228 |
|
|
Depreciation and amortization
|
|
|
310 |
|
|
|
358 |
|
|
|
394 |
|
|
Loss (gain) on note repurchases
|
|
|
|
|
|
|
96 |
|
|
|
(9 |
) |
|
Asset impairment and other related charges
|
|
|
486 |
|
|
|
37 |
|
|
|
21 |
|
|
Losses (gains) on divestitures and asset sales
|
|
|
29 |
|
|
|
18 |
|
|
|
(38 |
) |
|
Minority interest
|
|
|
(16 |
) |
|
|
13 |
|
|
|
9 |
|
|
Deferred income taxes
|
|
|
751 |
|
|
|
(125 |
) |
|
|
(35 |
) |
|
Unremitted earnings of affiliates
|
|
|
(40 |
) |
|
|
(36 |
) |
|
|
(49 |
) |
|
Change in accounts receivable
|
|
|
146 |
|
|
|
(275 |
) |
|
|
(127 |
) |
|
Change in inventories
|
|
|
81 |
|
|
|
(155 |
) |
|
|
|
|
|
Change in other operating assets
|
|
|
(93 |
) |
|
|
(312 |
) |
|
|
65 |
|
|
Change in operating liabilities
|
|
|
(304 |
) |
|
|
448 |
|
|
|
(81 |
) |
|
Effect of change in accounting
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
Other
|
|
|
43 |
|
|
|
(56 |
) |
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows from (used in) operating activities
|
|
$ |
(216 |
) |
|
$ |
73 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid were $127, $43 and $63 in 2005, 2004 and 2003.
Interest paid was $164, $237 and $235 in 2005, 2004 and 2003.
The accompanying notes are an integral part of the consolidated
financial statements.
53
Dana Corporation Consolidated Statement of Shareholders’
Equity
and Comprehensive Income (Loss)
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other | |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) | |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Additional | |
|
|
|
Foreign | |
|
Minimum | |
|
Net | |
|
|
|
|
Common | |
|
Paid-In | |
|
Retained | |
|
Currency | |
|
Pension | |
|
Unrealized | |
|
Shareholders’ | |
|
|
Stock | |
|
Capital | |
|
Earnings | |
|
Translation | |
|
Liability | |
|
Gain (Loss) | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, December 31, 2002
|
|
$ |
149 |
|
|
$ |
170 |
|
|
$ |
2,276 |
|
|
$ |
(785 |
) |
|
$ |
(358 |
) |
|
$ |
(2 |
) |
|
$ |
1,450 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2003
|
|
|
|
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613 |
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
Issuance of shares for equity compensation plans, net
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
149 |
|
|
|
171 |
|
|
|
2,490 |
|
|
|
(488 |
) |
|
|
(272 |
) |
|
|
— |
|
|
|
2,050 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for 2004
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414 |
|
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(73 |
) |
Issuance of shares for equity compensation plans, net
|
|
|
1 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
150 |
|
|
|
190 |
|
|
|
2,479 |
|
|
|
(265 |
) |
|
|
(143 |
) |
|
|
— |
|
|
|
2,411 |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for 2005
|
|
|
|
|
|
|
|
|
|
|
(1,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152 |
) |
|
|
|
|
|
|
|
|
|
Reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,815 |
) |
Cash dividends declared
|
|
|
|
|
|
|
|
|
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55 |
) |
Issuance of shares for equity compensation plans, net
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$ |
150 |
|
|
$ |
194 |
|
|
$ |
819 |
|
|
$ |
(323 |
) |
|
$ |
(295 |
) |
|
$ |
— |
|
|
$ |
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
54
Dana Corporation
Index to Notes to Consolidated
Financial Statements
1. Organization and Summary of Significant Accounting
Policies
2. Preferred Share Purchase Rights
3. Preferred Shares
4. Common Shares
5. Inventories
6. Goodwill
7. Components of Certain Balance Sheet Amounts
8. Investments in Equity Affiliates
9. Financial Instruments and Fair Value of Financial
Instruments
10. Compensation Plans
11. Benefit Plans
12. Income Taxes
13. Commitments and Contingencies
14. Warranty
15. Impairments, Discontinued Operations, Divestitures and
Realignment of Operations
16. Segments
17. Subsequent Events
55
Notes to Consolidated Financial Statements
(In millions, except share and per share amounts)
|
|
Note 1. |
Organization and Summary of Significant Accounting
Policies |
Organization — We serve the majority of the
world’s vehicular manufacturers as a leader in the
engineering, manufacture and distribution of systems and
components. Although we divested the majority of our automotive
aftermarket businesses in November 2004, we continue to
manufacture and supply a variety of service parts. We have also
been a provider of lease financing services in selected markets
through our wholly-owned subsidiary, Dana Credit Corporation
(DCC).
The preparation of these consolidated financial statements in
accordance with generally accepted accounting principles
(GAAP) in the U.S. requires estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. Some of the more
significant estimates include: valuation of deferred tax assets
and inventories; restructuring, environmental, product liability
and warranty accruals; valuation of post-employment and
postretirement benefits; depreciation and amortization of
long-lived assets; 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 our consolidated
financial statements.
Reorganization Proceedings under Chapter 11 of the
Bankruptcy Code — On March 3, 2006 (the
Filing Date), Dana Corporation and forty of our wholly-owned
domestic subsidiaries (collectively, the Debtors) filed
voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code (the Bankruptcy Code) in the
United States Bankruptcy Court for the Southern District of New
York (the Bankruptcy Court). These Chapter 11 cases are
collectively referred to as the “Bankruptcy Cases.”
Neither DCC nor any of our
non-U.S. affiliates
commenced any bankruptcy proceedings.
Principles of Consolidation — Our consolidated
financial statements include all 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, as are certain investments in partnerships and
limited liability companies in which we may have an ownership
interest of less than 20%. Operations of affiliates accounted
for under the equity method of accounting are generally included
for periods ended within one month of our year-end. Our
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.
Discontinued Operations — In accordance with
Statement of Financial Accounting Standards
(SFAS) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” we classify a business
component that either has been disposed of or is classified as
held for sale as a discontinued operation if the cash flow of
the component has been or will be eliminated from our ongoing
operations and we will no longer have any significant continuing
involvement in the component. The results of operations of our
discontinued operations through the date of sale, including any
gains or losses on disposition, are aggregated and presented on
two lines in the income statement. SFAS No. 144
requires the reclassification of amounts presented for prior
years to effect their classification as discontinued operations.
The amounts presented in the income statement for years prior to
2005 were reclassified to comply with SFAS No. 144.
With respect to the consolidated balance sheet, the assets and
liabilities relating to our discontinued operations are
aggregated and reported separately as assets and liabilities of
discontinued operations following the decision to dispose of the
components. As a result of the completion of the divestiture of
the majority of our automotive aftermarket businesses in
November 2004, the balance sheet as of December 31, 2004
did not include any assets or liabilities of discontinued
operations. The balance sheet at December 31, 2005 reflects
our announced plan to sell our engine products, routing products
and pump products businesses during 2006. In the consolidated
statement of cash flows, the cash flows of discontinued
operations are not reclassified. See Note 15 for additional
information regarding our discontinued operations.
56
Foreign Currency Translation — The financial
statements of subsidiaries and equity affiliates outside the
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
typically is the local currency. Transaction gains and losses
resulting from translating assets and liabilities of these
entities into the functional currency are included in net
earnings. Other income includes transaction losses of $8, gains
of $1 and $4 in 2005, 2004 and 2003, respectively. When
translating into U.S. dollars, income and expense items are
translated at average monthly rates of exchange, while 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
deferred and included 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 included in net
income for these affiliates were $2 in 2005 and 2004 and
immaterial in 2003.
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.
Goodwill — Pursuant to SFAS No. 142,
“Goodwill and Other Intangible Assets,” we
discontinued amortizing goodwill in 2002 and now test goodwill
for impairment on an annual basis as of December 31 unless
conditions arise that would require a more frequent evaluation.
In assessing the recoverability of goodwill, projections
regarding estimated future cash flows and other factors are made
to determine the fair value of the respective assets. If these
estimates or related projections change in the future, we may be
required to record impairment charges for the associated
goodwill.
Pre-Production Costs Related to Long-Term Supply
Arrangements — The costs of tooling used to make
products sold under long-term supply arrangements are
capitalized as part of property, plant and equipment and
amortized over their useful lives if we own the tooling. These
costs are also capitalized and amortized if we fund the purchase
but our customer owns the tooling and grants us the irrevocable
right to use the tooling over the contract period. If we have a
contractual right to bill our customers, costs incurred in
connection with the design and development of tooling are
carried as a component of other accounts receivable until
invoiced. 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 when
incurred. At December 31, 2005, the machinery and equipment
component of property, plant and equipment included $14 of our
tooling related to long-term supply arrangements and $6 of our
customers’ tooling which we have the irrevocable right to
use, while trade and other accounts receivable included $58 of
costs related to tooling which we have a contractual right to
collect from our customers.
Lease Financing — Lease financing consists of
direct financing leases, leveraged leases and operating leases
on equipment. Income on direct financing leases is recognized by
a method that produces a constant periodic rate of return on the
outstanding investment in the lease. Income on leveraged leases
is recognized by a method that 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.
Operating leases for equipment are 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 that 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 asset repossession has started as
the primary means of recovery are classified within other assets
at their estimated realizable value.
57
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 whenever
events and circumstances indicate they may be impaired. When
appropriate, carrying amounts are adjusted to fair market value
less cost to sell. Useful lives for buildings and building
improvements, machinery and equipment, tooling and office
equipment, furniture and fixtures principally range from twenty
to thirty years, five to ten years, three to five years and
three to ten years, respectively.
Revenue Recognition — Sales are recognized when
products are shipped and risk of loss has transferred to the
customer. We accrue for warranty costs, sales returns and other
allowances based on experience and other relevant factors, when
sales are recognized. Adjustments are made as new information
becomes available. Shipping and handling fees billed to
customers are included in sales, while 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
income taxes are provided for temporary differences between the
recorded values of assets and liabilities for financial
reporting purposes and the basis of such assets and liabilities
as measured by tax laws and regulations. Deferred income taxes
are also provided for net operating loss, tax credit and other
carryforwards. Amounts are stated at enacted tax rates expected
to be in effect when taxes are actually paid or recovered.
In accordance with SFAS No. 109, “Accounting for
Income Taxes,” we periodically assess whether it is more
likely than not that we will generate sufficient future taxable
income to realize our deferred income tax assets. This
assessment requires significant judgment and, in making this
evaluation, we consider all available positive and negative
evidence. Such evidence includes historical results, trends and
expectations for future U.S. and
non-U.S. pre-tax
operating income, the time period over which our temporary
differences and carryforwards will reverse and the
implementation of feasible and prudent tax planning strategies.
While the assumptions require significant judgment, they are
consistent with the plans and estimates we are using to manage
the underlying business.
We provide a valuation allowance against our deferred tax assets
if, based upon available evidence, we determine that it is more
likely than not that some portion or all of the recorded
deferred tax assets will not be realized in future periods.
Creating a valuation allowance serves to increase income tax
expense during the reporting period. Once created, a valuation
allowance against deferred tax assets is maintained until
realization of the deferred tax asset is judged more likely than
not to occur. Reducing a valuation allowance against deferred
tax assets serves to reduce income tax expense unless the
reduction occurs due to the expiration of the underlying loss or
tax credit carry-forward period.
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 — We enter
into forward currency contracts to hedge our exposure to the
effects of currency fluctuations on a portion of our projected
sales and purchase commitments. The changes in the fair value of
these contracts are recorded in cost of sales and are generally
offset by exchange gains or losses on the underlying exposures.
We also use interest rate swaps to manage exposure to
fluctuations in interest rates and to adjust the mix of our
fixed and floating rate debt. We do not use derivatives for
trading or speculative purposes and we do not hedge all of our
exposures.
We follow SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and
SFAS No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Transactions.” These
Statements require, among other things, that all derivative
instruments be recognized on the balance sheet
58
at fair value. Our fixed-for-variable interest rate swap
agreements have been formally designated as fair value hedges.
The effect of marking these contracts to market has been
recorded in the balance sheet as a direct adjustment of the
underlying debt. The adjustment does not affect the results of
operations unless the contract is terminated, in which case the
receipt of cash is offset by a valuation adjustment of the
underlying debt that is amortized to interest expense over the
remaining life of the debt. The repurchase in 2004 of a portion
of our notes resulted in a significant reduction in the amount
of the related valuation adjustments. Forward currency contracts
have not been designated as hedges and the effect of marking
these instruments to market has been recognized in 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 that do not
contribute to our 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. If the cost estimates result
in a range of equally probable amounts, the lower end of the
range is accrued.
Settlements with insurers — In certain
circumstances we commute policies that provide insurance for
asbestos-related bodily injury claims. The insurance proceeds
are recognized in the periods in which the company recognizes
asbestos claims to which they relate and defers that portion
related to future demands for which the company has not recorded
a liability.
Pension Benefits — Annual net pension
benefits/expenses under defined benefit pension plans are
determined on an actuarial basis. Our policy is to fund these
costs through deposits with trustees in amounts that, at a
minimum, satisfy the applicable funding regulations. 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 expense under the defined
benefit plans and the related liabilities are determined on an
actuarial basis. Our policy is to fund 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
post-employment benefits expense under our benefit plans and the
related liabilities 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.
Cash and Cash Equivalents — For purposes of
reporting cash flows, we consider highly liquid investments with
maturities of three months or less when purchased to be cash
equivalents. Our marketable securities satisfy the criteria for
cash equivalents and are classified accordingly.
At December 31, 2005, we maintained cash deposits of $109
to provide credit enhancement for certain lease agreements and
to support surety bonds that allow us to self-insure our
workers’ compensation obligations. These financial
instruments are typically renewed each year. The deposits may
not be withdrawn.
Our ability to move cash among operating locations is subject to
the operating needs of those locations in addition to locally
imposed restrictions on the transfer of funds in the form of
dividends or loans. Restricted net assets related to our
consolidated subsidiaries totaled $127 as of December 31,
2005. The $127 is attributable to $106 of our Venezuelan
operations due to strict governmental limitations on our
subsidiaries’ ability to transfer funds outside the country
and $21 of cash deposits required by certain of our Canadian
subsidiaries in connection with credit enhancements on lease
agreements and the support of surety bonds.
Equity-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
59
Employees,” and related interpretations. No compensation
expense is recorded for our stock options as they were granted
at the market value of the underlying stock. The table below
sets forth the amounts that would have been recorded as stock
option expense for the years ended December 31, 2005, 2004
and 2003, if we had used the fair value method of accounting,
the alternative policy set out in SFAS No. 123,
“Accounting for Stock-Based Compensation.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Stock compensation expense, as reported
|
|
$ |
6 |
|
|
$ |
3 |
|
|
$ |
2 |
|
Stock option expense, pro forma
|
|
|
37 |
|
|
|
8 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense, pro forma
|
|
$ |
43 |
|
|
$ |
11 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$ |
(1,605 |
) |
|
$ |
62 |
|
|
$ |
228 |
|
Net income (loss), pro forma
|
|
|
(1,642 |
) |
|
|
54 |
|
|
|
214 |
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$ |
(10.73 |
) |
|
$ |
0.41 |
|
|
$ |
1.54 |
|
|
Net income (loss), pro forma
|
|
|
(10.98 |
) |
|
|
0.36 |
|
|
|
1.45 |
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$ |
(10.73 |
) |
|
$ |
0.41 |
|
|
$ |
1.53 |
|
|
Net income (loss), pro forma
|
|
|
(10.98 |
) |
|
|
0.36 |
|
|
|
1.44 |
|
As a result of our providing a valuation allowance against our
U.S. net deferred tax assets as of the beginning of 2005,
no tax benefit related to stock compensation expense has been
reflected for the year ended December 31, 2005. Tax
benefits of $5 and $9 were reflected for the same period in 2004
and 2003.
Accelerated Option Vesting — On
December 1, 2005, the Compensation Committee of our Board
approved the immediate vesting of all unvested stock options and
stock appreciation rights (SARs) granted to employees under the
Amended and Restated Stock Incentive Plan with an option
exercise price of $15.00 or more per share or an SAR grant price
of $15.00 or more. As a result, unvested stock options granted
under the plan to purchase 3,584,646 shares of our
common stock, with a weighted average exercise price of
$18.23 per share, and 11,837 unvested SARs, with a weighted
grant price of $21.97 per share, became exercisable on
December 1, 2005, rather than on the later dates when they
would have vested in the normal course.
The decision to accelerate the vesting of these stock options
and SARs was made to reduce the compensation expense that we
would otherwise be required to record in future periods
following our adoption of SFAS No. 123(R) in January
2006. If the vesting of these stock options and SARs had not
been accelerated, we would have expected to recognize an
incremental share-based compensation expense of approximately
$19 in the aggregate from 2006 through 2009. The resulting pro
forma share-based expense of $19 is included in the pro forma
2005 expense reflected in the table above. As a result of the
accelerated vesting, we expect to recognize approximately $4 of
share-based compensation from 2006 through 2008, in the
aggregate, with respect to the options and SARs that remained
unvested at December 31, 2005.
Option Valuation Methods — During the first
quarter of 2005, we changed the method used to value stock
option grants from the Black-Scholes method to the binomial
method. We believe the binomial method provides a fair value
that is more representative of our historical exercise and
termination experience because the binomial method considers the
possibility of early exercises of options. We have valued stock
options granted prior to January 1, 2005 using the
Black-Scholes method and stock options granted thereafter using
the binomial method.
The weighted average fair value of the 2,368,570 options and
SARs granted in 2005 was $4.04 per share under the binomial
method, using a weighted average market value at date of grant
of $14.87 and
60
the following weighted average assumptions: risk-free interest
rate of 3.91%, a dividend yield of 2.69%, volatility of 30.8% to
31.5%, expected forfeitures of 17.93% and an expected option
life of 6.8 years.
The key assumptions used in 2004 and 2003 under the
Black-Scholes method are as follows:
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
Risk-free interest rate
|
|
3.29% |
|
2.97% |
Dividend yield
|
|
2.22% |
|
0.48% |
Expected life
|
|
5.4 years |
|
5.4 years |
Stock price volatility
|
|
51.84% |
|
43.46% |
Other Equity Grants — Our Stock Incentive Plan
also provides for the issuance of restricted stock units,
restricted shares, stock awards and performance shares and SARs,
which may be granted separately or in conjunction with options.
During 2005, we granted 66,625 restricted stock units, 17,000
restricted shares, 342,104 stock-denominated performance shares,
67,250 shares as stock awards and 7,960 SARs. The vesting
periods, where applicable, range from one to five years. Charges
to expense related to these incentive awards totaled $3 in 2005.
At December 31, 2005, there were 6,052,225 shares
available for future grants of options and other types of awards
under this plan.
Recent Accounting Pronouncements — In May 2005,
the Financial Accounting Standards Board (FASB) issued
SFAS No. 154, “Accounting Changes and Error
Corrections.” SFAS No. 154 replaces Accounting
Principles Board Opinion No. 20, “Accounting
Changes,” and SFAS No. 3, “Reporting
Accounting Changes in Interim Financial Statements,” and
requires the direct effects of accounting principle changes to
be retrospectively applied. The existing guidance with respect
to accounting estimate changes and error corrections of errors
is carried forward in SFAS No. 154.
SFAS No. 154 is effective for accounting changes and
corrections made in fiscal years beginning after
December 15, 2005. We do not expect the adoption of
SFAS No. 154 to have a material effect on our
financial statements.
In March 2005, the FASB issued Financial Interpretation
No. 47 (FIN 47), “Accounting for Conditional
Asset Retirement Obligations.” FIN 47 is an
interpretation of SFAS No. 143, “Accounting for
Asset Retirement Obligations,” and clarifies that
liabilities associated with asset retirement obligations whose
timing or settlement method are conditional upon future events
should be recognized at fair value as soon as fair value is
reasonably estimable. FIN 47 also provides guidance on the
information required to reasonably estimate the fair value of
the liability. Our adoption of FIN 47 during the fourth
quarter of 2005 resulted in an after-tax charge of $2 recorded
as the effect of a change in accounting in our Consolidated
Statement of Income. A conditional asset retirement obligation
of $3 and an associated asset of $1, net of accumulated
depreciation of less than $1, were recorded at December 31,
2005. If the provisions of FIN 47 had been applied
retrospectively to December 31, 2004 and 2003, a liability
of $3 would have been recorded at both dates. An asset of less
than $1, net of accumulated depreciation, would have been
recorded at both December 31, 2004 and 2003. Related
accretion and depreciation expense, on an after-tax basis, for
the years ended December 31, 2005, 2004 and 2003 would have
been less than $1 during each period.
In December 2004, the FASB issued SFAS No. 123(R),
“Share-Based Payment.” SFAS No. 123(R)
requires recognition of the cost of employee services provided
in exchange for stock options and similar equity instruments
based on the fair value of the instrument at the date of grant.
The effective date for this guidance was delayed for public
companies until January 1, 2006. The requirements of
SFAS No. 123(R) apply to stock options granted
subsequent to December 31, 2005, as well as the unvested
portion of prior grants. On December 1, 2005, all of our
unvested stock options with an exercise price of $15.00 or more
per share and all of our SARs with a grant price of $15.00 or
more held by our employees were immediately vested. See
Note 10 for further details regarding our compensation
plans.
We will begin recognizing compensation expense related to stock
options and SARs in the first quarter of 2006. The amount of the
total share-based compensation expense in 2006 will be affected
by the volume of grants, exercises and forfeitures, our dividend
rate and the volatility of our stock price. We expect
61
to recognize approximately $4 of share-based compensation from
2006 through 2008, in the aggregate, with respect to the
employee options and SARs that remained unvested at
December 31, 2005. See Note 10 for additional
information.
In December 2004, the FASB issued SFAS No. 151,
“Inventory Costs, an amendment of ARB No. 43,
Chapter 4.” SFAS No. 151, effective
January 1, 2006, requires the treatment of certain abnormal
costs, such as idle facility expense, excessive freight and
handling, as period expenses and requires that allocation of
fixed overhead be based on normal capacity. We are in the
process of evaluating the potential impact on our financial
position and results of operations. While we believe the new
guidance will affect certain of our units, we do not believe it
will have a material impact overall.
|
|
Note 2. |
Preferred Share Purchase Rights |
Pursuant to our Rights Agreement dated as of April 25,
1996, we have a preferred share purchase rights plan 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, for the exercise price of $110 (subject to adjustment
as provided in the Plan). The rights have no voting privileges
and will expire on July 25, 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 (or commences a tender offer that would
result in acquiring) 15% or more of our outstanding common
stock, the rights not held by the acquirer will become
exercisable unless our Board of Directors postpones their
distribution date. In that event, instead of purchasing
1/1000th of a share of the Participating Preferred Stock,
the holder of each right may elect to purchase from us the
number of shares of our common stock that have a market value of
twice the right’s exercise price (in effect, a 50% discount
on our stock). Thereafter, if we merge with or sell 50% or more
of our assets or earnings power to the acquirer or engage in
similar transactions, any rights not previously exercised
(except those held by the acquirer) can also be exercised. In
that event, the holder of each right may elect to purchase from
the acquiring company the number of shares of its common stock
that have a market value of twice the right’s exercise
price (in effect, a 50% discount on the acquirer’s stock).
Our Board may authorize the redemption of 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 authorize the exchange of each
right (except those held by the acquirer) for one share of our
common stock.
We have 5,000,000 shares of preferred stock authorized,
without par value, including 1,000,000 shares reserved for
issuance under the Rights Agreement referred to in Note 2.
No shares of preferred stock have been issued.
Common stock transactions during the last three years are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Shares outstanding at beginning of year
|
|
|
149.9 |
|
|
|
148.6 |
|
|
|
148.6 |
|
Issued for equity compensation plans, net of forfeitures
|
|
|
0.6 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding at end of year
|
|
|
150.5 |
|
|
|
149.9 |
|
|
|
148.6 |
|
|
|
|
|
|
|
|
|
|
|
Certain of our employee and director stock option plans provide
that participants may tender stock to satisfy the purchase price
of the shares and/or the income taxes required to be withheld on
the transaction.
62
In connection with these plans, we repurchased 635 and
4,914 shares of common stock in 2005 and 2004. No shares
were repurchased in 2003.
The following table reconciles the average shares outstanding
used in determining basic earnings per share to the number of
shares used in the diluted earnings per share calculation (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Average shares outstanding for the year — basic
|
|
|
149.6 |
|
|
|
148.8 |
|
|
|
148.2 |
|
Plus: Incremental shares from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation units
|
|
|
0.6 |
|
|
|
0.4 |
|
|
|
0.3 |
|
|
Restricted stock
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.1 |
|
|
Stock options
|
|
|
0.6 |
|
|
|
1.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive shares
|
|
|
1.4 |
|
|
|
1.8 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding for the year —
diluted
|
|
|
151.0 |
|
|
|
150.6 |
|
|
|
148.8 |
|
|
|
|
|
|
|
|
|
|
|
Potential common shares of 13.3, 11.9 and 15.1 for the years
ended December 31, 2005, 2004 and 2003 have been excluded
from the computation of diluted net earnings per share. The
effect of including them is anti-dilutive. These shares
represent stock options with exercise prices higher than the
average share price of our stock during the respective periods.
The components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Raw materials
|
|
$ |
250 |
|
|
$ |
414 |
|
Work in process and finished goods
|
|
|
414 |
|
|
|
484 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
664 |
|
|
$ |
898 |
|
|
|
|
|
|
|
|
Inventories amounting to $252 and $401 at December 31, 2005
and 2004 were valued using the LIFO method. If all inventories
were valued at replacement cost, reported values would be
increased by $109 and $121 at December 31, 2005 and 2004.
During 2005, we experienced reductions in certain inventory
quantities which caused a liquidation of LIFO inventory values
and reduced our net loss by $7. See Note 15 for inventories
reclassified to discontinued operations.
In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets,” goodwill is required to be tested
for impairment annually at the reporting unit level. In
addition, goodwill must be tested for impairment between annual
tests if an event occurs or circumstances change that would more
likely than not reduce the fair value of the reporting unit
below its related carrying value. Fair value is approximated
using a discounted future cash flow method.
During the third quarter of 2005, management determined that we
were likely to divest our engine hard parts, fluid products and
pump products businesses within ASG. Although these operations
were considered “held for use” at September 30,
2005, the likelihood of divesting these businesses triggered a
review of goodwill and other long-lived assets relating to these
operations. Goodwill related to these businesses was $86. Of
this amount, $83 was written off as impaired and the remaining
$3 was reclassified to assets of discontinued operations at
December 31, 2005.
In connection with the 2005 annual assessment completed as of
December 31, management determined that $53 of goodwill was
impaired, including $28 related to structural products, $8
related to heavy
63
axle products, $7 related to a DCC investment and $10 related to
a joint venture based in the U.K. These amounts are reported in
continuing operations in the Statement of Income.
Changes in goodwill during the years ended December 31,
2005 and 2004, by segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of | |
|
|
|
|
Beginning | |
|
Discontinued | |
|
|
|
Currency | |
|
Ending | |
|
|
Balance | |
|
Operations | |
|
Impairments | |
|
and Other | |
|
Balance | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
463 |
|
|
$ |
(86 |
) |
|
$ |
(38 |
) |
|
$ |
(11 |
) |
|
$ |
328 |
|
HVTSG
|
|
|
123 |
|
|
|
|
|
|
|
(8 |
) |
|
|
(4 |
) |
|
|
111 |
|
DCC
|
|
|
7 |
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
593 |
|
|
$ |
(86 |
) |
|
$ |
(53 |
) |
|
$ |
(15 |
) |
|
$ |
439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
431 |
|
|
|
|
|
|
|
|
|
|
$ |
32 |
|
|
$ |
463 |
|
HVTSG
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
123 |
|
DCC
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
558 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
35 |
|
|
$ |
593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Note 7. |
Components of Certain Balance Sheet Amounts |
The following items comprise the amounts indicated in the
respective balance sheet captions:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Other Current Assets
|
|
|
|
|
|
|
|
|
Deferred tax benefits
|
|
$ |
9 |
|
|
$ |
113 |
|
Prepaid expense and other
|
|
|
132 |
|
|
|
72 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
141 |
|
|
$ |
185 |
|
|
|
|
|
|
|
|
Investments and Other Assets
|
|
|
|
|
|
|
|
|
Prepaid pension expense
|
|
$ |
349 |
|
|
$ |
407 |
|
Deferred tax benefits
|
|
|
189 |
|
|
|
761 |
|
Investments in leases
|
|
|
192 |
|
|
|
281 |
|
Notes receivable
|
|
|
96 |
|
|
|
106 |
|
Amounts recoverable from insurers
|
|
|
67 |
|
|
|
24 |
|
Other
|
|
|
184 |
|
|
|
278 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,077 |
|
|
$ |
1,857 |
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
Land and improvements to land
|
|
$ |
81 |
|
|
$ |
102 |
|
Buildings and building fixtures
|
|
|
629 |
|
|
|
754 |
|
Machinery and equipment
|
|
|
2,950 |
|
|
|
3,656 |
|
|
|
|
|
|
|
|
Total
|
|
|
3,660 |
|
|
|
4,512 |
|
Less: Accumulated depreciation
|
|
|
2,032 |
|
|
|
2,341 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,628 |
|
|
$ |
2,171 |
|
|
|
|
|
|
|
|
Deferred Employee Benefits and Other Noncurrent
Liabilities
|
|
|
|
|
|
|
|
|
Postretirement other than pension
|
|
$ |
906 |
|
|
$ |
919 |
|
Pension
|
|
|
407 |
|
|
|
414 |
|
Product liabilities
|
|
|
182 |
|
|
|
112 |
|
Postemployment
|
|
|
115 |
|
|
|
113 |
|
Environmental
|
|
|
49 |
|
|
|
50 |
|
Compensation
|
|
|
16 |
|
|
|
43 |
|
Other noncurrent liabilities
|
|
|
123 |
|
|
|
108 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,798 |
|
|
$ |
1,759 |
|
|
|
|
|
|
|
|
The components of investments in leases are as follows:
|
|
|
|
|
|
|
|
|
Leveraged leases
|
|
$ |
208 |
|
|
$ |
287 |
|
Direct financing and other leases
|
|
|
1 |
|
|
|
9 |
|
Allowance for credit losses
|
|
|
(17 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
|
Total
|
|
|
192 |
|
|
|
284 |
|
Less: Current portion
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
192 |
|
|
$ |
281 |
|
|
|
|
|
|
|
|
65
The components of the net investment in leveraged leases are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Rentals receivable
|
|
$ |
1,516 |
|
|
$ |
2,312 |
|
Residual values
|
|
|
135 |
|
|
|
248 |
|
Nonrecourse debt service
|
|
|
(1,244 |
) |
|
|
(1,905 |
) |
Unearned income
|
|
|
(199 |
) |
|
|
(368 |
) |
|
|
|
|
|
|
|
Total investments
|
|
|
208 |
|
|
|
287 |
|
Less: Deferred taxes arising from leverage leases
|
|
|
170 |
|
|
|
164 |
|
|
|
|
|
|
|
|
Net investments
|
|
$ |
38 |
|
|
$ |
123 |
|
|
|
|
|
|
|
|
|
|
Note 8. |
Investments in Equity Affiliates |
Equity Affiliates — At December 31, 2005,
we had a number of investments in entities that engage in the
manufacture of vehicular parts, primarily axles, driveshafts,
wheel-end braking systems, all wheel drive systems and
transmissions, supplied to OEMs. In addition, DCC had a number
of investments in entities, primarily general and limited
partnerships and limited liability companies that are special
purpose entities engaged in financing transactions for the
benefit of third parties.
The principal components of our investments in equity affiliates
engaged in manufacturing activities at December 31, 2005
(those with an investment balance exceeding $5) were as follows:
|
|
|
|
|
Investment |
|
Ownership | |
|
|
| |
Bendix Spicer Foundation Brake LLC
|
|
|
19.8 |
% |
GETRAG Getriebe-und Zahnradfabrik Hermann Hagenmeyer
GmbH & Cie
|
|
|
30.0 |
|
GETRAG Corporation of North America
|
|
|
49.0 |
|
GETRAG Dana Holding GmbH
|
|
|
42.0 |
|
Spicer, S.A. de C.V.
|
|
|
48.8 |
|
Taiway Ltd.
|
|
|
13.9 |
|
At December 31, 2005, the investment in the affiliates
presented above was $598, out of an aggregate investment of $611
in all affiliates that engage in manufacturing activities.
Summarized combined financial information for all of our equity
affiliates engaged in manufacturing activities follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Statement of Income Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
2,205 |
|
|
$ |
2,198 |
|
|
$ |
1,929 |
|
|
Gross profit
|
|
|
259 |
|
|
|
256 |
|
|
|
294 |
|
|
Net income
|
|
|
56 |
|
|
|
57 |
|
|
|
107 |
|
Dana’s share of net income
|
|
|
30 |
|
|
|
29 |
|
|
|
28 |
|
|
Financial Position Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
717 |
|
|
$ |
783 |
|
|
|
|
|
|
Noncurrent assets
|
|
|
1,181 |
|
|
|
1,443 |
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
520 |
|
|
$ |
752 |
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
500 |
|
|
|
481 |
|
|
|
|
|
|
Net worth
|
|
|
878 |
|
|
|
993 |
|
|
|
|
|
|
Dana’s share of net worth
|
|
$ |
611 |
|
|
$ |
690 |
|
|
|
|
|
66
The principal components of DCC’s investments in equity
affiliates engaged in leasing and financing activities (those
with an investment balance exceeding $20) at December 31,
2005 follow:
|
|
|
|
|
Investment |
|
Ownership | |
|
|
| |
Indiantown Cogeneration LP
|
|
|
75.2 |
% |
Pasco Cogen Ltd.
|
|
|
50.1 |
|
Terabac Investors LP
|
|
|
79.0 |
|
Triumph Trust
|
|
|
66.4 |
|
At December 31, 2005, DCC’s investment in the
affiliated entities presented above was $148 out of an aggregate
investment of $207 in DCC affiliates that engage in financing
activities. Summarized combined financial information of all of
DCC’s equity affiliates engaged in lease financing
activities follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Statement of Income Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease finance and other revenue
|
|
$ |
73 |
|
|
$ |
97 |
|
|
$ |
164 |
|
|
Net income
|
|
|
25 |
|
|
|
25 |
|
|
|
71 |
|
DCC’s share of net income
|
|
|
10 |
|
|
|
8 |
|
|
|
20 |
|
|
Financial Position Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease financing and other assets
|
|
$ |
383 |
|
|
$ |
662 |
|
|
|
|
|
|
Total liabilities
|
|
|
114 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net worth
|
|
$ |
269 |
|
|
$ |
523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DCC’s share of net worth
|
|
$ |
207 |
|
|
$ |
300 |
|
|
|
|
|
Variable Interest Entities (VIEs) — Included in
the equity affiliates engaged in lease financing activities in
the table above are certain affiliates that qualify as VIEs,
where DCC is not the primary beneficiary. In addition, DCC has
several investments in leveraged leases that qualify as VIEs but
are not required to be consolidated under FIN No. 46;
accordingly, these leveraged leases have been
“deconsolidated” and are now included with other
investments in equity affiliates. Lastly, DCC has investments in
a number of leveraged leases (through ownership interests in
trusts) that qualify as VIEs that are required to be
consolidated; accordingly, the classification of these leases in
our financial statements has not changed. Following is
summarized information relating to these investments as well as
equity affiliates that qualify as VIEs:
|
|
|
|
|
|
|
|
|
Investment in Leveraged Leases |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Total minimum lease payments
|
|
$ |
499 |
|
|
$ |
548 |
|
Residual values
|
|
|
63 |
|
|
|
63 |
|
Nonrecourse debt service
|
|
|
(292 |
) |
|
|
(340 |
) |
Unearned income
|
|
|
(141 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
120 |
|
Less — Deferred income taxes
|
|
|
(68 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
|
Net investment in leveraged leases
|
|
$ |
61 |
|
|
$ |
63 |
|
|
|
|
|
|
|
|
DCC’s share of net investments
|
|
$ |
31 |
|
|
$ |
31 |
|
67
|
|
|
|
|
|
|
|
|
Investment in Equity Affiliates |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Lease financing assets
|
|
$ |
143 |
|
|
$ |
285 |
|
Total assets
|
|
$ |
324 |
|
|
$ |
503 |
|
Total liabilities
|
|
|
145 |
|
|
|
183 |
|
|
|
|
|
|
|
|
Total net worth
|
|
$ |
179 |
|
|
$ |
320 |
|
|
|
|
|
|
|
|
DCC’s share of net worth
|
|
$ |
147 |
|
|
$ |
200 |
|
Revenue
|
|
$ |
33 |
|
|
$ |
66 |
|
Total expenses
|
|
|
35 |
|
|
|
45 |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
(2 |
) |
|
$ |
21 |
|
|
|
|
|
|
|
|
DCC’s share of net income
|
|
$ |
4 |
|
|
$ |
6 |
|
The investment in equity affiliates that qualify as VIEs relate
to investments in real estate, 8%; cruise ship, 51%; natural gas
processing facilities, 14%; aircraft, 14%; and affordable
housing, 13%.
The net investment in leveraged leases at December 31, 2005
relates to an entity that has a leveraged lease in a power
generation facility. DCC has made loans to VIEs, including two
loans with outstanding balances of $9 at December 31, 2005,
to equity affiliates included in the table above. DCC also has
three loans with an aggregate outstanding balance of $11, which
it has made to VIEs in which DCC does not hold an equity
interest. DCC’s maximum exposure to loss from its
investments in VIEs is limited to its share of the net worth of
the VIEs, net investment in leveraged leases and outstanding
balance of loans to VIEs, less any established reserves.
We have equity investments in three entities engaged in
manufacturing activities that qualify as VIEs. These
entities’ assets, liabilities, revenue and net loss as of
December 31, 2005 and for the year then ended are not
material. Our total investment at risk in these VIEs at
December 31, 2005, including loans, was $17. In addition,
we have a business relationship with a supplier whose principal
activity is manufacturing. The entity qualifies as a VIE and we
are the primary beneficiary. We do not consolidate this entity
into our financial statements due to the inability to obtain
appropriate accounting information. Our total loss exposure for
this VIE is $18 at December 31, 2005.
Our retained earnings includes undistributed income of our
non-consolidated manufacturing and leasing affiliates accounted
for under the equity method of $315 and $226 at
December 31, 2005 and 2004, respectively.
|
|
Note 9. |
Financial Instruments and Fair Value of Financial
Instruments |
Short-term Debt — Our accounts receivable
securitization program provided up to a maximum of $275 at
December 31, 2005 to meet periodic demand for short-term
financing. Under the program, certain of our divisions and
subsidiaries either sold or contributed accounts receivable to
Dana Asset Funding LLC (DAF), a special purpose entity. DAF
funded its accounts receivable purchases by pledging the
receivables as collateral for short-term loans from
participating banks.
The securitized account receivables were owned in their entirety
by DAF. DAF’s receivables are included in our consolidated
financial statements solely because DAF does not meet certain
accounting requirements for treatment as a “qualifying
special purpose entity” under generally accepted accounting
principles. Accordingly, the sales and contributions of the
account receivables are eliminated in consolidation and any
loans to DAF are reflected as short-term borrowings in our
consolidated financial statements. The amounts available under
the program were subject to reduction based on adverse changes
in our credit ratings or those of our customers, customer
concentration levels or certain characteristics of the
underlying accounts receivable. This program was subject to
possible termination by the lenders in the event our senior
unsecured credit ratings were lowered below B3 by Moody’s
Investor Service (Moody’s) and B- by Standard &
Poor’s (S&P).This program has an annual renewal date
every April 15. The interest rates under the facility equal the
London inter-bank offered rate (LIBOR) or bank prime, plus
a spread that
68
varies depending on our credit ratings. In February 2006,
S&P lowered our credit rating to CCC+. As a result, we
obtained a waiver under this program to remove the credit rating.
As of December 31, 2005, we had a five-year bank facility,
maturing on March 4, 2010, that provided us with $400 in
borrowing capacity. The facility required us to meet specified
financial ratios as of the end of each calendar quarter,
including the ratio of net senior debt to tangible net worth;
the ratio of earnings before interest, taxes, depreciation and
amortization (EBITDA) less capital expenditures to interest
expense; and the ratio of net senior debt to EBITDA with all
terms as defined in the facility. As amended during June 2005,
the ratios are: (i) net senior debt to tangible net worth
of not more than 1.10:1; (ii) EBITDA less capital
expenditures to interest expense of not less than 2.25:1 at
December 31, 2005; and 2.50:1 thereafter and (iii) net
senior debt to EBITDA of not greater than 2.75:1 at
December 31, 2005 and 2.50:1 thereafter. The ratio
calculations were based on the additional financial information
that presented our consolidated financial statements with DCC
accounted for on an equity basis. Excluding DCC, we had
committed borrowing lines of $942 and uncommitted lines of $241
at December 31, 2005. At December 31, 2005, borrowings
outstanding under our various lines consisted of $377 under the
bank facility, $185 under the accounts receivable securitization
program and $25 drawn by
non-U.S. subsidiaries.
We announced in September and October 2005 that we had lowered
our 2005 earnings estimate and that we would establish a
valuation allowance against our U.S. deferred tax assets
and restate our financial statements for the first and second
quarters of 2005, the year 2004 and prior periods. In connection
with those announcements, we obtained waivers under our bank and
accounts receivable agreements of covenants requiring that our
previously issued financial statements be prepared in accordance
with accounting principles generally accepted in the United
States (GAAP), any events of default that might have resulted or
might result in connection with the announcements and a waiver
under the bank facility for all three financial covenants for
the end of the third quarter of 2005. During the fourth quarter
of 2005, we amended both the bank and accounts receivable
agreements and we obtained extensions of the existing waivers
under these agreements to May 31, 2006, including the
waivers of the financial covenants in the bank facility. In
addition, the lenders waived non-compliance with other covenants
related to the delayed filing or delivery of this report, as
well as the reports for the earlier periods that were restated.
As part of the amendment of the bank facility, we granted
security interests in certain domestic current assets and
machinery and equipment.
Fees are paid to the banks for providing committed lines, but
not for uncommitted lines. We paid fees of $10, $6 and $5 in
2005, 2004 and 2003 in connection with our committed facilities.
Amortization of bank commitment fees totaled $7, $7 and $4 in
2005, 2004 and 2003.
Selected details of consolidated short-term borrowings are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
|
Interest | |
|
|
Amount | |
|
Rate | |
|
|
| |
|
| |
Balance at December 31, 2005
|
|
$ |
587 |
|
|
|
6.5 |
% |
Average during 2005
|
|
|
400 |
|
|
|
4.5 |
|
Maximum during 2005 (month end)
|
|
|
587 |
|
|
|
6.5 |
|
|
Balance at December 31, 2004
|
|
$ |
98 |
|
|
|
3.6 |
% |
Average during 2004
|
|
|
315 |
|
|
|
4.3 |
|
Maximum during 2004 (month end)
|
|
|
419 |
|
|
|
3.8 |
|
Long-term Debt — Since 1998, we have issued
various unsecured notes with maturities extending out as far as
March 1, 2029. A default under the related indentures may
result in defaults under the long-term bank facility or the
accounts receivable securitization program.
In March 2004, the $231 of 6.25% notes matured and was
repaid. In December 2004, we tendered for and repurchased $891
(or the equivalent) of our March 2010 and August 2011 notes.
Specifically, we repurchased $175 of the March 2010 notes and
$460 and €
193 (the equivalent of $256) of the August
69
2011 notes. The $1,086 paid for the notes exceeded their
carrying amount (including $52 of valuation adjustments
resulting from the termination of prior hedging arrangements)
and unamortized issuance costs by $155. This loss and the $2 of
expenses related to the tender offer are included in other
expense and affected net income in 2004 by $96. The funds used
for the repurchase included the proceeds of an issue of $450 of
5.85% unsecured notes due January 15, 2015. As part of the
tender process, the respective note holders consented to the
modification of the indentures governing the March 2010 and
August 2011 notes, effectively eliminating the limits on
borrowings, payments and transactions that we may undertake.
At December 31, 2005, long-term debt at DCC included notes
totaling $275 outstanding under a $500 Medium Term
Note Program established during 1999. Terms of the notes
were determined at the time of issuance. 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, except as permitted. Interest on the notes is
payable on a semi-annual basis. During 2005, DCC refinanced a
secured note related to one of its investments, due 2007, as
non-recourse notes due 2010 and increased the principal
outstanding from $40 to $55.
Debt Reclassification — As of June 30,
2005, we had determined that following the expiration of the
waivers obtained through May 31, 2006, it was unlikely that
we would be able to comply with the financial covenants in our
bank facility during the subsequent twelve-month period.
Non-compliance would trigger cross-acceleration provisions in
most of our indenture agreements. Therefore, under the
accounting requirements for debt classification, we reclassified
our long-term debt that was subject to cross-acceleration as
debt payable within one year. Our filing for reorganization
under Chapter 11 of the U.S. Bankruptcy Code on
March 3, 2006 (see above and Note 17), triggered the
immediate acceleration of certain direct financial obligations,
including, among others, currently outstanding non-secured notes
issued under the company’s Indentures dated as of
December 15, 1997; August 8, 2001; March 11, 2002
and December 10, 2004. The accelerated amounts are
characterized as unsecured debt for purposes of the
reorganization proceedings in the Bankruptcy Court. Only the $55
of certain DCC non-recourse debt and $12 of certain
international borrowings continue to be classified as noncurrent
debt.
Details of our consolidated long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Indebtedness of Dana, excluding consolidated
subsidiaries —
|
|
|
|
|
|
|
|
|
|
Unsecured notes, fixed rates —
|
|
|
|
|
|
|
|
|
|
|
6.5% notes, due March 15, 2008
|
|
$ |
150 |
|
|
$ |
150 |
|
|
|
7.0% notes, due March 15, 2028
|
|
|
164 |
|
|
|
164 |
|
|
|
6.5% notes, due March 1, 2009
|
|
|
349 |
|
|
|
349 |
|
|
|
7.0% notes, due March 1, 2029
|
|
|
266 |
|
|
|
266 |
|
|
|
9.0% notes, due August 15, 2011
|
|
|
115 |
|
|
|
115 |
|
|
|
9.0% euro notes, due August 15, 2011
|
|
|
9 |
|
|
|
10 |
|
|
|
10.125% notes, due March 15, 2010
|
|
|
74 |
|
|
|
74 |
|
|
|
5.85% notes, due January 15, 2015
|
|
|
450 |
|
|
|
450 |
|
|
Valuation adjustments
|
|
|
5 |
|
|
|
9 |
|
Indebtedness of DCC —
|
|
|
|
|
|
|
|
|
|
Unsecured notes, fixed rates, 2.00% — 8.375%, due 2005
to 2011
|
|
|
400 |
|
|
|
450 |
|
|
Secured notes, due 2010, variable rate of 6.15% at the end of
2004
|
|
|
|
|
|
|
40 |
|
|
Nonrecourse notes, fixed rates, 5.2%, due 2010
|
|
|
55 |
|
|
|
4 |
|
Indebtedness of other consolidated subsidiaries
|
|
|
21 |
|
|
|
30 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
2,058 |
|
|
|
2,111 |
|
Less: Amount reclassified to current liabilities
|
|
|
1,898 |
|
|
|
|
|
Less: Current maturities
|
|
|
93 |
|
|
|
57 |
|
|
|
|
|
|
|
|
Long-term debt reported as noncurrent liabilities
|
|
$ |
67 |
|
|
$ |
2,054 |
|
|
|
|
|
|
|
|
70
The total maturities of all long-term debt for the next five
years and after are as follows: 2006, $93; 2007, $315; 2008,
$153; 2009, $354 and 2010 and beyond, $1,143.
Interest Rate Agreements — Under our interest
rate swap agreements, we have agreed to exchange with third
parties, at specific intervals, the fixed and variable rate
interest amounts calculated by reference to agreed notional
amounts. Differentials to be paid or received under these
agreements were accrued and recognized as adjustments to
interest expense.
Swap Agreements — We were a party to two
interest rate swap agreements, expiring in August 2011, under
which we have agreed to exchange the difference between fixed
rate and floating rate interest amounts on notional amounts
corresponding with the amount and term of our August 2011 notes.
Converting the fixed interest rate to a variable rate was
intended to provide a better balance of fixed and variable rate
debt. Both swap agreements have been designated as fair value
hedges of the August 2011 notes. Based on the aggregate fair
value of these agreements, we recorded a $4 non-current
liability at December 31, 2005, which was offset by a
decrease in the carrying value of long-term debt. Additional
adjustments to the carrying value of long-term debt resulted
from the modification or replacement of swap agreements that
generated cash receipts prior to 2004. These valuation
adjustments, which are being amortized as a reduction of
interest expense over the remaining life of the notes, totaled
$5 at December 31, 2005.
As of December 31, 2005, the interest rate swap agreements
provided for us to receive a fixed rate of 9.0% on a notional
amount of $114 and pay variable rates based on LIBOR, plus a
spread. The average variable rate under these contracts
approximated 9.4% at the end of 2005.
Fair Value of Financial Instruments — The
estimated fair values of our financial instruments are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Carrying | |
|
Fair | |
|
Carrying | |
|
Fair | |
|
|
Amount | |
|
Value | |
|
Amount | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
762 |
|
|
$ |
762 |
|
|
$ |
634 |
|
|
$ |
634 |
|
|
Notes receivable
|
|
|
96 |
|
|
|
96 |
|
|
|
106 |
|
|
|
106 |
|
|
Loans receivable (net)
|
|
|
18 |
|
|
|
14 |
|
|
|
28 |
|
|
|
29 |
|
|
Investment securities
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
Currency forwards
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$ |
587 |
|
|
$ |
587 |
|
|
$ |
98 |
|
|
$ |
98 |
|
|
Long-term debt
|
|
|
2,058 |
|
|
|
1,705 |
|
|
|
2,111 |
|
|
|
2,235 |
|
|
Interest rate swaps
|
|
|
4 |
|
|
|
4 |
|
|
|
1 |
|
|
|
1 |
|
|
Currency forwards
|
|
|
3 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
|
|
Note 10. |
Compensation Plans |
Employee Plans — Under our Stock Incentive
Plan, the Compensation Committee of our Board may grant stock
options to our employees. All outstanding options have been
granted at exercise prices equal to the market price of our
underlying common shares on the dates of grant. Generally, the
options are exercisable in cumulative 25% increments at each of
the first four anniversary dates of the grant and expire ten
years from the date of grant. The vesting of some outstanding
options has been accelerated as described in Note 1 and
below.
When we merged with Echlin Inc. in 1998, we assumed
Echlin’s 1992 Stock Option Plan for employees and the
underlying Echlin shares were converted to our stock. At the
time of the merger, there were options outstanding under this
plan for the equivalent of 1,692,930 shares. No options
were granted under
71
this plan after the merger. The plan expired in 2002 and the
options outstanding at the date of expiration remained
exercisable according to their terms. All options outstanding
under this plan will expire no later than 2008, if not exercised
before then.
The following table summarizes the stock option activity under
these two plans in the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
Number of | |
|
Exercise | |
|
|
Shares | |
|
Price | |
|
|
| |
|
| |
Outstanding at December 31, 2002
|
|
|
17,509,255 |
|
|
$ |
30.14 |
|
|
Granted — 2003
|
|
|
2,544,650 |
|
|
|
8.34 |
|
|
Exercised — 2003
|
|
|
(1,850 |
) |
|
|
15.33 |
|
|
Cancelled — 2003
|
|
|
(2,581,622 |
) |
|
|
32.77 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
17,470,433 |
|
|
|
26.57 |
|
|
Granted — 2004
|
|
|
2,018,219 |
|
|
|
22.03 |
|
|
Exercised — 2004
|
|
|
(958,964 |
) |
|
|
12.13 |
|
|
Cancelled — 2004
|
|
|
(2,351,475 |
) |
|
|
31.10 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
16,178,213 |
|
|
|
26.20 |
|
|
Granted — 2005
|
|
|
2,368,570 |
|
|
|
14.87 |
|
|
Exercised — 2005
|
|
|
(166,233 |
) |
|
|
10.12 |
|
|
Cancelled — 2005
|
|
|
(3,079,852 |
) |
|
|
30.17 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
15,300,698 |
|
|
$ |
23.83 |
|
|
|
|
|
|
|
|
The following table summarizes information about the stock
options outstanding under these plans at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options | |
|
Exercisable Options? | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Contractual | |
|
Exercise | |
|
Number of | |
|
Exercise | |
Range of Exercise Prices |
|
Options | |
|
Life in Years | |
|
Price | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 8.34-$18.81
|
|
|
6,084,901 |
|
|
|
7.7 |
|
|
$ |
13.33 |
|
|
|
4,714,083 |
|
|
$ |
14.37 |
|
20.19- 33.08
|
|
|
6,349,409 |
|
|
|
5.5 |
|
|
|
23.87 |
|
|
|
6,349,409 |
|
|
|
23.87 |
|
37.52- 52.56
|
|
|
2,866,388 |
|
|
|
2.7 |
|
|
|
46.01 |
|
|
|
2,866,388 |
|
|
|
46.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,300,698 |
|
|
|
5.9 |
|
|
|
23.83 |
|
|
|
13,929,880 |
|
|
|
25.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
Directors’ Plan — Some of our
non-management directors have outstanding options granted under
our 1998 Directors’ Stock Option Plan, which we
terminated in 2004. Under the plan, options for 3,000 common
shares had been granted annually to each non-management
director. The option price was the market value of the stock at
the date of grant. The options outstanding on the termination
date remained exercisable in accordance with their terms. All
options outstanding under this plan will expire no later than
2013, if not exercised before then. The following is a summary
of the stock option activity of this plan in the last three
years:
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
Weighted Average | |
|
|
Shares | |
|
Exercise Price | |
|
|
| |
|
| |
Outstanding at December 31, 2002
|
|
|
210,000 |
|
|
$ |
32.41 |
|
|
Granted — 2003
|
|
|
30,000 |
|
|
|
8.52 |
|
|
Cancelled — 2003
|
|
|
(9,000 |
) |
|
|
24.25 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
231,000 |
|
|
|
29.63 |
|
|
Cancelled — 2004
|
|
|
(42,000 |
) |
|
|
33.66 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
189,000 |
|
|
|
28.73 |
|
|
Cancelled — 2005
|
|
|
(15,000 |
) |
|
|
24.81 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
174,000 |
|
|
$ |
29.07 |
|
|
|
|
|
|
|
|
The following table summarizes information about the stock
options outstanding under this plan at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options | |
|
Exercisable Options | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Contractual | |
|
Exercise | |
|
Number of | |
|
Exercise | |
Range of Exercise Prices |
|
Options | |
|
Life in Years | |
|
Price | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$ 8.52-$21.53
|
|
|
81,000 |
|
|
|
6.4 |
|
|
$ |
15.56 |
|
|
|
81,000 |
|
|
$ |
15.56 |
|
28.78- 32.25
|
|
|
54,000 |
|
|
|
2.2 |
|
|
|
30.75 |
|
|
|
54,000 |
|
|
|
30.75 |
|
50.25- 60.09
|
|
|
39,000 |
|
|
|
2.8 |
|
|
|
54.79 |
|
|
|
39,000 |
|
|
|
54.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,000 |
|
|
|
4.3 |
|
|
|
29.07 |
|
|
|
174,000 |
|
|
|
29.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director Deferred Fee Plan — Under our Director
Deferred Fee Plan, our non-management directors could elect
prior to February 2006 to defer payment of their retainers and
fees for Board and Committee service under this plan. Deferred
amounts were credited to an Interest Equivalent Account and/or a
Stock Account. The number of stock units credited to the Stock
Account were based on the amount deferred and the market price
of our stock. Stock Accounts are credited with additional stock
units when cash dividends are paid on our stock, based on the
number of units in the Stock Account and the amount of the
dividend. The plan also provides that non-management directors
are credited with an annual grant of units equal in value to the
number of shares of our stock that could have been purchased
with $75,000, assuming a stock purchase price based on the
average of the high and low trading prices of our stock on the
grant date. The plan provides that distributions will be made
when the directors retire, die or terminate service with us, in
the form of cash and/or our stock.
73
Equity-Based Compensation — In accordance with
our accounting policy for stock-based compensation, we have not
recognized any compensation expense relating to our stock
options. The table below sets forth the amounts that would have
been recorded as stock option expense for the years ended
December 31, 2005, 2004 and 2003 if we had used the fair
value method of accounting, the alternative policy set out in
SFAS No. 123, “Accounting for Stock-Based
Compensation.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Stock compensation expense, as reported
|
|
$ |
6 |
|
|
$ |
3 |
|
|
$ |
2 |
|
Stock option expense, pro forma
|
|
|
37 |
|
|
|
8 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense, pro forma
|
|
$ |
43 |
|
|
$ |
11 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$ |
(1,605 |
) |
|
$ |
62 |
|
|
$ |
228 |
|
|
Net income (loss), pro forma
|
|
|
(1,642 |
) |
|
|
54 |
|
|
|
214 |
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
$ |
(10.73 |
) |
|
$ |
0.41 |
|
|
$ |
1.54 |
|
Net income (loss), pro forma
|
|
|
(10.98 |
) |
|
|
0.36 |
|
|
|
1.45 |
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported
|
|
|
(10.73 |
) |
|
|
0.41 |
|
|
|
1.53 |
|
Net income (loss), pro forma
|
|
|
(10.98 |
) |
|
|
0.36 |
|
|
|
1.44 |
|
As a result of our providing a valuation allowance against our
U.S. net deferred tax assets as of the beginning of 2005,
no tax benefit related to stock compensation expense has been
reflected for the year ended December 31, 2005. Tax
benefits of $5 and $9 were reflected for 2004 and 2003.
Accelerated Option Vesting — On
December 1, 2005, the Compensation Committee of our Board
approved the immediate vesting of all unvested stock options and
stock appreciation rights (SARs) granted to employees under the
Amended and Restated Stock Incentive Plan (SIP) with an
option exercise price of $15.00 or more per share or an SAR
grant price of $15.00 or more. As a result, unvested stock
options granted under the plan to
purchase 3,584,646 shares of our common stock, with a
weighted average exercise price of $18.23 per share, and
11,837 unvested SARs, with a weighted average grant price of
$21.97 per share, became exercisable on December 1,
2005 rather than on the later dates when they would have vested
in the normal course.
The decision to accelerate the vesting of these stock options
and SARs was made to reduce the compensation expense that we
would otherwise be required to record in future periods
following our adoption of SFAS No. 123(R).We will
adopt SFAS No. 123(R) in January 2006. If the vesting
of these stock options and SARs had not been accelerated, we
would have expected to recognize an incremental share-based
compensation expense of approximately $19 in the aggregate from
2006 through 2009. The resulting pro forma share-based expense
of $19 is included in the pro forma 2005 expense reflected in
the table above. As a result of the accelerated vesting, we
expect to recognize approximately $4 of share-based compensation
from 2006 through 2008, in the aggregate, with respect to the
options and SARs that remained unvested at December 31,
2005.
Option Valuation Methods — During the first
quarter of 2005, we changed the method used to value stock
option grants from the Black-Scholes method to the binomial
method. We believe the binomial method provides a fair value
that is more representative of our historical exercise and
termination experience because the binomial method considers the
possibility of early exercises of options. We have valued stock
options granted prior to January 1, 2005 using the
Black-Scholes method and stock options granted thereafter using
the binomial method.
The weighted average fair value of the 2,368,570 options and
SARs granted in 2005 was $4.04 per share under the binomial
method, using a weighted average market value at date of grant
of $14.87 and
74
the following weighted average assumptions: risk-free interest
rate of 3.91%, a dividend yield of 2.69%, volatility of 30.8% to
31.5%, expected forfeitures of 17.93% and an expected option
life of 6.8 years.
The assumptions used in 2004 and 2003 under the Black-Scholes
method are as follows:
|
|
|
|
|
|
|
2004 |
|
2003 |
|
|
|
|
|
Risk-free interest rate
|
|
3.29% |
|
2.97% |
Dividend yield
|
|
2.22% |
|
0.48% |
Expected life
|
|
5.4 years |
|
5.4 years |
Stock price volatility
|
|
51.84% |
|
43.46% |
Other Equity Grants — Our Stock Incentive Plan
also provides for the issuance of restricted stock units,
restricted shares, stock awards and performance shares and SARs,
which historically could be granted separately or in conjunction
with options. During 2005, we granted 66,625 restricted stock
units, 17,000 restricted shares, 342,104 stock-denominated
performance shares, 67,250 shares as stock awards and 7,960
SARs. The vesting periods for these grants, where applicable,
range from one to five years. Charges to expense related to
these incentive awards totaled $3 in 2005. At December 31,
2005, there were 6,052,225 shares available for future
grants of options and other types of awards under this plan.
Additional Compensation Plan — We have had
numerous additional compensation plans under which we pay our
employees for increased productivity and improved performance.
One such plan is our Additional Compensation Plan, under which
key management employees selected by our Compensation Committee
historically could earn annual cash bonuses if pre-established
annual corporate and/or other performance goals were attained.
Prior to 2005, the participants in this plan could elect whether
to defer the payment of their bonuses, whether the deferred
amounts would be credited to a Stock Account and/or an Interest
Equivalent Account and whether payment of the deferred awards
would be made in cash and/or stock. Amounts deferred in a Stock
Account were credited in the form of units, each equivalent to a
share of our stock, and the units were credited with the
equivalent of dividends on our stock and adjusted in value based
on the market value of the stock. The deferral feature was
eliminated in 2005; however, plan accounts established before
2005 remain in effect. Expense related to the Stock Accounts is
charged or credited in connection with increases or decreases,
respectively, in the value of the units in those accounts.
Amounts deferred in the Interest Equivalent Accounts are
credited quarterly with interest earned at a rate tied to the
prime rate.
Activity for the last three years related to the compensation
deferred under this plan was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Accrued for bonuses
|
|
$ |
— |
|
|
$ |
9 |
|
|
$ |
10 |
|
Dividends and interest credited to participants’ accounts
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
Mark-to-market adjustments
|
|
|
(3 |
) |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
Plan expense (credit)
|
|
$ |
(3 |
) |
|
$ |
11 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
In order to satisfy a portion of our deferred compensation
obligations to retirees and other former employees under this
plan, we distributed shares totaling 318,641, 229,058 and 9,437
in 2005, 2004 and 2003.
Restricted Stock Plans — Our Compensation
Committee may grant restricted common shares to key employees
under our 1999 Restricted Stock Plan. The shares are subject to
forfeiture until the restrictions lapse or terminate. Generally,
the employee must remain employed with us for three to five
years after the date of grant to avoid forfeiting the shares.
Dividends on granted restricted shares have historically been
credited in the form of additional restricted shares.
Participants historically could elect to convert their
75
unvested restricted stock into an equal number of restricted
stock units under certain conditions. This conversion feature
was eliminated in 2005. There were no restricted shares
converted to restricted stock units in 2005 and the number of
restricted shares converted to restricted stock units was 4,397
in 2004. The units, which are credited with the equivalent of
dividends, are payable in unrestricted stock upon retirement or
termination of employment unless subject to forfeiture.
Under the 1999 Restricted Stock Plan, we granted shares of
345,436, 129,500 and 53,900 in 2005, 2004 and 2003. At
December 31, 2005, there were 421,160 shares available for
future grants and dividends under this plan, including
approximately 48,938 shares forfeited in 2005.
Grants were made under the predecessor 1989 Restricted Stock
Plan through February 1999, at which time the authorization to
grant restricted stock under this plan lapsed. At
December 31, 2005, there were 462,313 shares available for
issuance in connection with dividends under this plan. Expenses
for these plans were $2 for 2005, 2004 and 2003.
Employees’ Stock Purchase Plan — Our
Employees’ Stock Purchase Plan, which had been in effect
for many years, was discontinued effective November 1, 2005.
Under the plan, full-time employees of Dana and our wholly-owned
subsidiaries and some part-time employees of our
non-U.S. subsidiaries
had been able to authorize payroll deductions of up to 15% of
their earnings. These deductions were deposited with an
independent plan custodian. We matched up to 50% of the
participants’ contributions in cash over a five-year
period, beginning with the year the amounts were withheld. To
get the full 50% match, shares purchased by the custodian for
any given year had to remain in the participant’s account
for five years.
The custodian used the payroll deductions and matching
contributions to purchase our stock at current market prices. As
record keeper for the plan, we allocated the purchased shares to
the participants’ accounts. Shares were distributed to the
participants from their accounts on request in accordance with
the plan’s withdrawal provisions.
The custodian purchased the following number of our shares in
the open market in the past three years: 1,447,001, 1,460,940
and 2,503,454 in 2005, 2004 and 2003. Expenses for our matching
contributions were $5, $8 and $10 in 2005, 2004 and 2003.
We were also authorized to issue up to 4,500,000 shares to
sell to the custodian in lieu of open market purchases. No
shares were issued for this purpose.
Pension — 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.
Under the terms of the defined contribution retirement plans,
employee and employer contributions may be directed into a
number of diverse investments. None of these defined
contribution plans allow direct investment of contributions in
our stock.
76
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, 2005, statements of
the funded status and schedules of the net amounts recognized in
the balance sheet at December 31, 2005 and 2004 for both
continuing and discontinued operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Reconciliation of benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at January 1
|
|
$ |
2,159 |
|
|
$ |
938 |
|
|
$ |
2,097 |
|
|
$ |
817 |
|
|
$ |
1,643 |
|
|
$ |
104 |
|
|
$ |
1,668 |
|
|
$ |
91 |
|
|
Service cost
|
|
|
31 |
|
|
|
15 |
|
|
|
38 |
|
|
|
21 |
|
|
|
9 |
|
|
|
2 |
|
|
|
10 |
|
|
|
3 |
|
|
Interest cost
|
|
|
121 |
|
|
|
47 |
|
|
|
128 |
|
|
|
50 |
|
|
|
87 |
|
|
|
6 |
|
|
|
97 |
|
|
|
6 |
|
|
Employee contributions
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan amendments
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
4 |
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
92 |
|
|
|
180 |
|
|
|
111 |
|
|
|
31 |
|
|
|
(28 |
) |
|
|
23 |
|
|
|
4 |
|
|
|
4 |
|
|
Benefit payments
|
|
|
(248 |
) |
|
|
(42 |
) |
|
|
(198 |
) |
|
|
(45 |
) |
|
|
(133 |
) |
|
|
(11 |
) |
|
|
(122 |
) |
|
|
(6 |
) |
|
Settlements, curtailments and terminations
|
|
|
8 |
|
|
|
4 |
|
|
|
(17 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
(1 |
) |
Acquisitions and divestitures
|
|
|
(12 |
) |
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
(68 |
) |
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at December 31
|
|
$ |
2,151 |
|
|
$ |
1,077 |
|
|
$ |
2,159 |
|
|
$ |
938 |
|
|
$ |
1,543 |
|
|
$ |
126 |
|
|
$ |
1,643 |
|
|
$ |
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation at December 31
|
|
$ |
2,142 |
|
|
$ |
1,002 |
|
|
$ |
2,146 |
|
|
$ |
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The measurement date for the amounts in these tables was
December 31 of each year presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
|
| |
|
| |
|
| |
|
| |
Reconciliation of fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at January 1
|
|
$ |
2,015 |
|
|
$ |
728 |
|
|
$ |
1,784 |
|
|
$ |
588 |
|
|
Actual return on plan assets
|
|
|
190 |
|
|
|
111 |
|
|
|
233 |
|
|
|
62 |
|
|
Acquisitions and divestitures
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
(19 |
) |
|
Employer contributions
|
|
|
41 |
|
|
|
39 |
|
|
|
196 |
|
|
|
94 |
|
|
Employee contributions
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
3 |
|
|
Benefit payments
|
|
|
(248 |
) |
|
|
(42 |
) |
|
|
(198 |
) |
|
|
(44 |
) |
|
Translation adjustments
|
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31
|
|
$ |
1,985 |
|
|
$ |
795 |
|
|
$ |
2,015 |
|
|
$ |
728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
The following table presents information regarding the funding
levels of our defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
|
| |
|
| |
|
| |
|
| |
Plans with fair value of plan assets in excess of obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
|
$ |
624 |
|
|
$ |
460 |
|
|
$ |
1,305 |
|
|
$ |
529 |
|
|
Accumulated benefit obligation
|
|
|
558 |
|
|
|
442 |
|
|
|
1,238 |
|
|
|
509 |
|
|
Projected benefit obligation
|
|
|
562 |
|
|
|
450 |
|
|
|
1,245 |
|
|
|
529 |
|
Plans with obligations in excess of fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$ |
1,584 |
|
|
$ |
560 |
|
|
$ |
908 |
|
|
$ |
359 |
|
|
Projected benefit obligation
|
|
|
1,588 |
|
|
|
627 |
|
|
|
914 |
|
|
|
409 |
|
|
Fair value of plan assets
|
|
|
1,361 |
|
|
|
335 |
|
|
|
710 |
|
|
|
199 |
|
The CashPlus Plan in the U.S. moved from a slightly over
funded status at December 31, 2004 to a slightly under
funded status at December 31, 2005.
The weighted average asset allocations of our pension plans at
December 31 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. | |
|
Non-U.S. | |
|
|
| |
|
| |
Asset Category |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Equity securities
|
|
|
40 |
% |
|
|
50 |
% |
|
|
46 |
% |
|
|
56 |
% |
Controlled-risk debt securities
|
|
|
33 |
|
|
|
28 |
|
|
|
47 |
|
|
|
39 |
|
Absolute return strategies investments
|
|
|
26 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
Cash and short-term securities
|
|
|
1 |
|
|
|
14 |
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our target asset allocations of U.S. pension plans for
equity securities, controlled-risk debt securities, absolute
return strategies investments and cash and other assets at
December 31, 2005 were 40%, 35%, 20% and 5%, while at
December 31, 2004, the target allocations for
controlled-risk debt securities were 45% and absolute return
strategies investments were 10%. Our U.S. pension
plan target asset allocations are established through an
investment policy, which is updated periodically and reviewed by
the Finance Committee of the Board of Directors.
Our policy recognizes that the link between assets and
liabilities is the level of long-term interest rates and that
properly managing the relationship between assets of the pension
plans and pension liabilities serves to mitigate the impact of
market volatility on our funding levels.
Given our U.S. plans’ demographics, an important
component of our asset/liability modeling approach is the use of
what we refer to as “controlled-risk assets;” for the
U.S. fund these assets are long duration
U.S. government fixed-income securities. Such securities
are a positively correlated asset class to pension liabilities
and their use mitigates interest rate risk and provides the
opportunity to allocate additional plan assets to other asset
categories with low correlation to equity market indices.
Our investment policy permits plan assets to be invested in a
number of diverse investment categories, including
“absolute return strategies” investments such as hedge
funds. Absolute return strategies investments are currently
limited to not less than 10% nor more than 30% of total assets.
At December 31, 2005, approximately 26% of our
U.S. plan assets were invested in absolute return
strategies investments, primarily in U.S. and international
hedged directional equity funds. The cash and other short-term
debt securities provide adequate liquidity for anticipated
near-term benefit payments.
78
The weighted-average asset allocation targets for our
non-U.S. plans at
December 31, 2005 were 48% equity securities, 47%
controlled-risk sovereign debt securities and 5% cash and other
assets. The following table presents the funded status of our
pension and other retirement benefit plans and the amounts
recognized in the balance sheet as of December 31, 2005 and
2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
Other Benefits | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Funded status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$ |
(166 |
) |
|
$ |
(281 |
) |
|
$ |
(145 |
) |
|
$ |
(209 |
) |
|
$ |
(1,543 |
) |
|
$ |
(126 |
) |
|
$ |
(1,643 |
) |
|
$ |
(104 |
) |
|
Unrecognized transition obligation
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
4 |
|
|
Unrecognized prior service cost
|
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
|
|
6 |
|
|
|
(128 |
) |
|
|
|
|
|
|
(105 |
) |
|
|
|
|
|
Unrecognized loss
|
|
|
505 |
|
|
|
241 |
|
|
|
453 |
|
|
|
140 |
|
|
|
692 |
|
|
|
66 |
|
|
|
758 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense (accrued cost)
|
|
$ |
344 |
|
|
$ |
(33 |
) |
|
$ |
315 |
|
|
$ |
(62 |
) |
|
$ |
(979 |
) |
|
$ |
(57 |
) |
|
$ |
(990 |
) |
|
$ |
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$ |
247 |
|
|
$ |
108 |
|
|
$ |
332 |
|
|
$ |
110 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
Accrued benefit liability
|
|
|
(13 |
) |
|
|
(151 |
) |
|
|
(17 |
) |
|
|
(172 |
) |
|
|
(979 |
) |
|
|
(57 |
) |
|
|
(990 |
) |
|
|
(56 |
) |
|
|
Intangible assets
|
|
|
4 |
|
|
|
5 |
|
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional minimum liability
|
|
|
(214 |
) |
|
|
(76 |
) |
|
|
(238 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
320 |
|
|
|
81 |
|
|
|
237 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
344 |
|
|
$ |
(33 |
) |
|
$ |
315 |
|
|
$ |
(62 |
) |
|
$ |
(979 |
) |
|
$ |
(57 |
) |
|
$ |
(990 |
) |
|
$ |
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts recorded in other comprehensive income (loss) were a
pre-tax charge of $157 in 2005 that increased the accumulated
other comprehensive loss by $152 and a pre-tax credit of $213 in
2004 that reduced the accumulated other comprehensive loss by
$129.
Benefit obligations of the U.S. non-qualified and certain
non-U.S. pension
plans, amounting to $176 at December 31, 2005, and the
other postretirement benefit plans of $1,669 are not funded.
In January 2005, the Center for Medicare and Medicaid Services
released final regulations to implement the new prescription
drug benefits under Part D of Medicare. The initial effect
of the subsidy was a $68 reduction in our APBO at
January 1, 2004 and a corresponding actuarial gain, which
we deferred in accordance with our accounting policy related to
retiree benefit plans. Amortization of the actuarial gain, along
with a reduction in service and interest costs, increased net
income by $8 in 2004. The final regulations resulted in further
reductions of $5 in expense and $43 in APBO in 2005.
79
Expected benefit payments by our pension plans and other
retirement plans for each of the next five years and for the
period 2010 through 2014 are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits | |
|
|
|
|
|
|
| |
|
|
Pension Benefits | |
|
U.S. | |
|
|
|
|
| |
|
| |
|
|
|
|
|
|
Prior to | |
|
|
|
Net After | |
|
|
|
|
|
|
Medicare | |
|
Medicare | |
|
Medicare | |
|
|
|
|
U.S. | |
|
Non-U.S. | |
|
Part D | |
|
Part D | |
|
Part D | |
|
Non-U.S. | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$ |
159 |
|
|
$ |
42 |
|
|
$ |
127 |
|
|
$ |
10 |
|
|
$ |
117 |
|
|
$ |
5 |
|
|
2007
|
|
|
162 |
|
|
|
43 |
|
|
|
129 |
|
|
|
10 |
|
|
$ |
119 |
|
|
|
5 |
|
|
2008
|
|
|
162 |
|
|
|
44 |
|
|
|
130 |
|
|
|
10 |
|
|
$ |
120 |
|
|
|
5 |
|
|
2009
|
|
|
163 |
|
|
|
46 |
|
|
|
130 |
|
|
|
11 |
|
|
$ |
119 |
|
|
|
6 |
|
|
2010
|
|
|
162 |
|
|
|
48 |
|
|
|
130 |
|
|
|
11 |
|
|
$ |
119 |
|
|
|
6 |
|
|
2011-2015
|
|
|
821 |
|
|
|
255 |
|
|
|
610 |
|
|
|
58 |
|
|
$ |
552 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,629 |
|
|
$ |
478 |
|
|
$ |
1,256 |
|
|
$ |
110 |
|
|
$ |
1,146 |
|
|
$ |
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected contributions to be made to our defined benefit
pension plans in 2006 are $34 for our U.S. plans and $30
for our
non-U.S. plans.
Components of net periodic benefit costs for the last three
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Service cost
|
|
$ |
31 |
|
|
$ |
15 |
|
|
$ |
38 |
|
|
$ |
21 |
|
|
$ |
36 |
|
|
$ |
17 |
|
Interest cost
|
|
|
121 |
|
|
|
47 |
|
|
|
128 |
|
|
|
50 |
|
|
|
137 |
|
|
|
40 |
|
Expected return on plan assets
|
|
|
(173 |
) |
|
|
(45 |
) |
|
|
(173 |
) |
|
|
(42 |
) |
|
|
(183 |
) |
|
|
(33 |
) |
Amortization of transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Amortization of prior service cost
|
|
|
2 |
|
|
|
2 |
|
|
|
4 |
|
|
|
4 |
|
|
|
8 |
|
|
|
2 |
|
Recognized net actuarial loss
|
|
|
18 |
|
|
|
6 |
|
|
|
13 |
|
|
|
6 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
(1 |
) |
|
|
25 |
|
|
|
10 |
|
|
|
38 |
|
|
|
(2 |
) |
|
|
29 |
|
Curtailment loss
|
|
|
|
|
|
|
4 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement loss
|
|
|
13 |
|
|
|
|
|
|
|
9 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost after curtailment and
settlements
|
|
$ |
12 |
|
|
$ |
29 |
|
|
$ |
21 |
|
|
$ |
44 |
|
|
$ |
(2 |
) |
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Benefits | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
U.S. | |
|
Non-U.S. | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Service cost
|
|
$ |
9 |
|
|
$ |
2 |
|
|
$ |
9 |
|
|
$ |
4 |
|
|
$ |
9 |
|
|
$ |
4 |
|
Interest cost
|
|
|
87 |
|
|
|
6 |
|
|
|
96 |
|
|
|
6 |
|
|
|
108 |
|
|
|
5 |
|
Amortization of prior service cost
|
|
|
(12 |
) |
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
Recognized net actuarial loss
|
|
|
37 |
|
|
|
2 |
|
|
|
38 |
|
|
|
2 |
|
|
|
36 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
|
121 |
|
|
|
10 |
|
|
|
131 |
|
|
|
12 |
|
|
|
146 |
|
|
|
11 |
|
Curtailment loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Settlement gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
Termination expenses
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost after curtailment and
settlements
|
|
$ |
121 |
|
|
$ |
10 |
|
|
$ |
132 |
|
|
$ |
11 |
|
|
$ |
147 |
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average assumptions used in the measurement of
pension benefit obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.65 |
% |
|
|
5.75 |
% |
|
|
6.25 |
% |
Expected return on plan assets
|
|
|
8.50 |
% |
|
|
8.75 |
% |
|
|
8.75 |
% |
Rate of compensation increase
|
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Plans | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
4.65 |
% |
|
|
5.54 |
% |
|
|
5.63 |
% |
Expected return on plan assets
|
|
|
6.38 |
% |
|
|
6.66 |
% |
|
|
6.80 |
% |
Rate of compensation increase
|
|
|
3.37 |
% |
|
|
3.46 |
% |
|
|
3.58 |
% |
The assumptions and expected return on plan assets for the
U.S. plans presented in the table above are used to
determine pension expense for the succeeding year.
Our pension plan discount rate assumption is evaluated annually.
Long-term interest rates on high quality debt instruments, which
are used to determine the discount rate, were almost equal at
the beginning and end of 2005 after declining in 2004. Using a
discounted bond portfolio analysis the year-end discount rate
was selected to determine our pension benefit obligation on our
U.S. plans in both years. Overall, a change in the discount
rate of 25 basis points would result in a change in our
obligation of approximately $57 and a change in pension expense
of approximately $3.
We select the expected rate of return on plan assets on the
basis of a long-term view of asset portfolio performance of our
pension plans. Since 1985, our asset/liability management
investment policy has resulted in a compound rate of return of
12.5%. Our two-year, five-year and ten-year compounded rates of
return through December 31, 2005 were 12.3%, 6.1% and 9.3%.
We assess the appropriateness of the expected rate of return on
an annual basis and when necessary revise the assumption. Our
rate of return assumption for U.S. plans was lowered from
8.75% to 8.5% as of December 31, 2005, based in part on our
expectation of lower future rates of return.
81
The weighted average assumptions used in the measurement of
other postretirement benefit obligations in the U.S. are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.60 |
% |
|
|
5.76 |
% |
|
|
6.24 |
% |
Initial weighted health care costs trend rate
|
|
|
9.00 |
% |
|
|
10.31 |
% |
|
|
11.81 |
% |
Ultimate health care costs trend rate
|
|
|
5.00 |
% |
|
|
4.98 |
% |
|
|
5.00 |
% |
Years to ultimate (2011)
|
|
|
6 |
|
|
|
7 |
|
|
|
8 |
|
The assumptions presented in the table above are used to
determine expense for the succeeding year. 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 2005:
|
|
|
|
|
|
|
|
|
|
|
1% Point | |
|
1% Point | |
|
|
Increase | |
|
Decrease | |
|
|
| |
|
| |
Effect on total of service and interest cost components
|
|
$ |
7 |
|
|
$ |
(6 |
) |
Effect on postretirement benefit obligations
|
|
|
110 |
|
|
|
(93 |
) |
Income tax expense (benefit) applicable to continuing operations
consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$ |
67 |
|
|
$ |
61 |
|
|
$ |
(123 |
) |
|
U.S. state and local
|
|
|
(19 |
) |
|
|
(4 |
) |
|
|
1 |
|
|
Non-U.S.
|
|
|
141 |
|
|
|
31 |
|
|
|
105 |
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
189 |
|
|
|
88 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal and state
|
|
|
776 |
|
|
|
(298 |
) |
|
|
(7 |
) |
|
Non-U.S.
|
|
|
(41 |
) |
|
|
5 |
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
735 |
|
|
|
(293 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
Total expense (benefit)
|
|
$ |
924 |
|
|
$ |
(205 |
) |
|
$ |
(52 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes from continuing operations
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
U.S. operations
|
|
$ |
(736 |
) |
|
$ |
(445 |
) |
|
$ |
(200 |
) |
Non-U.S. operations
|
|
|
451 |
|
|
|
280 |
|
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before income taxes
|
|
$ |
(285 |
) |
|
$ |
(165 |
) |
|
$ |
62 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided for temporary differences
between amounts of assets and liabilities for financial
reporting purposes and the basis of such assets and liabilities
as measured by tax laws and regulations, as well as net
operating loss, tax credit and other carryforwards.
SFAS No. 109, “Accounting for Income Taxes”,
requires that deferred tax assets be reduced by a valuation
allowance if, based an all available evidence, it is considered
more likely than not that some portion or all of the recorded
deferred tax assets will not be realized in future periods.
82
The current income tax expense reflects changes in the amount of
income taxes currently payable or receivable. Although
Dana’s current operating results, as discussed below, did
not generate federal income taxes payable in the U.S., the
current federal income tax expense in 2004 and 2005 generally
reflects estimated amounts payable as a result of Internal
Revenue Service examinations of the years 1997 through
2002 — periods for which NOLs were not available.
During the third quarter of 2005, Dana recorded a non-cash
charge of $918 to establish a full valuation allowance against
our net deferred tax assets in the U.S. and U.K. This charge
represents the valuation allowance against the applicable net
deferred tax assets at July 1, 2005, which included $817 of
net deferred tax assets as of the beginning of the year.
Dana’s income tax expense for 2005 includes $100 of income
tax expense primarily related to
non-U.S. countries
whose results continued to be taxable due to their ongoing
profitability.
In assessing the need for additional valuation allowances during
the third quarter of 2005, we considered the impact of the
revised outlook of our profitability in the U.S. on our
2005 operating results. The revised outlook of profitability was
due in part to the lower than previously anticipated levels of
performance, resulting from manufacturing inefficiencies and our
failure to achieve projected cost reductions, as well as
higher-than-expected costs for steel, other raw materials and
energy which we have not been able to recover fully. In light of
these developments, there was sufficient negative evidence and
uncertainty as to our ability to generate the necessary level of
U.S taxable earnings to realize our deferred tax assets in the
U.S. for us to conclude, in accordance with the
requirements of SFAS No. 109 and our accounting
policies, that a full valuation allowance against the net
deferred tax asset was required. Additionally, we concluded that
an additional valuation allowance was required for the deferred
tax assets in U.K. where recoverability was also considered
uncertain. In reviewing our results for the fourth quarter of
2005 and beyond, we concluded that there were no further changes
to our previous assessments as to the realization of our other
deferred tax assets.
83
Deferred tax benefits (liabilities) consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Postretirement benefits other than pensions
|
|
$ |
409 |
|
|
$ |
372 |
|
Pension accruals
|
|
|
|
|
|
|
7 |
|
Postemployment benefits
|
|
|
48 |
|
|
|
40 |
|
Other employee benefits
|
|
|
8 |
|
|
|
82 |
|
Capital loss carryforward
|
|
|
226 |
|
|
|
251 |
|
Net operating loss carryforwards
|
|
|
583 |
|
|
|
424 |
|
Foreign tax credits recoverable
|
|
|
187 |
|
|
|
108 |
|
Other tax credits recoverable
|
|
|
60 |
|
|
|
47 |
|
Inventory reserves
|
|
|
21 |
|
|
|
15 |
|
Expense accruals
|
|
|
156 |
|
|
|
125 |
|
Goodwill
|
|
|
54 |
|
|
|
62 |
|
Research and development costs
|
|
|
116 |
|
|
|
128 |
|
Other
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,897 |
|
|
|
1,661 |
|
Valuation allowances
|
|
|
(1,535 |
) |
|
|
(387 |
) |
|
|
|
|
|
|
|
Deferred tax benefits
|
|
|
362 |
|
|
|
1,274 |
|
|
|
|
|
|
|
|
Leasing activities
|
|
|
(183 |
) |
|
|
(281 |
) |
Depreciation — non-leasing
|
|
|
(63 |
) |
|
|
(70 |
) |
Pension accruals
|
|
|
(21 |
) |
|
|
|
|
Unremitted equity earnings
|
|
|
(11 |
) |
|
|
(12 |
) |
Other
|
|
|
|
|
|
|
(37 |
) |
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(278 |
) |
|
|
(400 |
) |
|
|
|
|
|
|
|
Net deferred tax benefits
|
|
$ |
84 |
|
|
$ |
874 |
|
|
|
|
|
|
|
|
84
Our deferred tax assets include benefits expected from the
utilization of net operating loss, capital loss and credit
carryforwards in the future. The following table identifies the
various deferred tax asset components and the related allowances
that existed at December 31, 2005. Due to time limitations
on the ability to realize the benefit of the carryforwards,
additional portions of these deferred tax assets may become
unrealizable in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred | |
|
|
|
|
|
Earliest | |
|
|
Tax | |
|
Valuation | |
|
Carryforward |
|
Year of | |
|
|
Asset | |
|
Allowance | |
|
Period |
|
Expiration | |
|
|
| |
|
| |
|
|
|
| |
Net operating losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$ |
325 |
|
|
$ |
325 |
|
|
20 |
|
|
2023 |
|
|
U.S. state
|
|
|
135 |
|
|
|
135 |
|
|
Various |
|
|
2006 |
|
|
Germany
|
|
|
42 |
|
|
|
21 |
|
|
Unlimited |
|
|
|
|
|
France
|
|
|
23 |
|
|
|
|
|
|
Unlimited |
|
|
|
|
|
U.K.
|
|
|
29 |
|
|
|
29 |
|
|
Unlimited |
|
|
|
|
|
Other non-U.S.
|
|
|
29 |
|
|
|
4 |
|
|
Various |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
583 |
|
|
|
514 |
|
|
|
|
|
|
|
Capital losses
|
|
|
226 |
|
|
|
212 |
|
|
Various |
|
|
2007 |
|
Foreign tax credit
|
|
|
187 |
|
|
|
187 |
|
|
10 |
|
|
2010 |
|
Other credits
|
|
|
60 |
|
|
|
60 |
|
|
20 |
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,056 |
|
|
$ |
973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The deferred tax asset and valuation allowance for capital loss
carryforwards decreased in 2005 as a result of capital gains
generated in connection with the divestiture of various leasing
subsidiaries. The valuation allowance of $14 on the capital loss
benefit is not required since the settlement of the IRS
examinations for the years prior to 1999 enable us to recover
these amounts through capital loss carryback provisions.
We have not provided for U.S. federal income and
non-U.S. withholding
taxes on $483 of undistributed earnings from
non-U.S. operations
as of December 31, 2005 because such earnings are intended
to be re-invested indefinitely outside of the U.S. Where
excess cash has accumulated in our
non-U.S. subsidiaries
and it is advantageous for business operations, tax or cash
reasons, subsidiary earnings are remitted. If these earnings
were distributed, our net operating loss and foreign tax credit
carryforwards available under current law would reduce or
eliminate the resulting U.S. income tax liability.
The American Jobs Creation Act of 2004 (JOBS Act), enacted on
October 22, 2004, provides for a temporary incentive for
U.S. corporations to repatriate earnings from foreign
subsidiaries. As such, corporations may deduct 85% for certain
dividends received from controlled foreign corporations.
Qualifying dividends must exceed a base amount and be invested
in the U.S. pursuant to a domestic reinvestment plan. We
have elected to forego claiming this deduction as it would still
require the company to pay cash taxes on 15% of any such
dividends (i.e., the balance of the dividends not covered by the
deduction) and neither U.S. net operating losses nor
foreign tax credits could be used to offset these payments.
At June 30, 2005, the State of Ohio enacted new tax
legislation that replaced the state’s current income-based
system with a new gross receipts-based system. With the
enactment of this legislation, we increased tax expense to
eliminate certain deferred tax assets relating to Ohio that
would no longer be realized. This charge was partially offset by
a credit to selling, general and administrative expenses to
recognize tax credits recoverable under the new system. The net
impact of this legislation was a $5 reduction to second quarter
2005 net income.
85
The effective income tax rate for continuing operations differs
from the U.S. federal income tax rate for the following
reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
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
|
|
|
(6.5 |
) |
|
|
(8.8 |
) |
|
|
(8.0 |
) |
|
Non-U.S. income
|
|
|
11.5 |
|
|
|
(3.1 |
) |
|
|
(26.6 |
) |
|
Ohio legislation
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
General business tax credits
|
|
|
(3.5 |
) |
|
|
(5.3 |
) |
|
|
(9.1 |
) |
|
Goodwill impairment
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
Provision to return adjustments
|
|
|
2.7 |
|
|
|
(1.4 |
) |
|
|
|
|
|
Miscellaneous items
|
|
|
(1.2 |
) |
|
|
(0.8 |
) |
|
|
4.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23.1 |
) |
|
|
(54.4 |
) |
|
|
(4.0 |
) |
|
Capital gain/loss
|
|
|
|
|
|
|
48.7 |
|
|
|
(234.9 |
) |
|
Valuation allowance adjustments
|
|
|
346.2 |
|
|
|
(118.4 |
) |
|
|
155.2 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
323.1 |
% |
|
|
(124.1 |
)% |
|
|
(83.7 |
)% |
|
|
|
|
|
|
|
|
|
|
Going forward, the need to maintain a valuation allowance
against deferred tax assets in the U.S. and other foreign
countries will cause variability in our effective tax rate. Dana
will maintain full valuation allowances against our net deferred
tax assets in the U.S., U.K. and other applicable countries
until sufficient positive evidence exists to reduce or eliminate
the valuation allowance.
|
|
Note 13. |
Commitments and Contingencies |
Impact of Our Bankruptcy Filing — On
March 3, 2006, the Debtors filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code, as
discussed in Item 1. Under the Bankruptcy Code, the filing
of a petition automatically stays most actions against us.
Substantially all of our pre-petition liabilities will be
resolved under our plan of reorganization if not otherwise
satisfied pursuant to orders of the Bankruptcy Court.
Class Action Lawsuit and Derivative Actions —
Dana and certain of our current and former officers are
defendants in a consolidated class action pending in the
U.S. District Court for the Northern District of Ohio. The
plaintiffs in this action allege violations of the
U.S. securities laws and claim that the price at which
Dana’s shares traded at various times between February 2004
and November 2005 was artificially inflated as a result of the
defendants’ alleged wrongdoing. Three derivative actions
are also pending in the same court naming certain of our
directors and current and former officers as defendants. Among
other things, the plaintiffs in these actions allege breaches of
the defendants’ fiduciary duties to Dana arising from the
same facts on which the consolidated class action is based. Due
to the preliminary nature of these lawsuits, at this time we
cannot predict their outcome or estimate Dana’s potential
exposure related thereto. While we have insurance coverage with
respect to these matters and do not currently believe that any
liabilities that may result from these proceedings are
reasonably likely to have a material adverse effect on our
liquidity, financial condition or results of operations, there
can be no assurance that the impact of any loss not covered by
insurance would not be material.
SEC Investigation — In September 2005, we
reported that management was investigating accounting matters
arising out of incorrect entries related to a customer agreement
in our Commercial Vehicle business unit and that our Audit
Committee had engaged outside counsel to conduct an independent
investigation of these matters as well. Outside counsel informed
the SEC of the investigation, which ended in December 2005,
about when we filed restated financial statements for the first
two quarters of 2005 and the years 2002 through 2004. In January
2006, we learned that the SEC had issued a formal order of
investigation
86
with respect to matters related to our restatements. The
SEC’s investigation is a non-public, fact-finding inquiry
to determine whether any violations of the law have occurred.
This investigation has not been suspended as a result of our
bankruptcy filing. We will continue to cooperate fully with the
SEC in the investigation.
Legal Proceedings Arising in the Ordinary Course of
Business — 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
environmental laws. We have reviewed these pending legal
proceedings, including the probable outcomes, our reasonably
anticipated costs and expenses, the availability and limits of
our insurance coverage and surety bonds 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 adverse effect on our
liquidity, financial condition or results of operations.
Asbestos-Related Product Liabilities — Under
the Bankruptcy Code, pending asbestos-related product liability
lawsuits are stayed during our reorganization process, and
claimants may not commence new lawsuits against us on account of
pre-petition claims. However, proofs of additional asbestos
claims may be filed in the Bankruptcy Cases either voluntarily
by claimants or if a bar date is established for asbestos
claims. Our obligations with respect to asbestos claims will be
resolved pursuant to our plan of reorganization or otherwise
resolved pursuant to order(s) of the Bankruptcy Court.
We had approximately 77,000 active pending asbestos-related
product liability claims at December 31, 2005, compared to
116,000 at December 31, 2004, including at both dates
10,000 claims that were settled but awaiting final documentation
and payment. The reduced number of active pending claims at
December 31, 2005, was due primarily to the effect of tort
reform legislation or medical criteria orders entered in various
courts. During the year, these factors resulted in a reduction
of approximately 20,000 claims in Texas, 12,000 claims in
Mississippi and 9,000 claims in Ohio. We had accrued $98 for
indemnity and defense costs for pending asbestos-related product
liability claims at December 31, 2005, compared to $139 at
December 31, 2004. We accrue for pending claims based on
our claims settlement and dismissal history.
In the past, we accrued only for pending asbestos-related
product liability claims because we did not believe our
historical trend data was sufficient to provide us with a
reasonable basis to estimate potential costs for future demands.
However, more recently, our claims activity has become more
stable following the dissolution of the Center for Claims
Resolution (CCR), as described below, the implementation of our
post-CCR legal and settlement strategy and legislative actions
that have reduced the volume of claims in the legal system. In
the third quarter of 2005, we concluded that our historical
claims activity had stabilized over a sufficient duration of
time to enable us to project possible future demands and related
costs. Therefore, in consultation with Navigant Consulting, Inc.
(a specialized consulting firm providing dispute, financial,
regulatory and operational advisory services), we analyzed our
potential future costs for such claims. Based on this analysis,
we estimated our potential liability for the next fifteen years
to be within a range of $70 to $120. Since the outcomes within
that range are equally probable, we accrued the lower end of the
range at December 31, 2005. Beyond fifteen years, we
believe there are reasonable scenarios in which our expenditures
related to asbestos-related product liability claims would be de
minimis; however, the process of estimating future demands is
highly uncertain.
Generally accepted methods of projecting future asbestos-related
product claims and costs require a complex modeling of data and
assumptions about occupational exposures, disease incidence,
mortality, litigation patterns and strategy and settlement
values. Although we do not believe that our products have ever
caused any asbestos-related diseases, for modeling purposes we
combined historical data relating to claims filed against us
with labor force data in an epidemiological model, in order to
project past and future disease incidence and resulting claims
propensity. Then we compared our claims history to historical
incidence estimates and applied these relationships to the
projected future incidence patterns, in order to estimate future
compensable claims. We then established a cost for such claims,
based on historical trends in claim settlement amounts. In
applying this methodology, we made a number of key assumptions,
87
including labor force exposure, the calibration period, the
nature of the diseases and the resulting claims that might be
made, the number of claims that might be settled, the settlement
amounts and the defense costs we might incur. Given the inherent
variability of our key assumptions, the methodology produced the
range of estimated potential values described above.
At December 31, 2005, we had recorded $78 as an asset for
probable recovery from our insurers for both the pending and
projected claims, compared to $118 recorded at December 31,
2004, solely for pending claims. During the second quarter of
2005, we received the final payment due us under an insurance
settlement agreement that we had entered into with some of our
carriers in December 2004. The asset recorded at
December 31, 2005, reflects our assessment of the capacity
of our remaining insurance agreements to provide for the payment
of anticipated defense and indemnity costs for pending claims
and future demands, assuming elections under our existing
coverage, which we intend to adopt in order to maximize our
insurance recovery.
Proceeds from insurance commutations are first applied to reduce
any recorded recoverable amount. Any excess over the recoverable
amount will be evaluated to assess whether any portion of the
excess represents payments by the insurer for potential future
liability. In October 2005, we signed a settlement agreement
with another of our insurers providing for us to receive cash
payments of $8 in 2006 in exchange for the release of all rights
to coverage for asbestos-related bodily injury claims under the
settled insurance policies. We recorded a receivable for this
amount at December 31, 2005, of which $2 was used to reduce
receivables related to pending and unasserted claims and the
balance was recorded as deferred income available for potential
future liabilities.
In addition, we had a net amount recoverable from our insurers
and others of $15 at December 31, 2005, compared to $26 at
December 31, 2004. This recoverable represents
reimbursements for settled asbestos-related product liability
claims, including billings in progress and amounts subject to
alternate dispute resolution proceedings with some of our
insurers. During the reorganization process, all asbestos
litigation is stayed. As a result, we do not expect to make any
asbestos payments in the near term. However, we are continuing
to pursue insurance collections with respect to asbestos-related
amounts paid prior to the Filing Date.
Other Product Liabilities — We had accrued $13
for contingent non-asbestos product liability costs at
December 31, 2005, compared to $11 at December 31,
2004, with no recovery expected from third parties at either
date. We estimate these liabilities based on assumptions about
the value of the claims and about the likelihood of recoveries
against us, derived from our historical experience and current
information. If there is a range of equally probable outcomes,
we accrue the lower end of the range. The difference between our
minimum and maximum estimates for these liabilities was $10 at
both dates.
Environmental Liabilities — We had accrued $63
for contingent environmental liabilities at December 31,
2005, compared to $73 at December 31, 2004. We estimate
these liabilities 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, we accrue the lower
end of the range. The difference between our minimum and maximum
estimates for these liabilities was $1 at both dates.
Included in these accruals are amounts relating to the Hamilton
Avenue Industrial Park Superfund site in New Jersey, where we
are presently one of four potentially responsible parties
(PRPs). We estimate our liability for this site quarterly. There
have been no material changes in the facts underlying these
estimates since December 31, 2004 and, accordingly, our
estimated liabilities for the three Operable Units at this site
at December 31, 2005 remained unchanged and were as follows:
|
|
|
|
• |
Unit 1 — $1 for future remedial work and past costs
incurred by the United States Environmental Protection Agency
(EPA) relating to off-site soil contamination, based on the
remediation performed at this Unit to date and our assessment of
the likely allocation of costs among the PRPs; |
88
|
|
|
|
• |
Unit 2 — $14 for future remedial work relating to
on-site soil
contamination, taking into consideration the $69 remedy proposed
by the EPA in a Record of Decision issued in September 2004 and
our assessment of the most likely remedial activities and
allocation of costs among the PRPs; and |
|
|
• |
Unit 3 — less than $1 for the costs of a remedial
investigation and feasibility study pertaining to groundwater
contamination, based on our expectations about the study that is
likely to be performed and the likely allocation of costs among
the PRPs. |
Other Liabilities Related to Asbestos Claims —
Until 2001, most of our asbestos-related claims were
administered, defended and settled by the CCR, which settled
claims for its member companies on a shared settlement cost
basis. In that year, the CCR was reorganized and discontinued
negotiating shared settlements. Since then, we have
independently controlled our legal strategy and settlements,
using Peterson Asbestos Consulting Enterprise (PACE), a unit of
Navigant Consulting, Inc., to administer our claims, bill our
insurance carriers and assist us in claims negotiation and
resolution. Some former CCR members defaulted on the payment of
their shares of some of the CCR-negotiated settlements and some
of the settling claimants have sought payment of the unpaid
shares from Dana and the other companies that were members of
the CCR at the time of the settlements. We have been working
with the CCR, other former CCR members, our insurers and the
claimants over a period of several years in an effort to resolve
these issues. Through December 31, 2005, we had paid $47 to
claimants and collected $29 from our insurance carriers with
respect to these claims. At December 31, 2005, we had a net
receivable of $13 that we expect to recover from available
insurance and surety bonds relating to these claims. We are
continuing to pursue insurance collections with respect to
asbestos-related amounts paid prior to the filing of our
bankruptcy petition.
Assumptions — The amounts we have recorded for
contingent asbestos-related liabilities and recoveries are based
on assumptions and estimates reasonably derived from our
historical experience and current information. The actual amount
of our liability for asbestos-related claims and the effect on
us could differ materially from our current expectations if our
assumptions about the outcome of the pending unresolved bodily
injury claims, the volume and outcome of projected future bodily
injury claims, the outcome of claims relating to the
CCR-negotiated settlements, the costs to resolve these claims
and the amount of available insurance and surety bonds prove to
be incorrect, or if currently proposed U.S. federal
legislation impacting asbestos personal injury claims is
enacted. In particular, although we have projected our liability
for asbestos-related product liability claims that may be
brought against us in the future based upon historical trend
data that we deem to be reliable, there can be no assurance that
our actual liability will not differ significantly from what we
currently project.
|
|
Note 14. |
Warranty Obligations |
We record a liability for estimated warranty obligations at the
dates our products are sold. Adjustments are made as new
information becomes available. Changes in our warranty
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Balance, beginning of period
|
|
$ |
80 |
|
|
$ |
82 |
|
Amounts accrued for current period sales
|
|
|
61 |
|
|
|
30 |
|
Adjustments of prior accrual estimates
|
|
|
3 |
|
|
|
5 |
|
Change in accounting
|
|
|
(6 |
) |
|
|
|
|
Settlements of warranty claims
|
|
|
(44 |
) |
|
|
(39 |
) |
Foreign currency translation
|
|
|
(3 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
91 |
|
|
$ |
80 |
|
|
|
|
|
|
|
|
In June 2005, we changed our method of accounting for warranty
liabilities from estimating the liability based on the credit
issued to the customer, to accounting for the warranty
liabilities based on our costs to
89
settle the claim. Management believes that this is a change to a
preferable method in that it more accurately reflects the cost
of settling the warranty liability. In accordance with GAAP, the
$6 pre-tax cumulative effect of the change was effective as of
January 1, 2005 and was reflected in the financial
statements for the three months ended March 31, 2005. In
the third quarter of 2005, the previously recorded tax expense
of $2 was offset by the valuation allowance established against
our U.S. net deferred tax assets. Warranty obligations are
reported as current liabilities in the consolidated balance
sheet.
|
|
Note 15. |
Impairments, Discontinued Operations, Divestitures and
Realignment of Operations |
Impairments
In accordance with SFAS No. 144, “Impairment of
Long-lived Assets” (SFAS No. 144), we review
long-lived assets for impairment whenever events or changes in
circumstances indicate the carrying amount of such assets may
not be recoverable. Recoverability of these assets is determined
by comparing the forecasted undiscounted net cash flows of the
operation to which the assets relate to their carrying amount.
If the operation is determined to be unable to recover the
carrying amount of its assets, the long-lived assets of the
operation (excluding goodwill), are written down to fair value.
Fair value is determined based on discounted cash flows, or
other methods providing best estimates of value.
As a result of testing our long-lived assets (excluding
goodwill), we recorded a non-cash charge of $23 in the fourth
quarter to reduce property, plant and equipment to its estimated
fair value. The $23 related to continuing operations within ASG.
Goodwill impairment is discussed in Note 6 and long-lived
asset impairments relating to discontinued operations is
discussed elsewhere in this Note.
Divestitures
During 2005, we recorded an aggregate after-tax charge of
approximately $18 for the following four transactions:
|
|
|
|
• |
We dissolved our joint venture with The Daido Metal Company,
which manufactured engine bearings and related materials in
Atlantic, Iowa and Bellefontaine, Ohio. We previously had a 70%
interest in the joint venture, which was consolidated for
financial reporting purposes. During the third quarter, we
acquired the remaining minority interests and sold the
Bellefontaine operations. We have assumed full ownership of the
Atlantic facility. The Bellefontaine operations had 2004 sales
of $44 including sales of $26 to Dana. |
|
|
• |
We sold our domestic fuel-rail business, consisting of a
production facility in Angola, Indiana with sales of
approximately $38 in 2004. |
|
|
• |
We sold our South African electronic engine parts distribution
business with 2004 sales of approximately $23. |
|
|
• |
We sold our Lipe business, a manufacturer and re-manufacturer of
heavy-duty clutches, based in Haslingden, Lancashire, United
Kingdom. Lipe had 2004 sales of approximately $5. |
On October 17, 2005, our Board approved a number of
operational and strategic initiatives to enhance the
company’s financial performance. Three businesses (engine
hard parts, fluid products and pump products) with annual
revenues of $1,220 were offered for sale. These businesses are
treated as “held for sale” and classified as
discontinued operations beginning at December 31, 2005.
In November 2004, we completed the sale of our automotive
aftermarket businesses to The Cypress Group for approximately
$1,000, including cash of $950 and a note with a face amount of
$75. In connection with this transaction, we recorded an
after-tax loss of $30 in discontinued operations in the fourth
quarter of 2004, with additional related after-tax charges of
$13 having been reported in discontinued operations previously
in 2004. The note is recorded at a discounted value that
represents the amounts receivable under the prepayment
provisions of the note. The note matures in 2019 and has a
carrying value of $56 at December 31, 2005.
90
In June 2003, we sold a significant portion of our engine
management operations to Standard Motor Products for $121. In
connection with the sale, we recorded after-tax charges of $4 in
2003. The subsidiary’s sales, which were included in the
former Automotive Aftermarket Group, were $142 for the year
ended December 31, 2003. The proceeds of $121 consisted of
$91 of cash and $30 of debt and equity. The equity securities
were restricted by agreement for a period of thirty months from
closing and were included in non-current assets at their
estimated fair value. In December 2005, the note was prepaid and
equity securities were repurchased by Standard Motor Products.
The total proceeds received from these transactions were $26
resulting in a loss of approximately $1 from the note prepayment.
In June 2003, we sold our Thailand structural products
subsidiary to AAPICO Hitech Public Co., Ltd., a Thailand-based
automotive supplier. The sale resulted in cash proceeds of $54
and an after-tax profit of $8. The subsidiary’s sales,
which were included in the Automotive Systems Group, were $21
for the year ended December 31, 2003.
During 2005, 2004 and 2003, we continued to sell DCC assets in
individually structured transactions and achieved further
reductions through normal portfolio runoff. We reduced
DCC’s assets by approximately $270 and $520 and recognized
after-tax losses of $5 and after-tax gains of $29 in 2005 and
2004.
Discontinued Operations
The provisions of SFAS No. 144 are generally
prospective from the date of adoption and therefore do not apply
to divestitures announced prior to January 1, 2002.
Accordingly, the disposal of selected subsidiaries of DCC that
were announced in October 2001 and completed in 2002 and 2003
were not considered in our determination of discontinued
operations. At the same time, while DCC had assets intended for
sale at December 31, 2005, 2004 and 2003, they did not meet
the criteria for treatment as discontinued operations given the
uncertainty surrounding the timing of the sales.
On October 17, 2005, as previously noted, our Board
approved the plan to sell the engine hard parts, fluid products
and pump products businesses, with annual revenues of $1,220.
These businesses are being treated as “held for sale”
and classified as discontinued operations beginning in the
fourth quarter of 2005.
Although not held for sale at September 30, 2005, we
determined that the sale of these businesses were likely at that
time. As such, we assessed the long-lived assets of the
businesses for potential impairment at September 30, 2005.
We recorded a non-cash charge of $207 in the third quarter to
reduce property, plant and equipment of these businesses to
their estimated fair value. The $207 was comprised of $165
related to our engine hard parts business and $42 related to the
fluid routing business. Additionally, we recorded a charge of
$83 to reduce goodwill related to the fluid routing business to
its estimated fair value. There is no goodwill associated with
the engine hard parts and pump products businesses. A tax
benefit of $15, related to the charges associated with certain
non-U.S. operations,
was recorded resulting in an after-tax charge of $275 being
incurred in the third quarter of 2005.
Additional charges of $121 to reduce the businesses to net
realizable value on a held for sale basis, were recognized in
the fourth quarter including cumulative translation adjustment
write-offs of $67. The $121 was comprised of $67 related to our
engine hard parts business, $53 to the pump business and $1 to
our fluid routing business. A tax expense of $2 was recognized,
resulting in a fourth quarter 2005 after-tax impairment of $123.
The $411 combined before-tax charge was comprised of $232 for
the engine hard parts business, $126 for the fluid products
business and $53 for the pump business. The $411 pre-tax and
$398 after-tax charge are included in income (loss) from
discontinued operations before income taxes and income (loss)
from discontinued operations in the Consolidated Statement of
Income for the year ended December 31, 2005.
In December 2003, we announced our intention to sell the
majority of our automotive aftermarket businesses. Because we
expected to complete the sale in 2004, these operations were
treated as
91
discontinued operations at the end of 2003. The engine
management business, subsequently sold in June 2003 (see
divestitures above) qualified as a discontinued operation at the
end of 2002.
The income statements for all prior years have been reclassified
to reflect the results of operations of these aforementioned,
divested or soon-to-be
divested businesses as discontinued operations.
The following summarizes the revenues and expenses of our
discontinued operations for 2005, 2004 and 2003 and reconciles
the amounts reported in the consolidated statement of income to
operating PAT reported in the segment table, which excludes
restructuring and other unusual charges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Sales
|
|
$ |
1,221 |
|
|
$ |
3,216 |
|
|
$ |
3,355 |
|
Other income (expense)
|
|
|
(121 |
) |
|
|
(24 |
) |
|
|
6 |
|
Cost of sales
|
|
|
1,173 |
|
|
|
2,842 |
|
|
|
2,897 |
|
Selling, general and administrative expenses
|
|
|
78 |
|
|
|
293 |
|
|
|
334 |
|
Realignment and impairment charges
|
|
|
290 |
|
|
|
39 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(441 |
) |
|
|
18 |
|
|
|
118 |
|
Income tax benefit (expense)
|
|
|
7 |
|
|
|
(28 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) reported in consolidated statement of income
|
|
|
(434 |
) |
|
|
(10 |
) |
|
|
73 |
|
Unusual items, net of tax
|
|
|
398 |
|
|
|
58 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
Operating PAT in segment table
|
|
$ |
(36 |
) |
|
$ |
48 |
|
|
$ |
80 |
|
|
|
|
|
|
|
|
|
|
|
The effective income tax rate differs from the U.S. federal
income tax rate primarily due to the valuation allowance
established against deferred tax assets in 2005 and the effect
of non — U.S. taxes in 2005, 2004 and 2003.
In 2005, other income (expense) includes $121 of loss recorded
to adjust the businesses held for sale at December 31, 2005
to net realizable value. In 2004, other income (expense)
includes $13 of professional fees and other expenses incurred in
preparing the automotive aftermarket businesses for sale and the
$30 pre-tax loss realized on the sale.
The sales of our discontinued operations, while not included in
our segment data, were associated with our business units as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
AAG
|
|
$ |
— |
|
|
$ |
1,943 |
|
|
$ |
2,138 |
|
ASG
|
|
|
1,221 |
|
|
|
1,273 |
|
|
|
1,217 |
|
|
|
|
|
|
|
|
|
|
|
Sales of discontinued operations
|
|
$ |
1,221 |
|
|
$ |
3,216 |
|
|
$ |
3,355 |
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of the three businesses that we
intend to divest in 2006 are aggregated and presented as assets
and liabilities of discontinued operations at December 31,
2005. In accordance with accounting requirements, the assets and
liabilities of these businesses in prior years have not been
aggregated and similarly presented.
92
The assets and liabilities of discontinued operations reported
in the consolidated balance sheet as of December 31, 2005,
consisting only of the amounts related to the businesses
announced October 17, 2005, included the following:
|
|
|
|
|
|
|
|
2005 | |
|
|
| |
Assets of discontinued operations:
|
|
|
|
|
|
Accounts receivable
|
|
$ |
212 |
|
|
Inventories
|
|
|
141 |
|
|
Cash and other current assets
|
|
|
7 |
|
|
Goodwill
|
|
|
4 |
|
|
Investments and other assets
|
|
|
101 |
|
|
Investments in leases
|
|
|
8 |
|
|
Property, plant and equipment
|
|
|
76 |
|
|
|
|
|
Total assets of discontinued operations
|
|
$ |
549 |
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
Accounts payable
|
|
$ |
123 |
|
|
Accrued payroll and employee benefits
|
|
|
40 |
|
|
Other current liabilities
|
|
|
58 |
|
|
Other noncurrent liabilities
|
|
|
8 |
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$ |
229 |
|
|
|
|
|
In the consolidated statement of cash flows, the cash flows of
discontinued operations are not separately classified or
aggregated. They are reported in the respective categories of
the consolidated statement of cash flows as if they were
continuing operations.
Realignment of Operations
During the fourth quarter of 2005, our Board approved a number
of operational initiatives to enhance the company’s
financial performance. The primary actions described below,
along with other items, resulted in total realignment charges of
$58 in 2005.
In December 2005, we announced plans to consolidate our North
American Thermal Products operations by mid-2006 to reduce
operating and overhead costs and strengthen our competitiveness.
Three facilities, located in Danville, Indiana; Sheffield,
Pennsylvania; and Burlington, Ontario, employing 200 people,
will be closed. We also announced workforce reductions of
approximately 500 people at our Structural Products plant in
Thorold, Ontario and approximately 300 people at three Traction
Products facilities in Australia, resulting from the expiration
of supply agreements for truck frames and rear axle modules,
respectively. We recorded expenses of $31 related to these
actions.
In November 2005, we signed a letter of intent with DESC S.A. de
C.V. (DESC) under which Dana and DESC will dissolve our
existing Mexican joint venture, Spicer S.A. de C.V. (Spicer). We
will assume 100% ownership of the Mexican subsidiaries of Spicer
that manufacture and assemble axles and driveshafts, as well as
related forging and foundry operations in which we currently
have an indirect 49% interest and 33% interest, respectively,
through our ownership in Spicer. These operations had combined
sales to Dana and to third parties of $296 for the year ended
December 31, 2005. During this period, sales to Dana were
$188 and purchases from Dana were $19. Net incremental sales
would have been $89 for the same period. DESC, in turn, will
assume full ownership of Spicer and its remaining subsidiaries
that operate transmission and aftermarket gasket businesses in
which DESC currently holds an indirect 51% interest through its
ownership in Spicer. While Dana and DESC have agreed to terms,
the transaction is subject to approval by the Bankruptcy Court.
In October 2005, we announced that traction and torque
operations of ASG will close two facilities in Virginia and
shift production in several other locations, affecting approxi-
93
mately 650 employees. The Commercial Vehicle operation of HVTSG
will increase gear production and assembly activity at its
Toluca, Mexico facility to relieve constraints at its principal
gear plant in Glasgow, Kentucky and improve throughput at its
Henderson, Kentucky assembly plant. We recorded a charge of $8
and anticipate additional costs in 2006 and 2007 of $21 in
association with these actions. We expect to make $7 of
additional cash investments to expand the facilities in Mexico.
During the second quarter of 2005, we reviewed the status of our
plan to reduce the workforce within our off-highway operations,
announced in the fourth quarter of 2004 resulting in charges of
$34 in connection with the closure of the Statesville, North
Carolina facility and workforce reductions in Brugge, Belgium.
These actions were to eliminate approximately 300 jobs. We
concluded that completion of the plan was no longer probable
within the required timeframe due to subsequent changes in the
related markets; accordingly, we reversed $4 (of the total
adjustment of $5) of the accrual for employee termination
benefits.
During the fourth quarter of 2004, the engine hard parts
business recorded realignment charges of $18 in connection with
signing a long-term supply agreement with Federal-Mogul
Corporation to supply us with gray iron castings. The foundry
operation in Muskegon, Michigan that previously supplied these
materials was closed in the third quarter of 2005, eliminating
240 jobs.
During 2003, we closed seven locations and reduced our
workforce. In connection with these efforts, we recorded $3 for
employee termination benefits and $9 for exit costs, including
the cost of relocating people, transferring equipment and
maintaining buildings held for sale. As discussed below, we
reduced accruals relating to certain restructuring initiatives
because we determined, following certain plan modifications,
that recorded estimates exceeded the amounts necessary to
complete the remaining restructuring activities. During the
third quarter of 2003, we modified our plans and announced the
closure of our Montgomery, Alabama commercial vehicle facility
and the relocation of most of the manufacturing and assembly
activities currently performed at Montgomery to our Lugoff
facility. As a result of the decision to move the Montgomery
operation to Lugoff, we reversed $16 of the $18 charge taken in
2002 for the Lugoff closure and recognized a $6 restructuring
charge related to the Montgomery facility closure.
94
The following summarizes the charges for the restructuring
activity recorded in our continuing operations in the last three
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee | |
|
Long-Lived | |
|
|
|
|
|
|
Termination | |
|
Asset | |
|
Exit | |
|
|
|
|
Benefits | |
|
Impairment | |
|
Costs | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2002
|
|
$ |
94 |
|
|
$ |
— |
|
|
$ |
38 |
|
|
$ |
132 |
|
Activity during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to expense
|
|
|
3 |
|
|
|
2 |
|
|
|
9 |
|
|
|
14 |
|
|
Adjustments of accruals
|
|
|
(12 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
(20 |
) |
|
Cash payments
|
|
|
(56 |
) |
|
|
|
|
|
|
(27 |
) |
|
|
(83 |
) |
|
Write-off of assets
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
29 |
|
|
|
|
|
|
|
12 |
|
|
|
41 |
|
Activity during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to expense
|
|
|
37 |
|
|
|
14 |
|
|
|
11 |
|
|
|
62 |
|
|
Adjustments of accruals
|
|
|
(14 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
(18 |
) |
|
Cash payments
|
|
|
(22 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
(27 |
) |
|
Write-off of assets
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
30 |
|
|
|
|
|
|
|
14 |
|
|
|
44 |
|
Activity during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges to expense
|
|
|
30 |
|
|
|
23 |
|
|
|
11 |
|
|
|
64 |
|
|
Adjustments of accruals
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
Cash payments
|
|
|
(13 |
) |
|
|
|
|
|
|
(10 |
) |
|
|
(23 |
) |
|
Write-off of assets
|
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
41 |
|
|
$ |
— |
|
|
$ |
15 |
|
|
$ |
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee terminations relating to the plans within our
continuing operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Total estimated
|
|
|
1,276 |
|
|
|
563 |
|
|
|
120 |
|
Less terminated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
2004
|
|
|
|
|
|
|
(76 |
) |
|
|
(115 |
) |
|
2005
|
|
|
(25 |
) |
|
|
(411 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
|
1,251 |
|
|
|
76 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, $56 of restructuring charges remained
in accrued liabilities. This balance was comprised of $41 for
the reduction of approximately 1,346 employees to be completed
in 2006 and $15 for lease terminations and other exit costs. The
estimated annual cash expenditures will be approximately $33 in
2006, $13 in 2007 and $10 thereafter. Our liquidity and cash
flows will be materially impacted by these actions. It is
anticipated that our operations over the long term will further
benefit from these realignment strategies through reduction of
overhead and certain material costs.
SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” establishes standards
for reporting information about operating segments and related
disclosures about products and services and geographic
locations. SFAS No. 131 requires reporting on a single
basis of segmentation. The components that management
establishes for purposes of making decisions about an
enterprise’s operating matters are referred to as
“operating segments.”
95
We currently have three operating segments — two
manufacturing business units (ASG and HVTSG) and one
non-manufacturing business unit (DCC).
The ASG sells axles, driveshafts, drivetrains, frames, sealing
and bearing products, fluid-management and power-cylinder
products, chassis products and related modules and systems for
the automotive light vehicle markets and manufactures
driveshafts for the original equipment (OE) commercial
vehicle market.
The ASG also manufactures sealing, bearing, fluid-management and
power-cylinder products for the commercial vehicle and the
leisure and outdoor power equipment markets.
The HVTSG sells axles, brakes (through our joint venture, Bendix
Spicer Foundation Brake LLC), driveshafts, chassis and
suspension modules, ride controls and related modules and
systems for the commercial and off-highway vehicle markets,
transmissions and electronic controls for the off-highway market
and bearing, fluid-management and power-cylinder products for
the leisure and outdoor power equipment markets.
The following table presents sales of similar products by
business unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
ASG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traction (Axle)
|
|
$ |
2,437 |
|
|
$ |
2,282 |
|
|
$ |
2,030 |
|
|
Torque (Driveshaft)
|
|
|
1,129 |
|
|
|
1,041 |
|
|
|
894 |
|
|
Structures
|
|
|
1,258 |
|
|
|
1,072 |
|
|
|
851 |
|
|
Sealing
|
|
|
673 |
|
|
|
633 |
|
|
|
554 |
|
|
Thermal
|
|
|
312 |
|
|
|
314 |
|
|
|
353 |
|
|
Other
|
|
|
132 |
|
|
|
42 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
Total ASG
|
|
|
5,941 |
|
|
|
5,384 |
|
|
|
4,723 |
|
HVTSG
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traction (Axle)
|
|
|
2,026 |
|
|
|
1,740 |
|
|
|
1,307 |
|
|
Torque (Driveshaft)
|
|
|
291 |
|
|
|
267 |
|
|
|
235 |
|
|
Other
|
|
|
323 |
|
|
|
292 |
|
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
Total HVTSG
|
|
|
2,640 |
|
|
|
2,299 |
|
|
|
1,908 |
|
Other
|
|
|
30 |
|
|
|
92 |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
8,611 |
|
|
$ |
7,775 |
|
|
$ |
6,714 |
|
|
|
|
|
|
|
|
|
|
|
Management evaluates the operating segments as if DCC were
accounted for on the equity method of accounting rather than on
the fully consolidated basis used for external reporting. This
is done because DCC is not homogeneous with our manufacturing
operations, its financing activities do not support the sales of
our other operating segments and its financial and performance
measures are inconsistent with those of our other operating
segments. Moreover, the financial covenants contained in
Dana’s long-term bank facility are measured with DCC
accounted for on an equity basis.
96
Information used to evaluate our operating segments is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter- | |
|
|
|
Net | |
|
|
|
|
|
|
|
|
External | |
|
Segment | |
|
|
|
Profit | |
|
Net | |
|
Capital | |
|
Depreciation/ | |
|
|
Sales | |
|
Sales | |
|
OPAT | |
|
(Loss) | |
|
Assets | |
|
Spend | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
5,941 |
|
|
$ |
140 |
|
|
$ |
130 |
|
|
$ |
(6 |
) |
|
$ |
2,355 |
|
|
$ |
179 |
|
|
$ |
205 |
|
|
HVTSG
|
|
|
2,640 |
|
|
|
4 |
|
|
|
46 |
|
|
|
(28 |
) |
|
|
716 |
|
|
|
72 |
|
|
|
47 |
|
|
DCC
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
23 |
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,581 |
|
|
|
144 |
|
|
|
199 |
|
|
|
(11 |
) |
|
|
3,389 |
|
|
|
251 |
|
|
|
252 |
|
|
Other
|
|
|
30 |
|
|
|
55 |
|
|
|
(434 |
) |
|
|
(224 |
) |
|
|
(82 |
) |
|
|
13 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
$ |
8,611 |
|
|
$ |
199 |
|
|
$ |
(235 |
) |
|
$ |
(235 |
) |
|
$ |
3,307 |
|
|
$ |
264 |
|
|
$ |
257 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(36 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operations
|
|
|
8,611 |
|
|
|
199 |
|
|
|
(271 |
) |
|
|
(271 |
) |
|
|
3,307 |
|
|
|
264 |
|
|
|
257 |
|
Tax valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(817 |
) |
|
|
(817 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of change in accounting
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unusual items excluded from performance measures
|
|
|
|
|
|
|
|
|
|
|
(521 |
) |
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
8,611 |
|
|
$ |
199 |
|
|
$ |
(1,605 |
) |
|
$ |
(1,605 |
) |
|
$ |
3,307 |
|
|
$ |
264 |
|
|
$ |
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
5,384 |
|
|
$ |
155 |
|
|
$ |
210 |
|
|
$ |
98 |
|
|
$ |
3,086 |
|
|
$ |
185 |
|
|
$ |
194 |
|
|
HVTSG
|
|
|
2,299 |
|
|
|
5 |
|
|
|
99 |
|
|
|
39 |
|
|
|
670 |
|
|
|
60 |
|
|
|
48 |
|
|
DCC
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
29 |
|
|
|
355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,683 |
|
|
|
160 |
|
|
|
338 |
|
|
|
166 |
|
|
|
4,111 |
|
|
|
245 |
|
|
|
242 |
|
|
Other
|
|
|
92 |
|
|
|
62 |
|
|
|
(173 |
) |
|
|
(1 |
) |
|
|
26 |
|
|
|
8 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
$ |
7,775 |
|
|
$ |
222 |
|
|
$ |
165 |
|
|
$ |
165 |
|
|
$ |
4,137 |
|
|
$ |
253 |
|
|
$ |
250 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operations
|
|
|
7,775 |
|
|
|
222 |
|
|
|
213 |
|
|
|
213 |
|
|
|
4,137 |
|
|
|
253 |
|
|
|
250 |
|
Unusual items excluded from performance measures
|
|
|
|
|
|
|
|
|
|
|
(151 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
7,775 |
|
|
$ |
222 |
|
|
$ |
62 |
|
|
$ |
62 |
|
|
$ |
4,137 |
|
|
$ |
253 |
|
|
$ |
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
4,723 |
|
|
$ |
126 |
|
|
$ |
226 |
|
|
$ |
123 |
|
|
$ |
3,026 |
|
|
$ |
173 |
|
|
$ |
180 |
|
|
HVTSG
|
|
|
1,908 |
|
|
|
38 |
|
|
|
81 |
|
|
|
29 |
|
|
|
611 |
|
|
|
39 |
|
|
|
51 |
|
|
DCC
|
|
|
|
|
|
|
|
|
|
|
21 |
|
|
|
21 |
|
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,631 |
|
|
|
164 |
|
|
|
328 |
|
|
|
173 |
|
|
|
3,926 |
|
|
|
212 |
|
|
|
231 |
|
|
Other
|
|
|
83 |
|
|
|
66 |
|
|
|
(215 |
) |
|
|
(60 |
) |
|
|
13 |
|
|
|
17 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations
|
|
$ |
6,714 |
|
|
$ |
230 |
|
|
$ |
113 |
|
|
$ |
113 |
|
|
$ |
3,939 |
|
|
$ |
229 |
|
|
$ |
238 |
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operations
|
|
|
6,714 |
|
|
|
230 |
|
|
|
193 |
|
|
|
193 |
|
|
|
3,939 |
|
|
|
229 |
|
|
|
238 |
|
Unusual items excluded from performance measures
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$ |
6,714 |
|
|
$ |
230 |
|
|
$ |
228 |
|
|
$ |
228 |
|
|
$ |
3,939 |
|
|
$ |
229 |
|
|
$ |
238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit after tax (PAT) is the key internal
measure of performance used by management, including our chief
operating decision maker, as a measure of segment profitability.
With the exception of DCC, operating PAT represents earnings
before interest and taxes (EBIT), tax effected at 39% (our
estimated long-term effective rate), plus equity in earnings of
affiliates. Net profit (loss), which is operating
97
PAT less allocated corporate expenses and net interest expense,
provides a secondary measure of profitability for our segments
that is more comparable to that of a free-standing entity. The
allocation is based on segment sales because it is readily
calculable, easily understood and, we believe, provides a
reasonable distribution of the various components of our
corporate expenses among our diverse business units. Because the
accounting guidance does not permit the allocation of corporate
expenses to discontinued operations and we have elected not to
allocate interest expense to discontinued operations, we have
included the corporate expenses and interest expense previously
allocated to AAG and the three businesses held for sale in 2005
that were previously included in ASG in Other in the segment
tables. These amounts totaled $28, $67 and $72 in 2005, 2004 and
2003. We believe this avoids distorting the net profit (loss)
previously reported for the remaining business units and
presents amounts that are indicative of the reduced level of
corporate expenses and interest expense anticipated following
the sale of our automotive aftermarket business and the three
held for sale businesses.
The Other category includes businesses unrelated to the
segments, trailing liabilities for certain closed plants and the
expense of corporate administrative functions. Other also
includes interest expense net of interest income, elimination of
inter-segment income and adjustments to reflect the actual
effective tax rate. In the net profit (loss) column, Other
includes the net profit or loss of businesses not assigned to
the segments and certain divested businesses (but not
discontinued operations), minority interest in earnings and the
tax differential.
Equity earnings included in operating PAT in 2005, 2004 and 2003
were $24, $23 and $31 for ASG and $4, $6 and $(3) for Other.
Equity earnings included for HVTSG were not material. The
related equity investments totaled $538, $617 and $564 for ASG,
$34, $31 and $2 for HVTSG and $39, $41 and $23 for Other in
2005, 2004 and 2003.
We have been divesting DCC’s businesses and assets in
accordance with plans announced in October 2001 and these
activities continued during 2005. As a result of asset sales and
normal run-off, DCC’s total portfolio assets were reduced
by $270 during the year, leaving assets of approximately $560
(after $55 reduction for non-recourse debt) at December 31,
2005. While we are continuing to pursue the sale of the
remaining DCC portfolio assets, we expect to retain certain of
them for varying periods of time because tax attributes and/or
market conditions make disposal uneconomical at this time. As of
December 31, 2005, we expected to retain approximately $300
of the $560 of DCC assets held at that date; however, changes in
market conditions may change our expectation. DCC’s
liabilities include certain asset-specific financing and general
obligations that are uneconomical to pay off in advance of their
scheduled maturities.
Realignment and unusual items consist of the following and are
more fully discussed in Note 15.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
OPAT | |
|
|
| |
Sale of businesses(1)
|
|
$ |
(398 |
) |
|
$ |
— |
|
|
$ |
— |
|
Sale of automotive aftermarket
|
|
|
|
|
|
|
(43 |
) |
|
|
|
|
Ohio tax legislation
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
DCC asset sales
|
|
|
(1 |
) |
|
|
29 |
|
|
|
35 |
|
Repurchase of notes
|
|
|
|
|
|
|
(96 |
) |
|
|
9 |
|
Realignment charges and goodwill impairment
|
|
|
(98 |
) |
|
|
(54 |
) |
|
|
|
|
Other divestitures and asset sales
|
|
|
(19 |
) |
|
|
13 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Unusual items
|
|
$ |
(521 |
) |
|
$ |
(151 |
) |
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
98
The OPAT impact of the unusual items by segment is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
OPAT | |
|
|
| |
Continuing operations-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
(102 |
) |
|
$ |
— |
|
|
$ |
(2 |
) |
|
HVTSG
|
|
|
(8 |
) |
|
|
(26 |
) |
|
|
|
|
|
DCC
|
|
|
(8 |
) |
|
|
29 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118 |
) |
|
|
3 |
|
|
|
33 |
|
|
Corporate
|
|
|
(5 |
) |
|
|
(96 |
) |
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
(123 |
) |
|
|
(93 |
) |
|
|
42 |
|
Discontinued operations-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG(1)
|
|
$ |
(398 |
) |
|
$ |
(15 |
) |
|
$ |
(7 |
) |
|
AAG
|
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
(398 |
) |
|
|
(58 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(521 |
) |
|
$ |
(151 |
) |
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Engine hard parts, fluid routing and pump businesses included in
ASG held for sale at December 31, 2005. |
In 2004, the $54 of realignment charges include: $15 relate to
discontinued operations of three businesses and $39 associated
with HVTSG. The repurchase of notes in 2004 and 2003 are
corporate items.
Net assets at the business unit level are intended to correlate
with invested capital. The amount includes accounts receivable,
inventories, prepaid expenses (excluding taxes), goodwill,
investments in affiliates, net property, plant and equipment,
accounts payable and certain accrued liabilities, but excludes
assets and liabilities of discontinued operations.
Net assets differ from consolidated total assets as follows:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net assets
|
|
$ |
3,307 |
|
|
$ |
4,137 |
|
Accounts payable and other current liabilities
|
|
|
1,679 |
|
|
|
2,168 |
|
DCC’s assets in excess of equity
|
|
|
658 |
|
|
|
767 |
|
Other current and long-term assets
|
|
|
1,193 |
|
|
|
1,947 |
|
Assets of discontinued operations
|
|
|
549 |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$ |
7,386 |
|
|
$ |
9,019 |
|
|
|
|
|
|
|
|
Although accounting for discontinued operations does not result
in the reclassification of prior balance sheets, our segment
reporting excludes the assets of our discontinued operations for
all periods presented based on the treatment of these items for
internal reporting purposes.
The differences between operating capital spend and depreciation
shown by business unit and purchases of property, plant and
equipment and depreciation shown on the cash flow statement
result from the exclusion from the segment table of the amounts
related to discontinued operations and our equity method of
measuring DCC for operating purposes. DCC’s capital spend
and depreciation are not included in the operating measures. DCC
purchased equipment for lease to our manufacturing operations
through 2002 and continues to lease that equipment to the
business units . These operating leases have been included in
the consolidated statements as purchases of assets and the
assets are being depreciated over their useful lives.
99
Certain expenses incurred in connection with our realignment
activities are included in the respective business units’
operating results, as are credits to earnings resulting from the
periodic adjustments of our restructuring accruals to reflect
changes in our estimates of the total cost remaining on
uncompleted restructuring projects and gains and losses realized
on the sale of assets related to realignment.
These expenses and credits for the years ended December 31,
2005, 2004 and 2003 are summarized by business unit in the
following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realignment | |
|
|
Realignment | |
|
Adjustments of | |
|
Disposition | |
|
|
Provisions | |
|
Accruals | |
|
Gain (Loss) | |
|
|
| |
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
HVTSG
|
|
|
11 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
11 |
|
|
$ |
(6 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
17 |
|
|
$ |
(16 |
) |
|
$ |
— |
|
HVTSG
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
18 |
|
|
$ |
(16 |
) |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
ASG
|
|
$ |
19 |
|
|
$ |
(10 |
) |
|
$ |
(2 |
) |
HVTSG
|
|
|
7 |
|
|
|
(17 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
26 |
|
|
$ |
(27 |
) |
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
100
Geographic Information
For consolidated net sales, no country other than the U.S. and
Canada accounts for 10% and only Brazil, Italy, Germany and
Australia account for more than 5%. Sales are attributed to the
location of the product entity recording the sale. Long-lived
assets include: property, plant and equipment; goodwill and
equity investments in joint ventures. It does not include
certain other non-current assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | |
|
Long-Lived Assets | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
North America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
4,421 |
|
|
$ |
4,093 |
|
|
$ |
3,673 |
|
|
$ |
1,265 |
|
|
$ |
1,738 |
|
|
$ |
1,779 |
|
|
Canada
|
|
|
853 |
|
|
|
995 |
|
|
|
887 |
|
|
|
169 |
|
|
|
183 |
|
|
|
225 |
|
|
Mexico
|
|
|
136 |
|
|
|
130 |
|
|
|
104 |
|
|
|
185 |
|
|
|
161 |
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America
|
|
$ |
5,410 |
|
|
$ |
5,218 |
|
|
$ |
4,664 |
|
|
$ |
1,619 |
|
|
$ |
2,082 |
|
|
$ |
2,169 |
|
Europe
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Italy
|
|
$ |
563 |
|
|
$ |
468 |
|
|
$ |
339 |
|
|
$ |
84 |
|
|
$ |
94 |
|
|
$ |
98 |
|
|
Germany
|
|
|
387 |
|
|
|
396 |
|
|
|
337 |
|
|
|
484 |
|
|
|
555 |
|
|
|
502 |
|
|
Other Europe
|
|
|
645 |
|
|
|
458 |
|
|
|
376 |
|
|
|
252 |
|
|
|
392 |
|
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Europe
|
|
$ |
1,595 |
|
|
$ |
1,322 |
|
|
$ |
1,052 |
|
|
$ |
820 |
|
|
$ |
1,041 |
|
|
$ |
970 |
|
South America
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil
|
|
$ |
440 |
|
|
$ |
418 |
|
|
$ |
356 |
|
|
$ |
113 |
|
|
$ |
113 |
|
|
$ |
103 |
|
|
Other South America
|
|
|
395 |
|
|
|
124 |
|
|
|
61 |
|
|
|
111 |
|
|
|
126 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total South America
|
|
$ |
835 |
|
|
$ |
542 |
|
|
$ |
417 |
|
|
$ |
224 |
|
|
$ |
239 |
|
|
$ |
212 |
|
Asia Pacific
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia
|
|
$ |
488 |
|
|
$ |
480 |
|
|
$ |
375 |
|
|
$ |
96 |
|
|
$ |
103 |
|
|
$ |
96 |
|
|
Other Asia Pacific
|
|
|
283 |
|
|
|
213 |
|
|
|
206 |
|
|
|
101 |
|
|
|
105 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia Pacific
|
|
$ |
771 |
|
|
$ |
693 |
|
|
$ |
581 |
|
|
$ |
197 |
|
|
$ |
208 |
|
|
$ |
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
8,611 |
|
|
$ |
7,775 |
|
|
$ |
6,714 |
|
|
$ |
2,860 |
|
|
$ |
3,570 |
|
|
$ |
3,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | |
|
|
| |
Sales to Major Customers |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Ford
|
|
$ |
2,234 |
|
|
$ |
2,051 |
|
|
$ |
1,777 |
|
|
|
|
25.9 |
% |
|
|
26.3 |
% |
|
|
26.5 |
% |
General Motors
|
|
$ |
990 |
|
|
$ |
839 |
|
|
$ |
699 |
|
|
|
|
11.2 |
% |
|
|
10.8 |
% |
|
|
10.4 |
% |
DaimlerChrysler
|
|
$ |
470 |
|
|
$ |
663 |
|
|
$ |
784 |
|
|
|
|
5.5 |
% |
|
|
8.5 |
% |
|
|
11.7 |
% |
Export sales from the U.S. to international locations were
$939, $278 and $116 in 2005, 2004 and 2003.
|
|
Note 17. |
Subsequent Events |
The following events have occurred subsequent to
December 31, 2005, that, although they do not impact the
reported balances or results of operations as of that date, are
material to our ongoing operations.
101
Bankruptcy Filing
On March 3, 2006 (the Filing Date), we and 40 of our
wholly-owned domestic subsidiaries (collectively, the Debtors)
filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code) in the United States Bankruptcy Court for the
Southern District of New York (the Bankruptcy Court). These
Chapter 11 cases are collectively referred to as the
“Bankruptcy Cases.” Neither Dana Credit Corporation
(DCC) nor any of our
non-U.S. affiliates
commenced any bankruptcy proceedings.
The wholly-owned subsidiaries included in the Bankruptcy Cases
are Dakota New York Corp., Brake Systems, Inc., BWDAC, Inc.,
Coupled Products, Inc., Dana Atlantic LLC f/k/a Glacier Daido
America, LLC, Dana Automotive Aftermarket, Inc., Dana Brazil
Holdings I LLC f/k/a Wix Filtron LLC, Dana Brazil Holdings LLC
f/k/a/ Dana Realty Funding LLC, Dana Information Technology LLC,
Dana International Finance, Inc., Dana International Holdings,
Inc., Dana Risk Management Services, Inc., Dana Technology Inc.,
Dana World Trade Corporation, Dandorr L.L.C., Dorr Leasing
Corporation, DTF Trucking, Inc., Echlin-Ponce, Inc., EFMG LLC,
EPE, Inc., ERS LLC, Flight Operations, Inc., Friction Inc.,
Friction Materials, Inc., Glacier Vandervell Inc.,
Hose & Tubing Products, Inc., Lipe Corporation, Long
Automotive LLC, Long Cooling LLC, Long USA LLC, Midland Brake,
Inc., Prattville Mfg., Inc., Reinz Wisconsin Gasket LLC, Spicer
Heavy Axle & Brake, Inc., Spicer Heavy Axle Holdings,
Inc., Spicer Outdoor Power Equipment Components LLC,
Torque-Traction Integration Technologies, LLC, Torque-Traction
Manufacturing Technologies, LLC, Torque-Traction Technologies,
LLC and United Brake Systems Inc.
The Bankruptcy Cases are being jointly administered with the
Debtors managing their businesses in the ordinary course as
debtors in possession subject to the supervision of the
Bankruptcy Court. We intend to continue normal business
operations during the Bankruptcy Cases while we evaluate our
businesses both financially and operationally and implement
comprehensive improvements as appropriate to enhance
performance. We intend to proceed with previously announced
divestiture and restructuring plans, which include the sale of
several non-core businesses, the closure of certain facilities
and the shift of production to lower-cost locations. In
addition, we intend to take steps to reduce costs, increase
efficiency and enhance productivity so that we emerge from
bankruptcy as a stronger, more viable company. We intend to
effect fundamental, not incremental, change to our business.
While we cannot predict with precision how long the
reorganization process will take, it could take upwards of 18 to
24 months.
Continuation of the Company as a going concern during the
reorganization plan is contingent upon, among other things, our
ability (i) to comply with the terms and conditions of the
Credit Agreement described below; (ii) to obtain
confirmation of a plan of reorganization under the Bankruptcy
Code; (iii) to reduce wage and benefit costs and
liabilities through the bankruptcy process; (iv) to return
to profitability; (v) to generate sufficient cash flow from
operations and; (vi) to obtain financing sources to meet
our future obligations. These matters create uncertainty
relating to our ability to continue as a going concern. The
accompanying consolidated financial statements do not reflect
any adjustments relating to the recoverability and
classification of liabilities that might result from the outcome
of these uncertainties. In addition, our plan of reorganization
could materially change amounts reported in the Company’s
consolidated financial statements. Our consolidated financial
statements as of December 31, 2005, do not give effect to
any adjustments to the carrying value of assets and liabilities
that may become necessary as a consequence of reorganization
under Chapter 11.
Our bankruptcy filing triggered the immediate acceleration of
certain direct financial obligations, including, among others,
an aggregate of $1,621 in principal amount (including accrued
interest) of currently outstanding non-secured notes issued
under our Indentures dated as of December 15, 1997;
August 8, 2001; March 11, 2002; and December 10,
2004. Such amounts are characterized as unsecured debt for
purposes of the reorganization proceedings and the related
obligations have been classified as current liabilities in our
consolidated balance sheet as of December 31, 2005. In
addition, the filing for reorganization created an event of
default under certain of our lease agreements. The ability of
Dana’s creditors to seek remedies to enforce their rights
under the agreements described above is automatically stayed as
a result of the filing of Dana’s Chapter 11 cases and
the creditors’ rights of enforcement are
102
subject to the applicable provisions of the Bankruptcy Code. See
Note 9 for additional information related to debt
reclassification.
An official committee of unsecured creditors has been appointed
in the Bankruptcy Cases and, in accordance with the provisions
of the Bankruptcy Code, will have the right to be heard on all
matters that come before the Bankruptcy Court. The Debtors are
required to bear certain of the committee’s costs and
expenses, including those of their counsel and financial
advisors.
While we continue our reorganization under Chapter 11,
investments in our securities will be highly speculative. Shares
of our common stock may have little or no value and there can be
no assurance that they will not be cancelled pursuant to our
reorganization plan. Since March 3, 2006, our common stock
has been traded on the Over The Counter Bulletin Board (OTCBB)
under the symbol “DCNAQ.”
Under the Bankruptcy Code, we have the right to assume or reject
executory contracts (i.e., contracts that are to be
performed by the contract parties after the Filing Date) and
unexpired leases, subject to Bankruptcy Court approval and other
limitations. In this context, “assuming” an executory
contract or unexpired lease means that we will agree to perform
our obligations and cure certain existing defaults under the
contract or lease and “rejecting” them means that we
will be relieved of our obligations to perform further under the
contract or lease, which will give rise to a pre-petition claim
for damages for the breach thereof. In March and April 2006, the
Bankruptcy Court authorized the Debtors to reject certain
unexpired leases and subleases.
We anticipate that substantially all of the Debtors’
liabilities as of the Filing Date will be resolved under, and
treated in accordance with, a plan of reorganization to be
proposed to and voted on by their creditors in accordance with
the provisions of the Bankruptcy Code. Although we intend to
file and seek confirmation of such a plan, there can be no
assurance as to when we will file the plan or that the plan will
be confirmed by the Bankruptcy Court and consummated. Nor can
there be any assurance that we will be successful in achieving
our restructuring goals, or that any measures that are
achievable will result in sufficient improvement to our
financial position. Accordingly, until the time that the Debtors
emerge from bankruptcy, there will be no certainty about our
ability to continue as a going concern. If a restructuring is
not completed, we could be forced to sell a significant portion
of our assets to retire debt outstanding or, under certain
circumstances, to cease operations.
DIP Credit Agreement
In March 2006, the Bankruptcy Court granted final approval to
our
debtor-in-possession
(DIP) credit facility, under which we may borrow up to
$1,450. This facility provides funding to continue our
operations without disruption and meet our obligations to
suppliers, customers and employees during the Chapter 11
reorganization process.
All of the loans and other obligations under the DIP Credit
Agreement will be due and payable on the earlier of
24 months after the effective date of the DIP Credit
Agreement or the consummation of a plan of reorganization under
the Bankruptcy Code. Prior to maturity, Dana will be required to
make mandatory prepayments under the DIP Credit Agreement in the
event that loans and letters of credit exceed the available
commitments and from the proceeds of certain asset sales and the
issuance of additional indebtedness. Such prepayments, if
required, are required to be applied, first, to the term loan
facility and, second, to the revolving credit facility with a
permanent reduction in the amount of the commitments thereunder.
Interest under the DIP Credit Agreement will accrue, at
Dana’s option, either at the London interbank offered rate
(LIBOR) plus a per annum margin of 2.25% for both the term
loan facility and the revolving credit facility or the prime
rate plus a per annum margin of 1.25% for both the term loan
facility and the revolving credit facility. Dana will pay a fee
for issued and undrawn letters of credit in an amount per annum
equal to the LIBOR margin applicable to the revolving credit
facility. Dana will also pay a commitment fee of 0.375% per
annum for unused committed amounts under the revolving credit
facility.
103
The DIP Credit Agreement is guaranteed by substantially all of
Dana’s domestic subsidiaries, excluding DCC. As collateral,
Dana and each of its guarantor subsidiaries has granted a
security interest in and lien on effectively all of its assets,
including a pledge of 66% of the equity interests of each
material direct foreign subsidiary owned by Dana and each
guarantor subsidiary.
Under the DIP Credit Agreement, Dana and each of its
subsidiaries (other than certain excluded subsidiaries) will be
required to comply with customary covenants for facilities of
this type. These include affirmative covenants as to corporate
existence, compliance with laws, insurance, payment of taxes,
access to books and records, use of proceeds, retention of a
restructuring advisor and financial advisor, maintenance of cash
management systems, use of proceeds, priority of liens in favor
of the lenders, maintenance of properties and monthly,
quarterly, annual and other reporting obligations and negative
covenants, including limitations on liens, additional
indebtedness, guaranties, dividends, transactions with
affiliates, claims in its bankruptcy proceedings, investments,
asset dispositions, nature of business, payment of pre-petition
obligations, capital expenditures, mergers and consolidations,
amendments to constituent documents, accounting changes,
limitations on restrictions affecting subsidiaries and sale and
lease-backs.
Additionally, the DIP Credit Agreement requires us to maintain a
minimum amount of consolidated earnings before interest, taxes,
depreciation, amortization, restructuring and reorganization
costs (EBITDAR), as defined, for each period beginning on
March 1, 2006 and ending on the last day of each fiscal
month through February 2007, and a rolling
12-month cumulative
EBITDAR for Dana and our direct and indirect subsidiaries, on a
consolidated basis, beginning on March 31, 2007 and ending
on February 28, 2008, at levels set forth in the DIP Credit
Agreement. We must also maintain minimum availability under the
DIP Credit Agreement at all times. The DIP Credit Agreement
contains certain defaults and events of default customary for
debtor-in-possession
financings of this type. Upon the occurrence and during the
continuance of any event of default under the DIP Credit
Agreement, interest on all outstanding amounts is payable on
demand at 2% above the then applicable rate.
As of March 30, 2006, we had borrowed $700 under the DIP
Credit Agreement and used the proceeds to pay off debt
obligations outstanding under our $275 receivables
securitization program and $400 pre-petition bank facility and
certain other pre-petition obligations, as well as to provide
for working capital and general corporate expenses.
DCC Notes
Following Dana’s bankruptcy filing, the holders of a
majority of the issued and outstanding medium term and private
placement notes of DCC (the DCC Notes) formed an Ad Hoc
Committee of Noteholders.
Effective April 10, 2006, DCC and the Ad Hoc Committee
entered into a Forbearance Agreement under which members of the
Ad Hoc Committee holding over 70% of the outstanding principal
amount of DCC Notes agreed to work with DCC toward a
restructuring of the DCC Notes and to forbear from exercising
rights and remedies with respect to any default or event of
default that may now exist or may hereafter occur under such
notes. The Forbearance Agreement will terminate 30 days
from its effective date, or sooner upon the occurrence of
certain events specified therein, including the commencement by
DCC of a voluntary Chapter 11 bankruptcy case or the filing
by any party of an involuntary petition for relief against DCC.
As a condition precedent to the effectiveness of the Forbearance
Agreement, DCC agreed not to make any payments of principal or
interest that were due and payable to the holders of certain DCC
Notes as of April 10, 2006. By letter dated as of
April 11, 2006, counsel to Great-West Life &
Annuity Insurance Company and The Great-West Life Assurance
Company, which are noteholders not part of the Ad Hoc Committee,
advised DCC that events of default had occurred under their
respective Note Agreements as a result of DCC’s
failure to pay the principal due as of April 10, 2006 on
the notes issued thereunder and demanded payment of the entire
principal of $7 and interest accrued on such notes.
DCC intends to continue to cooperate with the Ad Hoc Committee
and its other noteholders to complete a restructuring of the DCC
Notes.
104
Accounting Requirements
American Institute of Certified Public Accountants Statement of
Position 90-7,
“Financial Reporting by Entities in Reorganization under
the Bankruptcy Code”
(SOP 90-7), which
is applicable to companies operating under Chapter 11,
generally does not change the manner in which financial
statements are prepared. However, it does require that the
financial statements for periods subsequent to the filing of the
Chapter 11 petition distinguish transactions and events
that are directly associated with the reorganization from the
ongoing operations of the business. Revenues, expenses, realized
gains and losses and provisions for losses that can be directly
associated with the reorganization and restructuring of the
business must be reported separately as reorganization items in
the statements of operations beginning in the quarter ended
March 31, 2006. Our balance sheet must distinguish
pre-petition liabilities subject to compromise from both those
pre-petition liabilities that are not subject to compromise and
from post-petition liabilities. Liabilities that may be affected
by a plan of reorganization must be reported at the amounts
expected to be allowed, even if they may be settled for lesser
amounts. In addition, cash provided by reorganization items must
be disclosed separately in our statement of cash flows. Dana
adopted SOP 90-7
effective March 3, 2006 and we will segregate those items
outlined above for all reporting periods subsequent to that date.
Unaudited Quarterly Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2005 Quarters Ended | |
|
|
| |
|
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
|
|
| |
|
| |
|
| |
|
| |
Net sales
|
|
$ |
2,149 |
|
|
$ |
2,297 |
|
|
$ |
2,119 |
|
|
$ |
2,046 |
|
Gross profit
|
|
|
129 |
|
|
|
156 |
|
|
|
104 |
|
|
|
17 |
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
13 |
|
|
|
29 |
|
|
|
(973 |
) |
|
|
(244 |
) |
|
Discontinued operations
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(301 |
) |
|
|
(133 |
) |
|
Effect of change in accounting
|
|
|
4 |
|
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
16 |
|
|
$ |
30 |
|
|
$ |
(1,272 |
) |
|
$ |
(379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
(6.50 |
) |
|
$ |
(1.64 |
) |
|
|
Discontinued operations
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
|
(2.01 |
) |
|
|
(0.89 |
) |
|
|
Effect of change in accounting
|
|
|
0.03 |
|
|
|
|
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.11 |
|
|
$ |
0.20 |
|
|
$ |
(8.50 |
) |
|
$ |
(2.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.09 |
|
|
$ |
0.19 |
|
|
$ |
(6.50 |
) |
|
$ |
(1.64 |
) |
|
|
Discontinued operations
|
|
|
(0.01 |
) |
|
|
0.01 |
|
|
|
(2.01 |
) |
|
|
(0.89 |
) |
|
|
Effect of change in accounting
|
|
|
0.03 |
|
|
|
|
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.11 |
|
|
$ |
0.20 |
|
|
$ |
(8.50 |
) |
|
$ |
(2.54 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations in the third quarter of 2005
includes a valuation allowance against deferred tax assets of
$918 (including $817 related to the deferred tax asset balance
at the beginning of the year). Loss from discontinued operations
includes an impairment charge of $275 for the three businesses
that became held for sale in the fourth quarter.
Loss from continuing operations in the fourth quarter includes
goodwill impairments of $53 and realignment charges and
long-lived asset impairments of $45. Loss from discontinued
operations includes a $123 provision for the loss on sale for
the three businesses held for sale at December 31, 2005.
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2004 Quarters Ended | |
|
|
| |
|
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
|
|
| |
|
| |
|
| |
|
| |
Net sales
|
|
$ |
1,969 |
|
|
$ |
1,998 |
|
|
$ |
1,820 |
|
|
$ |
1,988 |
|
Gross profit*
|
|
|
171 |
|
|
|
191 |
|
|
|
135 |
|
|
|
89 |
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
40 |
|
|
|
54 |
|
|
|
52 |
|
|
|
(74 |
) |
|
Discontinued operations
|
|
|
18 |
|
|
|
46 |
|
|
|
(10 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
58 |
|
|
$ |
100 |
|
|
$ |
42 |
|
|
$ |
(138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.27 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
(0.50 |
) |
|
|
Discontinued operations
|
|
|
0.12 |
|
|
|
0.31 |
|
|
|
(0.09 |
) |
|
|
(0.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.39 |
|
|
$ |
0.67 |
|
|
$ |
0.27 |
|
|
$ |
(0.93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.27 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
(0.50 |
) |
|
|
Discontinued operations
|
|
|
0.12 |
|
|
|
0.30 |
|
|
|
(0.08 |
) |
|
|
(0.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
0.39 |
|
|
$ |
0.66 |
|
|
$ |
0.28 |
|
|
$ |
(0.93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
Realignment charges (credits) of $(3), $4 and $5 incurred
in the first, second and third quarters of 2004 were considered
immaterial for separate reporting in the Statement of Income and
were included in Cost of sales. As a result of the realignment
charges these amounts have been included in our Consolidated
Statement of Income for the year ended December 31, 2004.
For consistency, the realignment charges (credits) have not
been included in the gross profit calculation for the 2004
quarters. |
Loss from continuing operations in the fourth quarter of 2004
includes realignment charges of $39 and the loss on repurchase
of notes of $96. Loss from discontinued operations for the
fourth quarter includes a $30 loss on the sale of AAG and $15 of
realignment charges related to the three businesses held for
sale at December 31, 2005.
106
DANA CORPORATION AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II(a)
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Years ended December 31, 2005, 2004 and 2003
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments | |
|
|
|
|
|
|
|
|
Trade accounts | |
|
arising from | |
|
|
|
|
|
|
|
|
receivable | |
|
change in | |
|
|
|
|
Balance at | |
|
Amounts | |
|
“written off” | |
|
currency | |
|
Balance at | |
|
|
beginning | |
|
charged | |
|
net of | |
|
exchange rates | |
|
end of | |
|
|
of period | |
|
to income | |
|
recoveries | |
|
and other items | |
|
period | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2005
|
|
$ |
36 |
|
|
$ |
1 |
|
|
$ |
(8 |
) |
|
$ |
(7 |
) |
|
$ |
22 |
|
2004
|
|
|
38 |
|
|
|
2 |
|
|
|
(9 |
) |
|
|
5 |
|
|
|
36 |
|
2003
|
|
|
40 |
|
|
|
7 |
|
|
|
(14 |
) |
|
|
5 |
|
|
|
38 |
|
107
SCHEDULE II(b)
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR CREDIT LOSSES — LEASE FINANCING
Years ended December 31, 2005, 2004 and 2003
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments | |
|
|
|
|
|
|
Amounts | |
|
|
|
arising from | |
|
|
|
|
|
|
charged | |
|
Amounts | |
|
change in | |
|
|
|
|
Balance at | |
|
(credited) | |
|
‘written off‘ | |
|
currency | |
|
Balance at | |
|
|
beginning | |
|
to | |
|
net of | |
|
exchange rates | |
|
end of | |
|
|
of period | |
|
income | |
|
recoveries | |
|
and other items | |
|
period | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2005
|
|
$ |
12 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
17 |
|
2004
|
|
|
26 |
|
|
|
(10 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
12 |
|
2003
|
|
|
34 |
|
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
26 |
|
|
|
(1) |
DCC had maintained an allowance for potential losses related to
assets held by a partnership interest. The partnership
recognized the underlying loss in 2004, resulting in a reduction
in the earnings from equity investments recorded by DCC.
Concurrently, DCC reduced the allowance for credit losses
resulting in no impact on net income. |
108
SCHEDULE II(c)
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
VALUATION ALLOWANCE FOR DEFERRED TAX ASSETS
Years ended December 31, 2005, 2004 and 2003
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions | |
|
|
|
|
Balance at | |
|
Amounts | |
|
due to | |
|
Balance at | |
|
|
beginning | |
|
charged | |
|
utilization or | |
|
end of | |
|
|
of period | |
|
to income | |
|
expiration | |
|
period | |
|
|
| |
|
| |
|
| |
|
| |
2005
|
|
$ |
387 |
|
|
$ |
1,191 |
|
|
$ |
(43 |
) |
|
$ |
1,535 |
|
2004
|
|
|
609 |
|
|
|
82 |
|
|
|
(304 |
) |
|
|
387 |
|
2003
|
|
|
538 |
|
|
|
141 |
|
|
|
(70 |
) |
|
|
609 |
|
109
SCHEDULE II(d)
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE FOR LOAN LOSSES
Years ended December 31, 2005, 2004 and 2003
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts | |
|
|
|
|
|
|
|
|
|
|
charged | |
|
|
|
|
|
|
|
|
Balance at | |
|
(credited) | |
|
|
|
Write-off | |
|
Balance at | |
|
|
beginning | |
|
to | |
|
|
|
recoveries | |
|
end of | |
|
|
of period | |
|
income | |
|
Write-off | |
|
and other | |
|
period | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
2005
|
|
$ |
3 |
|
|
$ |
6 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
9 |
|
2004
|
|
|
3 |
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
3 |
|
|
|
3 |
|
2003
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
-None-
|
|
Item 9A. |
Controls and Procedures |
Disclosure Controls and Procedures — We
maintain disclosure controls and procedures that are designed to
ensure that the information disclosed in the reports we file
with the SEC under the Exchange Act of 1934 as amended (the
Exchange Act) is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), as appropriate, to
allow timely decisions regarding required disclosure.
In the second quarter of 2005, senior management at our
corporate office identified an unsupported asset sale
transaction in our Commercial Vehicle business unit and recorded
the necessary adjustments to correct for the accounting related
to this matter before the accounting and reporting was completed
for the quarter. At that time, management initiated an
investigation into the matter. In September 2005, corporate
management found other incorrect accounting entries related to a
customer agreement within the same business unit and informed
the Audit Committee of the Board of Directors of its findings.
The Audit Committee engaged outside counsel to conduct an
independent investigation of the situation. The independent
investigation included interviews with nearly one hundred
present and former employees with operational and financial
management responsibilities for each of our business units.
The investigations also included a review and assessment of
accounting transactions identified through the interviews noted
above, and through other work performed by the company and the
independent investigators engaged by the Audit Committee. The
independent investigators also reviewed and assessed certain
items identified as part of the annual audit performed by our
independent registered public accounting firm. Upon completion
of the investigations, we restated our consolidated financial
statements for the first and second quarters of 2005 and for the
years 2002 through 2004.
Management, including our CEO and CFO, carried out an evaluation
of the effectiveness of our disclosure controls and procedures,
as of December 31, 2005, in accordance with
Rules 13a-15(b)
and 15d-15(b) of the
Exchange Act. Based on that evaluation and the existence of the
material weaknesses discussed below under
“Management’s Report on Internal Control Over
Financial Reporting,” management, including our CEO and
CFO, has concluded that our disclosure controls and procedures
were not effective as of December 31, 2005.
Management’s Report on Internal Control Over Financial
Reporting — Our management is responsible for
establishing and maintaining adequate internal control over
financial reporting (as defined in
110
Rules 13a-15(f)
and 15d-15(f) under the
Exchange Act). A company’s internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles (GAAP).
A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and disposition
of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and the
oversight of the board of directors of the company; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision of our CEO and CFO, management conducted
an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2005, using the
criteria set forth in the framework established by the Committee
of Sponsoring Organizations of the Treadway Commission
(COSO) entitled “Internal Control —
Integrated Framework.”
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of a company’s
annual or interim financial statements will not be prevented or
detected. Management identified the following material
weaknesses in our internal control over financial reporting as
of December 31, 2005:
(1) We did not maintain an effective control environment
at our Commercial Vehicle business unit. Specifically, there
were inadequate controls to prevent, identify and respond to
improper intervention or override of established policies,
procedures and controls by management within the Commercial
Vehicle business unit. This improper management intervention and
override at this business unit allowed the improper recording of
certain transactions with respect to asset sale contracts,
supplier cost recovery arrangements, and contract pricing
changes to achieve accounting results that were not in
accordance with GAAP and journal entries which were not
appropriately supported or documented. Additionally, financial
personnel in the unit failed to report instances of
inappropriate conduct and potential financial impropriety to
senior financial management outside the unit. This control
deficiency primarily affected accounts receivable, accounts
payable, accrued liabilities, revenue, other income, and other
direct expenses.
(2) Our financial and accounting organization was not
adequate to support our financial accounting and reporting
needs. Specifically, lines of communication between our
operations and accounting and finance personnel were not
adequate to raise issues to the appropriate level of accounting
personnel and we did not maintain a sufficient complement of
personnel with an appropriate level of accounting knowledge,
experience and training in the application of GAAP commensurate
with our financial reporting requirements. This control
deficiency resulted in ineffective controls over the accurate
and complete recording of certain customer contract pricing
changes and asset sale contracts (both within and outside of the
Commercial Vehicle business unit) to ensure they were accounted
for in accordance with GAAP. The lack of a sufficient complement
of personnel with an appropriate level of accounting knowledge,
experience and training contributed to the control deficiencies
noted in items 3 through 6 below.
(3) We did not maintain effective controls over the
completeness and accuracy of certain revenue and expense
accruals. Specifically, we failed to identify, analyze, and
review certain accruals at period end relating to certain
accounts receivable, accounts payable, accrued liabilities,
revenue, and other direct expenses to ensure that they were
accurately, completely and properly recorded.
111
(4) We did not maintain effective controls over
reconciliations of certain financial statement accounts.
Specifically, our controls over the preparation, review and
monitoring of account reconciliations primarily related to
certain inventory, accounts payable, accrued expenses and the
related income statement accounts and certain inter-company
balances were ineffective to ensure that account balances were
accurate and supported with appropriate underlying detail,
calculations or other documentation, and that inter-company
balances appropriately eliminate.
(5) We did not maintain effective controls over the
valuation and accuracy of long-lived assets and goodwill.
Specifically, we did not maintain effective controls to identify
the deterioration in fourth quarter operating results as a
condition that triggered a requirement to assess long-lived
assets for impairment. Also, certain plants did not maintain
effective controls to identify impairment of idle assets in a
timely manner. Further, we did not maintain effective controls
to ensure goodwill impairment calculations were accurate and
supported with appropriate underlying documentation, including
the determination of net book value and fair value of reporting
units.
(6) We did not maintain effective segregation of duties
over automated and manual transaction processes.
Specifically, certain information technology personnel had
unrestricted access to financial applications, programs and data
beyond that needed to perform their individual job
responsibilities and without adequate independent monitoring. In
addition, certain personnel with financial responsibilities for
purchasing, payables and sales had incompatible duties that
allowed for the creation, review and processing of certain
financial data without adequate independent review and
authorization. This control deficiency primarily affects
revenue, accounts receivable and accounts payable.
Each of the control deficiencies described in items 1 through 4
resulted in the restatement of our annual consolidated financial
statements for 2004, each of the interim periods in 2004 and the
first and second quarters of 2005, as well as certain
adjustments, including audit adjustments, to our third quarter
2005 consolidated financial statements. Each of the control
deficiencies described in items 2 through 4 further resulted in
the restatement of our annual consolidated financial statements
for 2003 and 2002. The control deficiency described in
item 5 resulted in audit adjustments to the 2005 annual
consolidated financial statements. Additionally, each control
deficiency could result in a misstatement of the aforementioned
accounts or disclosures that would result in a material
misstatement in our annual or interim consolidated financial
statements that would not be prevented or detected. Management
has determined that each of the control deficiencies described
in items 1 through 6 constitutes a material weakness.
As a result of these material weaknesses, management has
concluded that we did not maintain effective internal control
over financial reporting as of December 31, 2005, based on
criteria established in “Internal Control —
Integrated Framework” issued by the COSO.
Management’s assessment of the effectiveness of the
company’s internal control over financial reporting as of
December 31, 2005, has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in its report which appears in
Item 8 of this
Form 10-K.
Plan for Remediation of Material Weaknesses —
We believe the steps described below, some of which we have
already taken as noted herein, together with others that we plan
to take, will remediate the material weaknesses discussed above.
Specifically, we believe the actions outlined in (i) and
(ii), below, will address the first material weakness, while the
steps presented in (iii) and (iv), below, will remediate
the others.
(i) We are committed to having a strong ethical climate and
ensuring that any employee concerned with activity believed to
be improper will bring his or her concerns to the prompt
attention of management, either directly or anonymously through
our Ethics and Compliance Helpline. Toward that end, in 2005, we
took the following actions:
|
|
|
|
• |
Within the Commercial Vehicle business unit, we installed a new
senior management team, reassigned several controllers and added
support resources to the finance staff; |
112
|
|
|
|
• |
We enhanced the training program for our Standards of
Business Conduct by deploying a new training tool to all
employees worldwide for reviewing and testing their
understanding of the principles contained in the
Standards; and |
|
|
• |
To further improve the visibility to management of potential
issues, we have begun requiring our division controllers to send
copies of the results of their required periodic
on-site plant reviews
directly to our Chief Accounting Officer and our controllers at
all levels to make their quarterly certifications and
representations directly to our CEO and CFO, as well as to their
immediate supervisors. Copies of these
on-site plant review
reports and quarterly controller certifications are also being
sent to Internal Audit to aid in identifying potential financial
reporting issues. |
(ii) To reduce operating management’s ability to
effect override of internal control through undue influence, we
have changed the reporting structure for the controllers in our
business units. Rather than reporting to operating management as
they have in the past, controllers now report directly to the
finance group headed by our CFO. Consequently, senior financial
management is now responsible for hiring, training, performance
appraisals, promotions and compensation of all finance people
within the company. Over the near term, the cultural aspects of
this change will be addressed through more robust communication
and interaction within the finance organization through more
frequent meetings of our controller groups and enhanced
web-based tools designed specifically to address the needs of
our finance organization.
(iii) We have augmented the GAAP training that is regularly
part of our periodic controller conferences, web casts and
outside continuing education programs by updating our special
GAAP training course. We held special GAAP training sessions for
our financial personnel in Europe in October and November 2005,
and we will continue this training in North America, South
America, and Asia Pacific in 2006.
(iv) We have taken or plan to take the following additional
steps to improve our internal control over financial reporting:
|
|
|
|
• |
During 2005, we augmented the resources in our corporate
accounting department, and in 2006 we will continue to add to
the department’s staff and utilize external resources as
appropriate; |
|
|
• |
Outside of the corporate accounting department, we will continue
to add financial personnel as necessary throughout the company
to provide adequate resources with appropriate levels of
experience and GAAP knowledge; |
|
|
• |
Additional emphasis is being placed by senior management in
operations and information technology to develop specific
remediation plans for all the control deficiencies,
concentrating initially on those pertaining to the segregation
of duties and other operations-based matters identified as
material weaknesses; |
|
|
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We are creating centers of excellence for finance functions to
process transactions which require specialized accounting
knowledge; |
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We will implement a centralized contract administration process
such that all significant agreements, and significant changes to
such agreements, are reviewed by experienced financial personnel
who will prescribe and monitor the appropriate accounting for
the underlying transactions; |
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We are currently recruiting to replace the human resource
professional assigned in 2005 to focus on the organizational
development needs of the Finance group and to track the training
and career paths of our finance personnel, reassess the
competency requirements for our key financial positions and
determine our overall financial staffing needs; |
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During 2005, we dedicated information technology
(IT) personnel to assist in planning for the future IT
needs of our finance function; |
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During 2006, we will complete the deployment to all our
locations of account reconciliation software to allow for the
access and review of reconciliations from a central location; |
113
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We will enhance our corporate accounting policies in certain
areas, including long-lived assets and goodwill, and deploy the
resultant changes to our financial people worldwide; |
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As part of the ongoing transformation of our finance function,
we will continue to centralize control and responsibility for
routine, high-volume accounting activities in shared service
centers or with third-party providers; and |
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During 2005, we conducted an independent review of the
effectiveness of our internal audit function. As a result of the
findings, we will broaden the nature and extent of work that our
internal audit department performs by increasing the size of the
department and enhancing the competency of its people. |
Changes in Internal Control Over Financial
Reporting — Our management, with the participation
of our CEO and CFO, evaluates any changes in our internal
control over financial reporting that occurred during each
fiscal quarter that have materially affected, or are reasonably
likely to materially affect, such internal control over
financial reporting. The following material changes occurred
during the fourth quarter of 2005 that materially affected, or
were reasonably likely to materially affect, our internal
control over financial reporting:
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The implementation of effective controls over the computation
and review of our LIFO inventory calculation by modifying the
instructions used by both Corporate Accounting and the
facilities to ensure all capitalized items, such as steel
surcharges, were appropriately reflected in the calculation; |
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The completion of the restructuring of the senior management
team in the Commercial Vehicle business unit; and |
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The ongoing deployment of the account reconciliation software to
our major facilities as described above. |
CEO and CFO Certifications — The Certifications
of our CEO and CFO, which are attached as Exhibits 31-A and
31-B to this
Form 10-K, include
information about our disclosure controls and procedures and
internal control over financial reporting. These Certifications
should be read in conjunction with the information contained in
this Item 9A for a more complete understanding of the
matters covered by the Certifications.
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Item 9B. |
Other Information |
-None-
114
PART III
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Item 10. |
Directors and Executive Officers of the Registrant |
Directors
We currently have the following directors, who will hold office
until their successors are elected by the Board:
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A. Charles Baillie, age 66, was formerly Chairman of
the Board of The Toronto-Dominion Bank, a Canadian chartered
bank which, with its subsidiaries, offers a full range of
financial products and services, from 1998 to 2003 and Chief
Executive Officer from 1997 to 2002. He has been a Dana director
since 1998 and is also a director of Canadian National Railway
Company and TELUS Corporation. |
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David E. Berges, age 56, has been Chairman of the
Board and Chief Executive Officer of Hexcel Corporation, a
leading international producer of advanced structural materials
and composite parts serving aerospace, defense, electronics and
other industrial markets, since 2001 and President since 2002.
He was previously President of the Automotive Products Group of
Honeywell International Inc., a manufacturer of aerospace
products and services, specialty materials, automation and
control systems and transportation and power systems from 1997
to 2001. He has been a Dana director since 2004. |
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Michael J. Burns, age 54, has been Chief Executive
Officer, President and a director of Dana since March 2004, and
Chairman of the Board and Chief Operating Officer since April
2004. He was previously President of General Motors Europe, a
vehicle manufacturer, from 1998 to 2004. He is also a director
of United Parcel Service, Inc. |
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Edmund M. Carpenter, age 64, has been President and
Chief Executive Officer of Barnes Group Inc., a diversified
international company serving a range of industrial and
transportation markets, since 1998. He has been a Dana director
since 1991 and is also a director of Campbell Soup Company. |
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Richard M. Gabrys, age 64, has been Dean of the
School of Business of Wayne State University since January 2006
and President and Chief Executive Officer of Mears Investments
LLC, a personal family investment company, since 2004. He was
previously Vice Chairman of Deloitte & Touche LLP, a
professional services firm providing audit and financial
advisory services, from 1995 to 2004. He has been a Dana
director since 2004 and is also a director of CMS Energy Corp. |
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Samir G. Gibara, age 67, was formerly Chairman of
the Board of The Goodyear Tire & Rubber Company, a
company which manufactures and markets tires and rubber,
chemical and plastic products for the transportation industry
and industrial and consumer markets, from 1996 to 2003, Chief
Executive Officer from 1996 to 2002, and President and Chief
Operating Officer from 1995 to 2002. He has been a Dana director
since 2004 and is also a director of International Paper Company. |
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Cheryl W. Grisé, age 53, has been Executive
Vice President of Northeast Utilities, a regional provider of
energy products and services, since December 2005, Chief
Executive Officer of Northeast Utilities’ principal
operating subsidiaries since 2002, and President of Northeast
Utilities’ Utility Group since 2001. She was previously
Senior Vice President, Secretary and General Counsel of
Northeast Utilities from 1998 to 2001. She has been a Dana
director since 2002 and is also a director of MetLife, Inc. |
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James P. Kelly, age 63, was formerly Chairman of the
Board and Chief Executive Officer of United Parcel Service,
Inc., a package delivery company and global provider of
specialized transportation and logistics services from 1997 to
2002. He has been a Dana director since 2002 and is also a
director of BellSouth Corporation, Hewitt Associates and United
Parcel Service, Inc. |
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Marilyn R. Marks, age 53, has been Chairman of the
Board and Chief Executive Officer of Corporate Marks, LLC, a
management advisory and consulting services company, since 2005.
She has been a Dana director since 1994. |
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Richard B. Priory, age 59, was formerly Chairman of
the Board and Chief Executive Officer of Duke Energy
Corporation, a supplier of energy and related services from 1997
to 2003. He has been a Dana director since 1996. |
Executive Officers
You can find information about our executive officers under the
caption “Executive Officers of the Registrant” in
Item 1.
Audit Committee and Audit Committee Financial Expert
Our Board has a separately designated Audit Committee
established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (the Exchange Act),
to oversee our accounting and financial reporting processes and
audits of our financial statements. All members of our Audit
Committee are non-management directors who meet the independence
requirements of Section 303A.02 of The New York Stock
Exchange Listed Company Manual. Currently, our Audit
Committee members are Mr. Gabrys (Chairman),
Mr. Carpenter, Mr. Gibara, Ms. Grisé and
Ms. Marks. Our Board has determined that each of these
individuals is an “audit committee financial expert”
as defined in Item 401(h) of
Regulation S-K
under the Exchange Act.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires our directors,
executive officers and persons who own more than 10% of our
stock to file initial stock ownership reports and reports of
changes in their ownership with the SEC. Under SEC rules, we
must be furnished with copies of these reports. Based on our
review of these reports and representations made to us by such
persons, we do not know of any failure by such persons to file a
report required by Section 16(a) on a timely basis during
2005.
Code of Ethics
Our Standards of Business Conduct (the Standards)
constitute the code of ethics that we have adopted for our
employees (including our principal executive officer, principal
financial officer, principal accounting officer, and persons
performing similar functions) which is designed to deter
wrongdoing and to promote (i) honest and ethical conduct,
including the ethical handling of actual or apparent conflicts
of interest between personal and professional relationships;
(ii) full, fair, accurate, timely, and understandable
disclosure in reports and documents that we file with, or submit
to, the SEC and in our other public communications;
(iii) compliance with applicable governmental laws, rules
and regulations; (iv) the prompt internal reporting of
violations of the Standards to the persons identified
therein; and (v) accountability for adherence to the
Standards. A copy of the Standards is posted on
our Internet website at http://www.dana.com/investors at the
“Corporate Governance” link.
If we adopt a substantive amendment to the Standards of
Business Conduct, or if we grant a waiver or implicit waiver
of any provision of the Standards relating to the above
elements to our principal executive, financial or accounting
officers or to persons performing similar functions, within four
business days following the date of such action, we will post a
notice at our website at the above address describing the nature
of the amendment or waiver and, in the case of any such waiver,
the name of the person to whom it was granted and the date of
the waiver. For this purpose, “waiver” means our
approval of a material departure from a provision of the
Standards and “implicit waiver” means our
failure to take action within a reasonable period of time
regarding a material departure from a provision of the
Standards that has been made known to one of our
executive officers.
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Item 11. |
Executive Compensation. |
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Summary Compensation Table |
The following table contains information about the compensation
for services rendered to Dana and our subsidiaries which was
paid or awarded to or earned by our Chief Executive Officer
(CEO); the four other most highly compensated persons who were
serving as our executive officers at the end of 2005; and
Mr. Laisure, who was an executive officer during 2005 but
left active employee status during the year (each a Named
Executive Officer). Messrs. Cole, Richter and Laisure
retired from Dana on January 1, March 1, and
April 1, 2006, respectively.
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Long-Term Compensation | |
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Awards | |
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Securities | |
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Annual Compensation | |
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Under- | |
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lying | |
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Other Annual | |
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Restricted | |
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Options/ | |
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All Other | |
Name and |
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Compensation | |
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Stock Awards | |
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SARs | |
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Compensation | |
Principal Position |
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Year | |
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Salary ($)(1) | |
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Bonus ($)(2) | |
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($)(3) | |
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($)(4) | |
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(#)(5) | |
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($)(6) | |
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Michael J. Burns
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2005 |
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$ |
1,029,167 |
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0 |
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$ |
196,648 |
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$ |
794,978 |
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321,543 |
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$ |
271,893 |
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Chairman, CEO, |
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2004 |
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826,250 |
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$ |
1,000,000 |
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100,539 |
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3,536,395 |
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510,000 |
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399,903 |
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President and Chief |
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2003 |
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— |
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— |
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— |
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— |
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— |
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— |
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Operating Officer |
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Robert C. Richter
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2005 |
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546,667 |
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0 |
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120,109 |
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246,439 |
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99,923 |
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3,308 |
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Chief Financial |
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2004 |
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530,000 |
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159,000 |
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50,865 |
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157,010 |
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34,000 |
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3,233 |
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Officer |
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2003 |
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500,000 |
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306,000 |
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— |
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0 |
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55,000 |
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3,158 |
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Bernard N. Cole
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2005 |
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506,667 |
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0 |
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136,689 |
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246,439 |
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99,923 |
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51,280 |
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President — Heavy |
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2004 |
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458,750 |
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165,000 |
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67,881 |
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246,730 |
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34,000 |
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5,235 |
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Vehicle |
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2003 |
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412,000 |
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210,000 |
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— |
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0 |
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40,000 |
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5,115 |
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Technologies and |
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Systems Group |
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Michael L. DeBacker
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2005 |
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402,500 |
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0 |
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134,238 |
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149,973 |
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60,662 |
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0 |
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General Counsel and |
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2004 |
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390,000 |
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146,250 |
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— |
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112,150 |
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22,000 |
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0 |
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Secretary |
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2003 |
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369,625 |
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205,000 |
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— |
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0 |
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36,000 |
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0 |
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Nick L. Stanage
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2005 |
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96,564 |
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126,000 |
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62,589 |
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226,440 |
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50,000 |
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99,577 |
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President — Heavy |
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2004 |
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— |
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— |
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— |
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— |
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— |
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— |
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Vehicle Products |
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2003 |
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— |
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— |
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— |
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— |
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— |
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— |
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James M. Laisure
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2005 |
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527,000 |
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0 |
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96,592 |
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246,439 |
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99,923 |
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4,733 |
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President |
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2004 |
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449,145 |
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130,000 |
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— |
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193,150 |
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22,000 |
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5,135 |
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Automotive Systems |
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2003 |
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388,000 |
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210,000 |
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— |
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0 |
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40,000 |
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4,515 |
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Group(7) |
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(1) |
The amount shown in this column for Mr. Laisure for 2005
includes salary of $155,000 paid while he was an active employee
of Dana, and a total of $372,000 in separation pay installments
paid pursuant to his separation agreement, discussed under the
caption “Separation Agreements.” The amount shown for
Mr. Stanage is the salary he earned in 2005 after joining
the company in August. |
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(2) |
We show annual bonuses in the year in which they are earned,
regardless of whether payment is made then or in the following
year or deferred for future distribution. The amount shown in
this column for Mr. Stanage consists of the $126,000
minimum guaranteed annual bonus for 2005 provided under his
employment agreement, discussed under the caption
“Employment Agreements.” |
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(3) |
This column shows the total value of the perquisites and
personal benefits received by the Named Executive Officer for
any year in which the aggregate of such perquisites and benefits
exceeded the lesser of $50,000 or 10% of his salary and bonus
for the year. |
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The amounts shown in this column include: (i) for
Mr. Burns in 2005, reimbursements for the payment of taxes
($76,576) and supplemental life insurance premiums ($75,515);
(ii) for Mr. Richter in 2005, reimbursements for the
payment of taxes ($48,006) and supplemental life insurance
premiums ($36,197) and in 2004, reimbursements for the payment
of taxes ($17,597) and fees for professional services ($19,833);
(iii) for Mr. Cole in 2005, reimbursements for the
payment of taxes ($47,942) and |
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supplemental life insurance premiums ($55,795), and in 2004,
reimbursements for the payment of taxes ($19,520) and use of
corporate aircraft ($21,313); (iv) for Mr. DeBacker in
2005, reimbursements for the payment of taxes ($55,892) and
supplemental life insurance premiums ($65,086); (v) for
Mr. Stanage in 2005, supplemental life insurance premiums
($58,464); and (vi) for Mr. Laisure in 2005,
reimbursements for the payment of taxes ($37,522) and
supplemental life insurance premiums ($33,068). |
The taxes which were reimbursed were those incurred by the
individuals in connection with the supplemental insurance
premiums and/or fees for professional financial planning, tax
preparation and/or estate planning services paid by Dana. For
Mr. Cole, they also included taxes incurred in connection with
his company vehicle.
The premiums paid by the company for supplemental life
insurance increased substantially in 2005 when, in response to
legislative and tax law changes, Dana changed the policies
provided under its Senior Management Life Insurance Program from
split dollar policies jointly owned by the participants and the
company to variable universal life policies owned by the
individuals. The premiums were affected by differences in the
way assets are invested under these two types of policies in
order for the policies to reach their targeted values in
specified time frames.
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(4) |
(a) For Mr. Burns, this column shows the value of
50,188 restricted shares granted on February 14, 2005,
under our 1999 Restricted Stock Plan; 63,135 restricted stock
units granted under his employment agreement on March 1,
2004; and 102,552 restricted stock units granted under his
employment agreement on April 19, 2004. |
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For the other Named Executive Officers, this column shows the
value of the following restricted shares granted under our 1999
Restricted Stock Plan: (i) for Mr. Richter,
15,558 shares granted on February 14, 2005, and
7,000 shares granted on February 9, 2004;
(ii) for Mr. Cole, 15,558 shares granted on
February 14, 2005, and 11,000 shares granted on
February 9, 2004; (iii) for Mr. DeBacker,
9,468 shares granted on February 14, 2005, and
5,000 shares granted on February 9, 2004;
(iv) for Mr. Stanage, 17,000 shares granted on
August 29, 2005; and (v) for Mr. Laisure,
15,558 shares granted on February 14, 2005,
5,000 shares granted on February 9, 2004, and
4,000 shares granted on April 20, 2004. None of these
restricted shares vest in under three years except those granted
to Mr. Cole in 2005, which would have vested on
February 28, 2007, but were forfeited when he retired. |
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We calculated the values shown in this column by multiplying the
number of restricted shares or restricted stock units granted by
the closing price of our shares on the grant dates; none of the
shares or units had a down payment or purchase price. Dividends
are payable on these restricted shares and restricted stock
units in the form of additional restricted shares or units,
accrued at the same times and rates as cash dividends are paid
to our shareholders. |
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(b) As of December 31, 2005, the aggregate number and
value of the restricted shares and restricted stock units held
by each Named Executive Officer were as follows: (i) for
Mr. Burns, 51,559 restricted shares and 174,050 restricted
stock units, valued at $1,619,872; (ii) for
Mr. Richter, 56,829 restricted shares and 11,287 restricted
stock units valued at $477,553; (iii) for Mr. Cole,
54,327 restricted shares and 7,824 restricted stock units valued
at $436,544; (iv) for Mr. DeBacker, 28,010 restricted
shares valued at $178,388; (v) for Mr. Stanage, 17,164
restricted shares valued at $123,238; and (vi) for
Mr. Laisure, 70,025 restricted shares valued at $502,780.
We calculated these aggregate values by multiplying (i) the
number of restricted shares or restricted stock units held by
each individual by (ii) the difference between the closing
price of our shares on December 30, 2005, the last trading
day of the year, and any per share or per unit purchase price
paid by the individual. |
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(5) |
This column shows the number of shares of Dana stock underlying
options granted under our Stock Incentive Plan. No stock
appreciation rights (SARs) were granted to the Named Executive
Officers in years 2003 through 2005. |
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(6) |
The amount shown in this column for Mr. Burns for 2005
consists of an annual service-based credit of $258,293 to the
notional account for the supplemental retirement benefit
provided under his employment agreement; a basic contribution of
$6,600 made by Dana to Mr. Burns’ account under our
SavingsWorks Plan, a defined contribution plan qualified under
Internal Revenue Code Sections 401(a) |
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and 401(k); and $7,000 in contributions made by Dana to the
SavingsWorks account to match his contributions. The amount
shown for Mr. Burns for 2004 consists of an annual
service-based credit of $104,354 to the notional account for his
supplemental retirement benefit; one-time payments pursuant to
his employment agreement consisting of $181,727 to replace
compensation earned from his former employer which was forfeited
on the termination of such employment, a standard relocation
payment of $79,167 (equal to one month’s salary), and
reimbursement of $11,415 for relocation expenses; a premium
payment of $12,923 for a term life insurance policy; a basic
contribution of $6,150 to his account under the SavingsWorks
Plan; and $4,167 in matching contributions to the SavingsWorks
account. |
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The amounts shown for Messrs. Richter and Laisure are
matching contributions made by Dana to these individuals’
accounts under our SavingsPlus Plan, a defined contribution plan
qualified under Internal Revenue Code Sections 401(a) and
401(k). |
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The amount shown for Mr. Cole for 2005 consists of a
one-time matching contribution of $45,925 made by Dana to his
account under our Employees’ Stock Purchase Plan at the
time this plan was terminated by Dana and a $5,355 matching
contribution made by Dana to his account under our SavingsPlus
Plan. The amounts shown for 2004 and 2003 consist of matching
contributions made by Dana to his SavingsPlus Plan account. |
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The amount shown for Mr. Stanage for 2005 consists of a
one-time payment of $70,000 under his employment agreement to
replace compensation earned from his former employer which was
forfeited on the termination of such employment; reimbursement
of $23,333 for relocation expenses; and a basic contribution of
$4,997 to his account under the SavingsWorks Plan and $1,247 in
matching contributions to this account. |
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(7) |
Mr. Laisure served as President — Engine and
Fluid Management Group from 2001 to 2004. |
Option/ SAR Grants in Last Fiscal Year
We granted options and SARs with respect to an aggregate of
2,368,570 shares of Dana stock in 2005 under our Stock
Incentive Plan. The following table shows the options that were
granted to the Named Executive Officers in 2005. No SARs were
granted to the Named Executive Officers in 2005, although SARs
were granted to other individuals.
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|
|
|
|
|
|
|
|
|
% of Total | |
|
|
|
|
|
|
|
|
|
|
Options/SARs | |
|
|
|
|
|
|
|
|
Number of Securities | |
|
Granted to | |
|
Exercise or | |
|
|
|
Grant Date | |
|
|
Underlying Options | |
|
Employees in | |
|
Base Price | |
|
Expiration | |
|
Present | |
Name |
|
Granted(#) | |
|
2005 | |
|
($/Share)(1) | |
|
Date(2) | |
|
Value($)(3) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Mr. Burns
|
|
|
321,543 |
|
|
|
13.57 |
% |
|
$ |
15.94 |
|
|
|
02-13-15 |
|
|
$ |
1,376,204 |
|
Mr. Richter
|
|
|
99,923 |
|
|
|
4.22 |
% |
|
$ |
15.94 |
|
|
|
02-13-15 |
|
|
|
427,670 |
|
Mr. Cole
|
|
|
99,923 |
|
|
|
4.22 |
% |
|
$ |
15.94 |
|
|
|
02-28-07 |
|
|
|
427,670 |
|
Mr. DeBacker
|
|
|
60,662 |
|
|
|
2.56 |
% |
|
$ |
15.94 |
|
|
|
02-13-15 |
|
|
|
259,633 |
|
Mr. Stanage
|
|
|
50,000 |
|
|
|
2.11 |
% |
|
$ |
13.35 |
|
|
|
08-28-15 |
|
|
|
180,500 |
|
Mr. Laisure
|
|
|
99,923 |
|
|
|
4.22 |
% |
|
$ |
15.94 |
|
|
|
02-13-15 |
|
|
|
427,670 |
|
|
|
(1) |
The exercise price is the amount the holder must pay to purchase
each share of stock that is subject to an option. The exercise
prices reported in this table equal the “fair market
value” (as defined in the Stock Incentive Plan) of the
stock on the grant date. All options shown in the table were
granted on February 14, 2005, except those shown for
Mr. Stanage, which were granted on August 29, 2005. |
|
(2) |
All options shown in the table became exercisable on
December 1, 2005, as a result of the accelerated vesting
described in Note 10 to our consolidated financial
statements, except those shown for Mr. Stanage, which will
vest in 25% increments on each of the first four anniversary
dates of the grant and expire ten years from the date of grant. |
|
(3) |
We used a binomial option pricing model to determine the
hypothetical grant date value for the options shown in this
table. The average fair value of the options granted to
Messrs. Burns, Richter, Cole, |
119
|
|
|
DeBacker and Laisure was $4.28 per share under the binomial
method, using a weighted-average market value at date of grant
of $15.94 and the following weighted-average assumptions:
risk-free interest rate of 3.86%, a dividend yield of 2.64%,
volatility of 30.0% to 31.5%, expected forfeitures of 17.52% and
an expected option life of 6.74 years. The average fair
value of the options granted to Mr. Stanage was
$3.61 per share under the binomial method, using a
weighted-average market value at date of grant of $13.35 and the
following weighted-average assumptions: risk-free interest rate
of 4.05%, a dividend yield of 3.17%, volatility of 31.5% to
35.0%, expected forfeitures of 45.7% and an expected option life
of 5.81 years. |
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
The following table shows (i) the number and value of
options exercised in 2005 by the Named Executive Officers;
(ii) the number of securities underlying the unexercised
options held by the Named Executive Officers at
December 31, 2005; and (iii) the value of the
unexercised
in-the-money options
held by the Named Executive Officers at December 31, 2005,
based on the $7.18 per share closing price of our stock on
December 30, 2005, the last trading day of the year. None
of the Named Executive Officers held or exercised any SARs
during 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities | |
|
Value of Unexercised | |
|
|
|
|
|
|
Underlying Unexercised | |
|
In-the-Money Options | |
|
|
|
|
|
|
Options at 12/31/05(#) | |
|
at 12/31/05 ($) | |
|
|
Shares Acquired | |
|
Value | |
|
| |
|
| |
Name |
|
on Exercise (#) | |
|
Realized($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable | |
|
Unexercisable | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Mr. Burns
|
|
|
0 |
|
|
$ |
0 |
|
|
|
831,543 |
|
|
|
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Mr. Richter
|
|
|
0 |
|
|
|
0 |
|
|
|
430,423 |
|
|
|
27,500 |
|
|
|
0 |
|
|
|
0 |
|
Mr. Cole
|
|
|
0 |
|
|
|
0 |
|
|
|
369,923 |
|
|
|
20,000 |
|
|
|
0 |
|
|
|
0 |
|
Mr. DeBacker
|
|
|
0 |
|
|
|
0 |
|
|
|
231,162 |
|
|
|
18,000 |
|
|
|
0 |
|
|
|
0 |
|
Mr. Stanage
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
50,000 |
|
|
|
0 |
|
|
|
0 |
|
Mr. Laisure
|
|
|
0 |
|
|
|
0 |
|
|
|
317,923 |
|
|
|
20,000 |
|
|
|
0 |
|
|
|
0 |
|
Long-Term Incentive Plan Awards in Last Fiscal Year
The following table contains information about the performance
shares that were awarded to the Named Executive Officers in 2005
under our Stock Incentive Plan.
The number of performance shares awarded to each Named Executive
Officer was determined based on an individual target dollar
value related to his pay group. Vesting of the performance
shares is contingent on Dana’s achieving, over the
three-year performance period from 2005 through 2007,
pre-established performance goals for (i) cumulative
earnings per share (EPS) and (ii) average return on
invested capital (ROIC) measured against the peer group
companies selected by our Compensation Committee.
The threshold number of performance shares shown in table will
be earned if Dana achieves the minimum level of performance set
by the Compensation Committee for the EPS and ROIC goals; the
target number of performance shares will be earned if Dana
achieves the target levels of performance; and the maximum
number of performance shares will be earned if Dana achieves at
least the maximum levels of performance. Generally, the
individual must be actively employed by Dana at the end of the
performance period (December 31, 2007) for his performance
shares to vest based on Dana’s performance. All vested
120
performance shares will be paid in cash in an amount equal to
the fair market value of such shares on December 31, 2007,
except for Mr. Burns’ performance shares, which will
be paid in shares of Dana stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts | |
|
|
Number of | |
|
Performance | |
|
Under Non-Stock Price-Based Plan | |
|
|
Performance | |
|
Period Until | |
|
| |
Name |
|
Shares Awarded | |
|
Payout | |
|
Threshold Level | |
|
Target Level | |
|
Maximum Level | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Mr. Burns
|
|
|
75,282 shares |
|
|
|
2005-2007 |
|
|
|
60,225 shares |
|
|
|
75,282 shares |
|
|
|
90,338 shares |
|
Mr. Richter
|
|
|
23,434 shares |
|
|
|
2005-2007 |
|
|
|
18,747 shares |
|
|
|
23,434 shares |
|
|
|
28,120 shares |
|
Mr. Cole
|
|
|
23,434 shares |
|
|
|
2005-2007 |
|
|
|
18,747 shares |
|
|
|
23,434 shares |
|
|
|
28,120 shares |
|
Mr. DeBacker
|
|
|
14,203 shares |
|
|
|
2005-2007 |
|
|
|
11,362 shares |
|
|
|
14,203 shares |
|
|
|
17,043 shares |
|
Mr. Stanage
|
|
|
5,000 shares |
|
|
|
2005-2007 |
|
|
|
4,000 shares |
|
|
|
5,000 shares |
|
|
|
6,000 shares |
|
Mr. Laisure
|
|
|
23,434 shares |
|
|
|
2005-2007 |
|
|
|
18,747 shares |
|
|
|
23,434 shares |
|
|
|
28,120 shares |
|
Pension Benefits
Pension benefits for Messrs. Burns and Stanage are provided
in their individual Supplemental Executive Retirement Plans,
established pursuant to their employment agreements and
described under the caption “Employment Agreements.”
Pension benefits for Mr. DeBacker will be determined under
the Dana pension plans described below. Pension benefits for
Messrs. Richter, Cole, and Laisure, who retired in 2006,
were determined under these plans and are described in more
detail below.
Dana Corporation Retirement Plan (the CashPlus
Plan) — This plan is a cash balance plan (a type
of non-contributory defined benefit pension plan in which the
participants’ benefits are expressed as individual
accounts). Management employees (and most other non-union
employees) first employed by Dana before January 1, 2003,
participate in this plan.
The normal retirement age under this plan is 65. Benefits under
the plan are computed as follows. During each year of
participation in the plan, a participating employee earns a
service credit equal to a specified percentage of his or her
earnings (as defined in the plan) up to one-quarter of the
Social Security taxable wage base, plus a specified percentage
of his or her earnings above one-quarter of the taxable wage
base. The percentages increase with the length of Dana service.
A participant with 30 or more years of service receives the
maximum credit (6.4% of earnings up to one-quarter of the
taxable wage base, plus 12.8% of earnings over one-quarter of
the taxable wage base).
A participant employed by Dana on July 1, 1988 (when this
plan was converted to a cash balance plan) also earns a
transition benefit designed to provide that his or her
retirement benefit under this plan will be comparable to the
benefit he or she would have received under the predecessor
plan. A participant earns this transition benefit ratably over
the period from July 1, 1988, to his or her
62nd birthday, except that in the event of a change in
control of Dana (as defined in the plan), the participant will
be entitled to the entire transition benefit. The accumulated
service credits and the transition benefit are credited with
interest annually, in an amount (generally not less than 5%)
established by our Board. A participant who was employed by Dana
on July 1, 1988, and was eligible to retire on July 1,
1993, will receive the greater of the benefit provided by this
plan or a benefit comparable to the benefit provided under the
predecessor plan (determined as of July 1, 1993) with
interest credits.
The estimated monthly annuity benefit payable under this plan to
Mr. DeBacker, starting at age 65, as accrued through
December 31, 2005, is $5,060. While we are not currently
contemplating any changes to this plan as a result of our
bankruptcy filing that would effect the payment of benefits
accrued thereunder, there can be no assurance that changes will
not be made.
Excess Benefits Plan — U.S. federal tax
law imposes maximum payment and covered compensation limitations
on tax-qualified pension plans. Dana has adopted an Excess
Benefits Plan which covers all employees eligible to receive
retirement benefits under any funded tax-qualified defined
benefit plan of the company, including the CashPlus Plan, whose
pension benefits are affected by these limitations. This plan
provides that Dana will pay from its general funds any amounts
that exceed the federal limitations and any amounts that are not
paid under the CashPlus Plan due to earnings being reduced by
deferred bonus
121
payments. In the event of a change of control of Dana (as
defined in the plan), participants will receive lump-sum
payments of all benefits previously accrued and will be entitled
to continue to accrue benefits thereunder. The estimated monthly
annuity benefit payable under this plan to Mr. DeBacker,
starting at age 65, as accrued through December 31,
2005, is $2,394. Claims for benefits accrued under this
non-qualified plan prior to our bankruptcy filing are
pre-petition claims and there can be no assurances that such
benefit amounts will be paid.
Supplemental Benefits Plan — Dana has also
adopted a Supplemental Benefits Plan that covers certain
U.S.-based senior
management who participated in the predecessor to the CashPlus
Plan as of June 30, 1988. Under this plan, a participant
who retires before the end of 2009, will be entitled to receive
the difference between the aggregate benefits that he or she
will receive under the CashPlus and Excess Benefits Plans and,
if greater, a percentage of the benefit that he or she would
have been entitled to receive under the predecessor plan to the
CashPlus Plan in effect before July 1, 1988. That
percentage is 70% in the event of retirement in the years 2005
through 2009. The predecessor plan formula is based on 1.6% of
final monthly earnings (as defined in the plan) for each year of
credited service, less 2% of 80% of a participant’s Social
Security benefit for each year of accredited service up to
25 years. In the event of a change of control of Dana (as
defined in the plan), participants will receive lump-sum
payments of all benefits previously accrued and will be entitled
to continue to accrue benefits thereunder. The estimated monthly
annuity benefit payable under this plan to Mr. DeBacker,
starting at age 65, as accrued through December 31,
2005, and reflecting the 70% benefit, is $3,310. Claims for
benefits accrued under this non-qualified plan prior to our
bankruptcy filing are pre-petition claims and there can be no
assurances that such benefit amounts will be paid.
Named Executive Officers Who Retired in 2006 —
Messrs. Richter, Cole and Laisure retired from service with
Dana in 2006. Mr. Richter has received lump sum
distributions of his pension benefits under the foregoing plans
as follows: $319,491 under the CashPlus Plan, $726,784 under the
Excess Benefits Plan, and $368,475 under the Supplemental
Benefits Plan. Mr. Cole has received lump sum distributions
of his benefits as follows: $961,975 under the CashPlus Plan,
$846,261 under the Excess Benefits Plan, and $763,522 under the
Supplemental Benefits Plan. He will receive an additional
payment of $113,311 under the CashPlus Plan later this year.
Mr. Laisure will receive monthly annuity payments of $6,119
under the CashPlus Plan. He also had accrued benefits under the
Excess Benefits Plan and the Supplemental Benefits Plan and the
estimated monthly annuity benefits payable to him under these
plans are $4,605 and $3,704, respectively. Claims for benefits
accrued under these plans prior to our bankruptcy filing are
pre-petition claims and there can be no assurances that these
amounts will be paid.
Compensation of Directors
We do not pay Mr. Burns any additional compensation for his
service as Chairman of the Board.
Our non-management directors receive an annual retainer of
$40,000 for Board service. In addition, our Audit and
Compensation Committee Chairmen receive annual retainers of
$15,000 for such service and the other members of these
committees receive annual retainers of $5,000. Our Finance and
Governance and Nominating Committee Chairmen receive annual
retainers of $10,000 for such service and the other members of
these committees receive annual retainers of $2,500.
In April 2006, our Board appointed Mr. Priory as its
Presiding Director. As such, his responsibilities include
chairing the executive sessions of the independent directors and
providing feedback to the Board Chairman with respect to matters
discussed in those sessions. He will also advise the Board
Chairman regarding the agenda and scheduling of Board meetings
and the flow of information from management to the Board. For
services as the Presiding Director, Mr. Priory will receive
an annual fee of $30,000, plus a payment of $3,000 for each full
or partial day when he is performing services as the Presiding
Director, assuming he is not at the time performing other
services for the Board or its committees.
Our non-management directors receive a fee of $1,500 for each
Board or committee meeting attended in person and $1,000 for
each meeting attended telephonically. Non-management directors
may attend all committee meetings, whether or not they are
members of the committee. Non-management
122
directors are reimbursed for expenses and may have the use of
company facilities in connection with travel to and from, and
attendance at, Board and committee meetings. In 2005,
Messrs. Berges and Carpenter and Ms. Grisé each
had imputed compensation of $339 (including reimbursement for
taxes) as a result of their personal use of company facilities.
We furnish our non-management directors with $25,000 in group
term life insurance. In 2005, we paid insurance premiums of
$60 per director for this coverage and reimbursed the
directors an average of $41 for payment of the related taxes.
Our non-management directors may be reimbursed for tuition and
fees for attending accredited educational programs relating to
Board and corporate governance matters. No amounts were paid or
reimbursed for such programs in 2005.
Our non-management directors participate in our Director
Deferred Fee Plan, which is described in Note 10 to our
consolidated financial statements. As a result of our bankruptcy
filing, there can be no assurance that any compensation deferred
under this plan will be paid. Some of our non-management
directors also have options that were granted under our
1998 Directors’ Stock Option Plan, also described in
Note 10 to our consolidated financial statements, which was
terminated in 2004. The last of these options will expire in
2013, if not exercised sooner.
All of our directors may participate in the Dana Foundation
Matching Gifts Program, under which the Dana Foundation matches
gifts by current and retired Dana directors and certain
full-time employees and retirees to accredited
U.S. educational institutions. In 2005, matches up to
$7,500 per year in the aggregate were permitted.
Subsequently, the maximum aggregate match has been reduced to
$2,500. In 2005, the Foundation matched gifts to educational
institutions of $1,500 for Mr. Baillie; $6,000 for
Mr. Berges; $5,200 for Mr. Burns; $4,500 for
Mr. Carpenter; and $5,750 for Mr. Gibara.
Employment Agreements
Mr. Burns’ Employment Agreement —
Mr. Burns entered into an employment agreement with Dana
when he commenced service with the company in March 2004.
Pursuant to this agreement, Mr. Burns received the
compensation shown in Summary Compensation Table for 2004 and
2005 (including the annual salary, other annual compensation and
long-term incentive equity grants shown for both years and the
2004 annual bonus) and the 2005 long-term equity grants shown
under the caption “Long-Term Incentive Plan Awards in Last
Fiscal Year.”
Under his agreement, Mr. Burns has a Supplemental Executive
Retirement Plan under which he will be entitled to receive a
non-qualified supplemental retirement benefit equal to the
vested amount credited to a notional account that we have
established on his behalf. An initial credit of $5,900,000 was
made to this account in 2004, his year of hire, to replace
non-qualified supplemental retirement benefits from his prior
employer that he forfeited upon leaving that employment.
Additional annual service-based credits and interest credits
will be made to his account each year as if he were
participating in our CashPlus Plan, without regard to certain
legal limits on compensation and benefits that apply to that
plan. For 2004 and 2005, these credits are shown in the
“All Other Compensation” column of the Summary
Compensation Table. For the purpose of determining the annual
service-based credit, Mr. Burns will be deemed to have
completed 30 years of service with Dana. As a result, he
will receive an annual service credit equal to 6.4% of earnings
(as defined in the CashPlus Plan) up to one-quarter of the
Social Security taxable wage base, plus 12.8% of earnings over
one-quarter of such taxable wage base. The benefit payable to
Mr. Burns under this arrangement will be offset by the
vested account balance he has under our SavingsWorks Plan, other
than the portion of such balance attributable to his elective
deferrals. The balance credited to his account is subject to a
five-year vesting requirement (with partial acceleration upon
his termination of employment by Dana without cause, by
Mr. Burns for good reason or due to his death or
disability). As a result of our bankruptcy filing,
Mr. Burns is an unsecured creditor with respect to the
retirement benefits accrued under this plan and there can be no
assurance that he will receive any payments under the plan.
123
Mr. Burns’ agreement will continue in effect until it
is terminated due to his death or disability, by Dana with or
without cause, or by Mr. Burns with or without good reason
(as defined in the agreement). In either of the latter two
events, Mr. Burns will be entitled to any accrued and
deferred salary, pro-rata bonus for the year of termination,
vacation pay and benefits through the date of termination. In
addition, upon a termination without cause by Dana or a
termination with good reason by Mr. Burns, conditioned upon
his signing a release of claims in favor of Dana, he will be
entitled to monthly severance payments for a two-year period
equal to 1/12 of the sum of his annual base salary and the
target bonus he was scheduled to receive during the year of
termination, continuation of benefits for the two-year severance
period, and service credit under Dana’s benefit plans for
such severance period.
Under his agreement, Mr. Burns has agreed not to disclose
any confidential information about Dana to others while employed
by the company or thereafter and not to engage in competition
with Dana for two years following his termination of employment.
Mr. Stanage’s Employment Agreement —
Mr. Stanage has an agreement with Dana pursuant to which he
commenced service with the company in August 2005. Under this
agreement, Mr. Stanage’s 2005 annual base salary was
$280,000 and he was guaranteed a minimum bonus of $126,000 in
2005. He also received (i) a one-time payment of $70,000 to
replace compensation earned from his former employer that was
forfeited upon termination of that employment, which must be
repaid if he voluntarily terminates his employment with Dana
within the first 12 months after his date of hire;
(ii) customary relocation reimbursement; and
(iii) 2005 equity grants consisting of 50,000 stock options
with a ten-year term which will vest in 25% increments on the
first four anniversary dates of the grant, 17,000 restricted
shares which will vest 100% at the end of five years, and 5,000
performance shares which will vest on December 31, 2005, if
earned based on the achievement of his individual performance
goals and the EPS and ROIC performance measures applicable to
the performance shares granted to other Dana executives in
February 2005.
Pursuant to his agreement, Mr. Stanage has a Supplemental
Executive Retirement Plan designed to provide him with certain
non-qualified retirement benefits to replace the non-qualified
retirement benefits from his prior employer that he forfeited
upon leaving that employment. The plan is an unfunded pension
plan subject to the Employee Retirement Income Security Act of
1974, as amended. Under the terms of the plan, if
Mr. Stanage continues employment with Dana to his normal
retirement age (age 62), he will receive a normal
retirement benefit of $2,095,500, payable in a lump sum. If he
dies, becomes disabled or is involuntarily terminated from
employment by Dana for any reason other than “cause”
(as defined in the plan) before he reaches age 62, he will
be entitled to a portion of his normal retirement benefit (not
exceeding 100%) equal to the greater of (i) his normal
retirement benefit multiplied by (a) his years of
“credited service” (as defined in the plan) divided by
(b) 15-4/12,
or (ii) 50% of his normal retirement benefit. If, after
August 29, 2010, and before he reaches age 62,
Mr. Stanage elects to retire or resign voluntarily or his
employment is terminated by Dana for cause, in lieu of any other
benefit payable under the plan, he will be entitled to a pro
rata share (not exceeding 100%) of his normal retirement
benefit, calculated by multiplying (a) his normal
retirement benefit by (b) his years of credited service
divided by
15-4/12
. In the event of a “change in control” of Dana
(as defined in the plan and subject to Internal Revenue Code
Section 409A), Mr. Stanage’s normal retirement
benefit will become fully vested and he will be entitled to a
lump sum payment within 30 days. As a result of our
bankruptcy filing, Mr. Stanage is an unsecured creditor
with respect to the retirement benefits accrued under this plan
and there can be no assurance that he will receive any payments
under the plan.
Pursuant to his agreement, Mr. Stanage is included in
Dana’s Change of Control Severance Plan, described below.
Change of Control Agreements
Messrs. Burns, DeBacker and four other individuals have
agreements which will become operative upon a “change of
control” of Dana (as defined in the agreements) if they are
then in the employ of the company. If these agreements become
operative, each individual will continue to receive not less
than the
124
total compensation in effect at the time the agreement became
operative and will continue to participate in Dana’s
executive incentive plans with at least the same reward
opportunities, and with perquisites, fringe benefits and service
credits for benefits at least equal to those that were provided
prior to the date the agreement became operative.
Under these agreements, following a change of control of Dana,
the individuals agree not to disclose any confidential
information about the company to others while employed by Dana
or thereafter and not to engage in competition with Dana for
three years following their termination of employment, or for
one year following such termination if the employment is
terminated by Dana without “cause” or by the
individual for “good reason” (both as defined in the
agreements).
If any of these individuals is terminated by Dana without cause
or terminates his employment for good reason after a change of
control, he will be entitled to receive a lump sum payment equal
to the lesser of the amount which is equal to three years of his
compensation or the amount of compensation which would be
received by such executive before he reaches the age of 65. For
the purpose of calculating the lump sum payment, compensation
means the individual’s base salary plus the greater of the
average of his highest annual bonus over the three preceding
years or his target annual bonus as of his date of termination.
Additionally, the individual will be entitled to continue his
participation under Dana’s employee benefit plans and
programs for a period of three years, unless benefit coverage is
provided by another employer, and will be entitled to certain
outplacement benefits.
Under these agreements, if an excise tax is imposed under
Internal Revenue Code Section 4999 on payments received by
the individual due to a change of control of the company, Dana
will generally pay him an amount that will net him the amount he
would have received if the excise tax had not been imposed.
However, if the change of control payments do not exceed 110% of
the highest amount that would not trigger the excise tax under
Treasury Department regulations, the amount of such payments
will be reduced to the amount necessary to avoid the imposition
of the excise tax entirely.
Messrs. Richter, Cole and Laisure had similar change of
control agreements, which terminated for Messrs. Richter
and Cole when they retired and for Mr. Laisure when he
ceased to be an active employee of Dana.
Mr. Stanage participates in our Change of Control Severance
Plan, which provides for severance payments and benefits to
designated senior managers, key leaders and corporate staff
(other than those executives with individual agreements) in the
event of a change of control of Dana. This plan, which our Board
adopted in 2003, is effective through December 31, 2006.
Termination of Employment Arrangements
Mr. Richter’s Consulting Agreement —
Mr. Richter entered into a Consulting Agreement with
Dana in connection with his retirement on March 1, 2006.
This agreement provides that Mr. Richter will serve in an
advisory and consulting capacity to Dana for twelve months, with
an option for Dana to extend the term for two additional
six-month periods. During the term of the agreement,
Mr. Richter will be paid a consulting fee of
$35,000 per month, plus additional hourly fees if the
services requested by Dana exceed 100 hours per month, and
will be reimbursed for his
out-of-pocket business
expenses. Under the agreement, Mr. Richter has agreed to
certain confidentiality, non-disclosure, non-competition,
non-disparagement and cooperation obligations.
Mr. Laisure’s Separation Agreement —
Mr. Laisure entered into a Separation Agreement, General
Release and Covenant Not to Sue with Dana pursuant to which he
ceased to be an active employee on April 12, 2005, and was
to retire following a twelve-month separation period. He
subsequently retired as of April 1, 2006. Pursuant to the
agreement, during this separation period, Mr. Laisure
received separation pay equal to twelve months of his 2005
annual base salary ($465,000), payable in ten equal installments
through the end of February 2006, and his annual target bonus
(60% of such base salary), payable in a lump sum prior to
March 15, 2006. The eight installments of separation
payments made to him in 2005 are shown in the “Salary”
column of the Summary Compensation Table. In 2006,
Mr. Laisure received the last
125
two installments of separation pay ($93,000), the lump sum
separation payment ($279,000), and incidental expenses ($30,000)
provided under the agreement.
Under his agreement, Mr. Laisure vested in a pro-rata
portion of his restricted stock awards, based on the number of
full months in the vesting period that elapsed through the end
of the separation period. He may exercise stock options granted
to him prior to 2005 until May 1, 2010, unless any specific
option expires sooner. Options granted to him in 2005 expired at
the end of the separation period. His performance share awards
vested on a pro-rata basis upon his retirement, in accordance
with the terms of the awards and the Stock Incentive Plan under
which they were granted.
Compensation Committee Information
Messrs. Baillie, Berges, Kelly, and Priory served as
members of our Compensation Committee during 2005. None of them
was an officer or employee during 2005, or formerly an officer,
of Dana or our subsidiaries, or had any relationship with Dana
requiring disclosure under Item 404 of
Regulation S-K.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
Equity Compensation Plan Information
The following table contains information as of December 31,
2005, about shares of stock which may be issued under our equity
compensation plans, all of which have been approved by our
shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities to | |
|
|
|
|
|
|
be Issued Upon | |
|
Weighted Average | |
|
|
|
|
Exercise of | |
|
Exercise Price of | |
|
Number of Securities | |
|
|
Outstanding Options, | |
|
Outstanding Options, | |
|
Remaining Available | |
Plan Category |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
for Future Issuance | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by security holders
|
|
|
15,878,700 |
(1) |
|
$ |
23.88 |
(2) |
|
|
7,003,564 |
(3) |
Equity compensation plans not approved by security holders
|
|
|
Not applicable |
|
|
|
Not applicable |
|
|
|
Not applicable |
|
Total
|
|
|
15,878,780 |
(1) |
|
$ |
23.88 |
(2) |
|
|
7,803,564 |
(3) |
|
|
(1) |
This number includes (i) 15,497,408 shares subject to
options and SARs outstanding under our Stock Incentive Plan,
1993 and 1998 Directors Stock Option Plans, and the Echlin
Inc. 1992 Stock Option Plan, and (ii) securities to be
issued relating to an aggregate of 381,292 restricted stock
units outstanding under our Stock Incentive Plan and 1989 and
1999 Restricted Stock Plans. |
|
|
|
This number does not include (i) the 295,194 units credited
to employees’ Stock Accounts under our Additional
Compensation Plan as of December 31, 2005, or the 217,075
units credited to our non-management directors’ Stock
Accounts under the Director Deferred Fee Plan as of that date
(all of which may be distributed in the form of cash and/or
stock according to the terms of those plans, but which may not
be distributed at all as a result of our bankruptcy filing) or
(ii) the 436,646 performance shares granted under our Stock
Incentive Plan for the 2004-2006 and 2005-2007 performance
periods. |
|
|
(2) |
In calculating the weighted average exercise price in this
column, we excluded the restricted stock units referred to in
Note 1, since they have no exercise price. |
|
(3) |
This number includes the following shares of stock available for
future issuance under our equity compensation plans, excluding
securities reflected in the second column of this table:
273,805 shares under our Additional Compensation Plan;
230,707 shares under our Director Deferred Fee Plan;
462,313 shares under our 1989 Restricted Stock Plan (as
dividend equivalents to be credited on outstanding grants);
421,160 shares under our 1999 Restricted Stock Plan; and
5,615,579 shares under our Stock Incentive Plan (taking
into account the 436,646 performance shares referred to in
Note 1 at the target payout levels). |
126
Security Ownership of More Than 5% Beneficial Owners
The following persons, listed alphabetically, have filed reports
with the SEC stating that they beneficially own more than 5% of
our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares | |
|
Percent | |
Name and Address of Beneficial Owner |
|
Beneficially Owned | |
|
of Class | |
|
|
| |
|
| |
Appaloosa Investment Limited Partnership I(1)
|
|
|
22,500,000 shares |
|
|
|
14.8 |
% |
|
26 Main Street
Chatham, NJ 07928 |
|
|
|
|
|
|
|
|
Brandes Investment Partners, L.P.(2)
|
|
|
10,859,029 shares |
|
|
|
7.2 |
% |
|
11988 El Camino Real, Suite 500
San Diego, CA 92130 |
|
|
|
|
|
|
|
|
Donald Smith & Co., Inc.(3)
|
|
|
15,037,400 shares |
|
|
|
9.99 |
% |
|
152 West 57th Street
New York, NY 10019 |
|
|
|
|
|
|
|
|
GAMCO Investors, Inc.(4)
|
|
|
7,308,889 shares |
|
|
|
4.86 |
% |
|
One Corporate Center
Rye, NY 10580 |
|
|
|
|
|
|
|
|
Owl Creek Asset Management, L.P.(5)
|
|
|
10,350,000 shares |
|
|
|
6.9 |
% |
|
640 Fifth Avenue,
20th Floor
New York, NY 10019 |
|
|
|
|
|
|
|
|
|
|
(1) |
In a Schedule 13G dated March 7, 2006, Appaloosa
Investment Limited Partnership I reported that it
beneficially owned 11,992,500 Dana shares, with shared voting
and dispositive powers for all such shares and that Palomino
Fund Ltd. beneficially owned 10,507,500 Dana shares, with
shared voting and dispositive powers for all such shares; and
Appaloosa Management L.P., Appaloosa Partners Inc., and David A.
Tepper each beneficially owned 22,500,000 Dana shares, with
shared voting and dispositive powers for all such shares. |
|
(2) |
In a Schedule 13G dated February 14, 2006, Brandes
Investment Partners, L.P. reported that it, Brandes Investment
Partners, Inc., Brandes Worldwide Holdings, L.P., Charles H.
Brandes, Glenn R. Carlson, and Jeffrey A. Busby each
beneficially owned 10,859,029 Dana shares, with shared voting
power for 9,692,782 of such shares and shared dispositive power
for all of them. |
|
(3) |
In a Schedule 13G dated February 12, 2006, Donald
Smith & Co., Inc. reported that it beneficially owned
15,037,400 Dana shares, with sole voting power for 8,263,000 of
such shares and sole dispositive power for all of them. |
|
(4) |
In a Schedule 13D dated April 24, 2006, GAMCO
Investors, Inc. reported that Gabelli Funds LLC beneficially
owned 2,205,000 Dana shares, with sole voting and dispositive
powers for all such shares; GAMCO Asset Management Inc.
beneficially owned 4,979,892 Dana shares, with sole voting power
for 4,779,192 of such shares and sole dispositive power for all
of them; Gabelli Securities, Inc. beneficially owned 25,000 Dana
shares, with sole voting and dispositive power for all such
shares; MJG Associates, Inc. beneficially owned 49,000 Dana
shares, with sole voting and dispositive powers for all such
shares; and that GGCP, Inc., GAMCO Investors, Inc. and Mario J.
Gabelli were reporting persons with respect to these shares. |
|
(5) |
In a Schedule 13G dated March 15, 2006, Owl Creek
Asset Management, L.P. reported that it beneficially owned
6,536,800 Dana shares, with shared voting and dispositive powers
for all such shares, and that Owl Creek I, L.P.
beneficially owned 465,200 Dana shares, with shared voting and
dispositive powers for all such shares; Owl Creek II, L.P.
beneficially owned 3,348,000 Dana shares, with shared voting and
dispositive powers for all such shares; Owl Creek Advisors, LLC
beneficially owned 3,813,200 Dana shares, with shared voting and
dispositive powers for all such shares; and Jeffrey A. Altman
beneficially owned 10,350,000 Dana shares, with shared voting
and dispositive powers for all such shares. |
127
Security Ownership of Directors and Executive Officers
Our directors, the Named Executive Officers, and other
individuals who were serving as executive officers of the
company as of December 31, 2005, have furnished the
following information about their beneficial ownership of our
stock. This table shows the number of shares beneficially owned
by such persons as of March 31, 2006, except that the
numbers of shares shown for Messrs. Cole and Richter are as
of their earlier retirement dates (January 1 and March 1,
2006, respectively).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Units | |
|
|
|
|
Number of Shares | |
|
Representing Deferred | |
|
Percent | |
Name of Beneficial Owner |
|
Beneficially Owned(1) | |
|
Compensation(2) | |
|
of Class | |
|
|
| |
|
| |
|
| |
Non-Management Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
A. Charles Baillie
|
|
|
20,000 shares |
|
|
|
31,055 units |
|
|
|
Less than 1 |
% |
David E. Berges
|
|
|
4,000 shares |
|
|
|
14,264 units |
|
|
|
Less than 1 |
% |
Edmund M. Carpenter
|
|
|
28,452 shares |
|
|
|
52,858 units |
|
|
|
Less than 1 |
% |
Richard M. Gabrys
|
|
|
1,000 shares |
|
|
|
6,721 units |
|
|
|
Less than 1 |
% |
Samir G. Gibara
|
|
|
No shares |
|
|
|
10,521 units |
|
|
|
Less than 1 |
% |
Cheryl W. Grisé
|
|
|
6,000 shares |
|
|
|
11,368 units |
|
|
|
Less than 1 |
% |
James P. Kelly
|
|
|
8,000 shares |
|
|
|
27,082 units |
|
|
|
Less than 1 |
% |
Marilyn R. Marks
|
|
|
30,500 shares |
|
|
|
24,658 units |
|
|
|
Less than 1 |
% |
Richard B. Priory
|
|
|
29,000 shares |
|
|
|
38,548 units |
|
|
|
Less than 1 |
% |
Named Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Burns
|
|
|
1,062,828 shares |
|
|
|
No units |
|
|
|
Less than 1 |
% |
Robert C. Richter
|
|
|
34,454 shares |
|
|
|
27,369 units |
|
|
|
Less than 1 |
% |
Bernard N. Cole
|
|
|
494,702 shares |
|
|
|
25,096 units |
|
|
|
Less than 1 |
% |
Michael L. DeBacker
|
|
|
282,840 shares |
|
|
|
6,837 units |
|
|
|
Less than 1 |
% |
Nick L. Stanage
|
|
|
18,376 shares |
|
|
|
No units |
|
|
|
Less than 1 |
% |
James M. Laisure
|
|
|
425,258 shares |
|
|
|
40,239 units |
|
|
|
Less than 1 |
% |
Directors and executive officers as a group (16 persons)
|
|
|
2,458,309 shares |
|
|
|
316,616 units |
|
|
|
1.63 |
% |
|
|
(1) |
All shares shown in this column are beneficially owned directly,
and each beneficial owner has sole voting and dispositive power
for such shares, except that Ms. Marks indirectly owns
4,000 shares held in trusts for which she is a trustee and
Mr. Priory indirectly owns 3,000 shares held by his
children. The address of each of these individuals is 4500 Dorr
Street, Toledo, Ohio 43615. |
|
|
|
The shares shown in this column include restricted stock units
granted to Mr. Burns under our Stock Incentive Plan in 2004
pursuant to his employment agreement, restricted shares granted
to Mr. Burns and the other executive officers under our
1989 and 1999 Restricted Stock Plans, and the restricted stock
units into which some such restricted shares have been
converted. You can find more information about the restricted
shares and restricted stock units owned by the Named Executive
Officers in Note 4 to the Summary Compensation Table in
Item 11. For Messrs. Richter and Cole, the number of
restricted shares and restricted stock units included in this
column are those which vested upon their respective retirements. |
|
|
The shares shown in this column also include the following
shares subject to options exercisable within 60 days from
March 31, 2006 (except as noted for Mr. Cole) granted
to our non-management directors under the
1998 Directors’ Stock Option Plan and to the executive
officers under our Stock Incentive Plan: Mr. Baillie,
15,000 shares; Mr. Carpenter, 24,000 shares;
Ms. Grisé, 3,000 shares; Mr. Kelly,
6,000 shares; Ms. Marks, 24,000 shares;
Mr. Priory, 21,000 shares; Mr. Burns,
831,543 shares; Mr. Cole, 389,923 shares subject
to options exercisable within 60 days from January 1,
2006; Mr. DeBacker, 249,162 shares; Mr. Laisure,
317,923 shares; and the directors and executive officers as
a group, 1,891,201 shares. No shares subject to exercisable
options are included in this column for |
128
|
|
|
Messrs. Richter or Stanage, as the options which
Mr. Richter held at retirement were forfeited at that time
and Mr. Stanage held no options exercisable within
60 days from March 31, 2006. |
|
|
(2) |
This column shows stock units representing deferred compensation
credited to the Stock Accounts of the non-management directors
under the Director Deferred Fee Plan and to the Stock Accounts
of the executive officers under our Additional Compensation
Plan. These plans provide that such units may ultimately be
distributed in the form of Dana stock and/or cash, at the
election of the participants and according to the terms of the
plans. We did not count these units in calculating the
“Percent of Class” column. This column does not show
deferred compensation credited to the Interest Equivalent
Accounts of the non-management directors and executive officers
under these plans, which may also be distributed in the form of
Dana stock and/or cash. |
|
|
Item 13. |
Certain Relationships and Related Transactions |
-None-
|
|
Item 14. |
Principal Accounting Fees and Services |
Audit Committee Pre-Approval Policy
Our Audit Committee pre-approves the audit and non-audit
services performed by our independent registered public
accounting firm, PricewaterhouseCoopers LLC (PwC), in order to
assure that the provision of such services does not impair
PwC’s independence. The Audit Committee annually determines
which audit services, audit-related services, tax services and
other permissible non-audit services to pre-approve and creates
a list of the pre-approved services and pre-approved cost
levels. Unless a type of service to be provided by PwC has
received general pre-approval, it requires specific pre-approval
by the Audit Committee. Any services exceeding pre-approved cost
levels also require specific pre-approval by the Audit
Committee. Management monitors the services rendered by PwC and
the fees paid for the audit, audit-related, tax and other
pre-approved services and reports to the Audit Committee on
these matters at least quarterly.
129
PwC’s Fees
PwC’s aggregate fees for professional services rendered to
Dana worldwide were approximately $23 million and
$14 million in the fiscal years ended December 31,
2004 and 2005. The following table shows details of these fees,
all of which were pre-approved by our Audit Committee.
|
|
|
|
|
|
|
|
|
|
Service |
|
2004 Fees | |
|
2005 Fees | |
|
|
| |
|
| |
|
|
($ in millions) | |
|
($ in millions) | |
|
|
| |
|
| |
Audit Fees
|
|
|
|
|
|
|
|
|
Audit of consolidated financial statements
|
|
$ |
10.5 |
|
|
$ |
11.5 |
|
Securities Act filings and registrations
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Total Audit Fees
|
|
$ |
10.6 |
|
|
$ |
11.6 |
|
|
|
|
|
|
|
|
Audit-Related Fees
|
|
|
|
|
|
|
|
|
Assistance with financial accounting and reporting matters
|
|
$ |
0.5 |
|
|
$ |
— |
|
Sarbanes-Oxley Sec. 404 Controls Project assistance
|
|
|
— |
|
|
|
— |
|
Other audit services, including audits in connection with
divestitures, joint venture and debt agreements
|
|
|
4.4 |
|
|
|
0.3 |
|
Financial due diligence related to acquisitions and divestitures
|
|
|
3.8 |
|
|
|
0.6 |
|
Employee benefit plan audits
|
|
|
0.7 |
|
|
|
0.8 |
|
Tax attestation in non-US jurisdictions
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Total Audit-Related Fees
|
|
$ |
9.5 |
|
|
$ |
1.8 |
|
|
|
|
|
|
|
|
Tax Fees
|
|
|
|
|
|
|
|
|
Tax consulting and planning services
|
|
$ |
1.3 |
|
|
|
— |
|
Tax compliance services
|
|
|
0.8 |
|
|
|
— |
|
Executive tax services
|
|
|
— |
|
|
|
— |
|
Expatriate tax services
|
|
|
— |
|
|
|
— |
|
Other tax services
|
|
|
0.2 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
Total Tax Fees
|
|
$ |
2.3 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
All Other Fees
|
|
|
|
|
|
|
|
|
Actuarial compliance and consulting services
|
|
$ |
— |
|
|
$ |
— |
|
Other services
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Total All Other Fees
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
130
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
131
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
Dana Corporation
|
|
|
|
(Registrant) |
Date: April 27, 2006
|
|
|
|
By: |
/s/ Michael L. DeBacker
|
|
|
|
|
|
Michael L. DeBacker |
|
Vice President, General Counsel and Secretary |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
date indicated.
|
|
|
|
Date: April 27, 2006 |
|
/s/ Michael J. Burns
Michael J. Burns, Chairman of the Board and Chief
Executive Officer |
|
Date: April 27, 2006 |
|
/s/ Kenneth A. Hiltz
Kenneth A. Hiltz, Chief Financial Officer |
|
Date: April 27, 2006 |
|
/s/ Richard J. Dyer
Richard J. Dyer, Chief Accounting Officer |
|
Date: April 27, 2006 |
|
* /s/ A. C. Baillie
A. C. Baillie, Director |
|
Date: April 27, 2006 |
|
* /s/ D. E. Berges
D. E. Berges, Director |
|
Date: April 27, 2006 |
|
* /s/ E. M. Carpenter
E. M. Carpenter, Director |
|
Date: April 27, 2006 |
|
* /s/ R. M. Gabrys
R. M. Gabrys, Director |
|
Date: April 27, 2006 |
|
* /s/ S. G. Gibara
S. G. Gibara, Director |
|
Date: April 27, 2006 |
|
* /s/ C. W. Grisé
C. W. Grisé, Director |
|
Date: April 27, 2006 |
|
* /s/ J. P. Kelly
J. P. Kelly, Director |
132
|
|
|
|
Date: April 27, 2006 |
|
* /s/ M. R. Marks
M. R. Marks, Director |
|
Date: April 27, 2006 |
|
* /s/ R. B. Priory
R. B. Priory, Director |
|
Date: April 27, 2006 |
|
*By: /s/ Michael L.
DeBacker
Michael L. DeBacker, Attorney-in-Fact |
133
EXHIBIT INDEX
|
|
|
|
|
|
|
No. |
|
Description |
|
Method of Filing |
|
|
|
|
|
|
2-A |
|
|
Stock and Asset Purchase Agreement by and between AAG Opco Corp.
and Dana Corporation |
|
Filed by reference to Exhibit 2-A to our Form 10-Q for
the quarter ended June 30, 2004 |
|
|
2-A(1) |
|
|
Amendment No. 1, dated as of November 1, 2004, to the
Stock and Asset Purchase Agreement by and between Affinia Group
Inc. (fka AAG Opco Corp.) and Dana Corporation |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on November 2, 2004 |
|
|
2-A(2) |
|
|
Amendment No. 2, dated as of November 30, 2004, to the
Stock and Asset Purchase Agreement by and between Affinia Group
Inc. and Dana Corporation |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on December 2, 2004 |
|
|
3-A |
|
|
Restated Articles of Incorporation |
|
Filed by reference to Exhibit 3-A to our Form 10-Q for
the quarter ended June 30, 1998 |
|
|
3-B |
|
|
By-Laws, adopted April 20, 2004 |
|
Filed by reference to Exhibit 3-B to our Form 10-Q for
the quarter ended March 31, 2004 |
|
|
4-A |
|
|
Specimen Single Denomination Stock Certificate |
|
Filed by reference to Exhibit 4-B to our Registration
Statement No. 333-18403 filed December 20, 1996 |
|
|
4-B |
|
|
Rights Agreement, dated as of April 25, 1996, between Dana
and The Bank of New York, Rights Agent, as successor to
ChemicalMellon Shareholder Services, L.L.C |
|
Filed by reference to Exhibit 1 to our Form 8-A filed
May 1, 1996 |
|
|
4-C |
|
|
Indenture for Senior Securities between Dana and Citibank, N.A.,
Trustee, dated as of December 15, 1997 |
|
Filed by reference to Exhibit 4-B to our Registration
Statement No. 333-42239 filed December 15, 1997 |
|
|
4-C(1) |
|
|
First Supplemental Indenture between Dana, as Issuer, and
Citibank, N.A., Trustee, dated as of March 11, 1998 |
|
Filed by reference to Exhibit 4-B-1 to our Report on
Form 8-K dated March 12, 1998 |
|
|
4-C(2) |
|
|
Form of 6.5% Notes due March 15, 2008 and
7.00% Notes due March 15, 2028 |
|
Filed by reference to Exhibit 4-C-1 to our Report on
Form 8-K dated March 12, 1998 |
|
|
4-C(3) |
|
|
Second Supplemental Indenture between Dana, as Issuer, and
Citibank, N.A., Trustee, dated as of February 26, 1999 |
|
Filed by reference to Exhibit 4.B.1 to our Form 8-K
dated March 2, 1999 |
|
|
4-C(4) |
|
|
Form of 6.25% Notes due 2004, 6.5% Notes due 2009, and
7.0% Notes due 2029 |
|
Filed by reference to Exhibit 4.C.1 to our Form 8-K
dated March 2, 1999 |
|
|
4-D |
|
|
Issuing and Paying Agent Agreement between Dana Credit
Corporation (DCC), as Issuer, and Bankers Trust Company, Issuing
and Paying Agent, dated as of December 6, 1999, with
respect to DCC’s $500 medium-term notes program |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-E |
|
|
Note Agreement dated April 8, 1997, by and between
Dana Credit Corporation and Metropolitan Life Insurance Company
for 7.18% notes due April 8, 2006, in the principal
amount of $37 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
134
|
|
|
|
|
|
|
No. |
|
Description |
|
Method of Filing |
|
|
|
|
|
|
4-F |
|
|
Note Agreement dated April 8, 1997, by and between
Dana Credit Corporation and Texas Life Insurance Company for
7.18% notes due April 8, 2006, in the principal amount
of $3 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-G |
|
|
Note Agreement dated April 8, 1997, by and between
Dana Credit Corporation and Nationwide Life Insurance Company
for 6.93% notes due April 8, 2006, in the principal
amount of $35 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-H |
|
|
Note Agreement dated April 8, 1997, by and between
Dana Credit Corporation and The Great-West Life &
Annuity Insurance Company for 7.03% notes due April 8,
2006, in the aggregate principal amount of $13 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-I |
|
|
Note Agreement dated April 8, 1997, by and between
Dana Credit Corporation and The Great-West Life Assurance
Company for 7.03% notes due April 8, 2006, in the
principal amount of $7 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-J |
|
|
Note Agreement dated August 28, 1997, by and between
Dana Credit Corporation and The Northwestern Mutual Life
Insurance Company for 6.88% notes due August 28, 2006,
in the principal amount of $20 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-K |
|
|
Note Agreements (four) dated August 28, 1997, by
and between Dana Credit Corporation and Sun Life Assurance
Company of Canada for 6.88% notes due August 28, 2006,
in the aggregate principal amount of $9 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-L |
|
|
Note Agreement dated August 28, 1997, by and between
Dana Credit Corporation and Massachusetts Casualty Insurance
Company for 6.88% notes due August 28, 2006, in the
principal amount of $1 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-M |
|
|
Note Agreements (four) dated December 18, 1998,
by and between Dana Credit Corporation and Sun Life Assurance
Company of Canada for 6.59% notes due December 1,
2007, in the aggregate principal amount of $12 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-N |
|
|
Note Agreements (five) dated December 18, 1998,
by and between Dana Credit Corporation and The Lincoln National
Life Insurance Company for 6.59% notes due December 1,
2007, in the aggregate principal amount of $25 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-O |
|
|
Note Agreement dated August 16, 1999, by and between
Dana Credit Corporation and Connecticut General Life Insurance
Company for 7.91% notes due August 16, 2006, in the
principal amount of $15 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
135
|
|
|
|
|
|
|
No. |
|
Description |
|
Method of Filing |
|
|
|
|
|
|
4-P |
|
|
Note Agreements (two) dated August 16, 1999, by
and between Dana Credit Corporation and The Northwestern Mutual
Life Insurance Company for 7.91% notes due August 16,
2006, in the aggregate principal amount of $15 |
|
This exhibit is not filed. We agree to furnish a copy of this
exhibit to the Commission upon request. |
|
|
4-Q |
|
|
Indenture between Dana, as Issuer, and Citibank, N.A., as
Trustee and as Registrar and Paying Agent for the Dollar
Securities, and Citibank, N.A., London Branch, as Registrar and
a Paying Agent for the Euro Securities, dated as of
August 8, 2001, relating to $575 of 9% Notes due
August 15, 2011 and #200 |
|
Filed by reference to Exhibit 4-I to our Form 10-Q for
the quarter ended June 30, 2001 |
|
|
4-Q(1) |
|
|
of 9% Notes due August 15, 2011 Form of Rule 144A
Dollar Global Notes, Rule 144A Euro Global Notes,
Regulation S Dollar Global Notes, and Regulation S
Euro Global Notes (form of initial securities) |
|
Filed by reference to Exhibit A to Exhibit 4-I to our
Form 10-Q for the quarter ended June 30, 2001 |
|
|
4-Q(2) |
|
|
Form of Rule 144A Dollar Global Notes, Rule 144A Euro
Global Notes, Regulation S Dollar Global Notes, and
Regulation S Euro Global Notes (form of exchange securities) |
|
Filed by reference to Exhibit B to Exhibit 4-I to our
Form 10-Q for the quarter ended June 30, 2001 |
|
|
4-Q(3) |
|
|
First Supplemental Indenture between Dana Corporation, as
Issuer, and Citibank, N.A., as Trustee, dated as of
December 1, 2004 |
|
Filed by reference to Exhibit 4-R(3) to our
Form 10-K/A for the fiscal year ended December 31, 2004 |
|
|
4-Q(4) |
|
|
Second Supplemental Indenture between Dana Corporation, as
Issuer, and Citibank, N.A., as Trustee, dated as of
December 6, 2004 |
|
Filed by reference to Exhibit 4-R(4) to our Form l0-K/A for
the fiscal year ended December 31, 2004 |
|
|
4-R |
|
|
Indenture between Dana, as Issuer, and Citibank, N.A., as
Trustee, Registrar and Paying Agent, dated as of March 11,
2002, relating to $250 of
101/8
% Notes due March 15, 2010 |
|
Filed by reference to Exhibit 4-NN to our Form 10-Q
for the quarter ended March 31, 2002 |
|
|
4-R(1) |
|
|
Form of Rule 144A Global Notes and Regulation S Global
Notes (form of initial securities) for
101/8
% Notes due March 15, 2010 |
|
Filed by reference to Exhibit 4-NN(1) to our Form 10-Q
for the quarter ended March 31, 2002 |
|
|
4-R(2) |
|
|
Form of Rule 144A Global Notes and Regulation S Global
Notes (form of exchange securities) for
101/8
% Notes due March 15, 2010 |
|
Filed by reference to Exhibit 4-NN(2) to our Form 10-Q
for the quarter ended March 31, 2002 |
|
|
4-R(3) |
|
|
First Supplemental Indenture between Dana Corporation, as
Issuer, and Citibank, N.A., as Trustee, Registrar and Paying
Agent, dated as of December 1, 2004 |
|
Filed by reference to Exhibit 4-S(3) to our
Form 10-K/A for the fiscal year ended December 31, 2004 |
|
|
4-S |
|
|
Indenture for Senior Securities between Dana Corporation, as
Issuer, and Citibank, N.A., as Trustee, dated as of
December 10, 2004 |
|
Filed by reference to Exhibit 4-T to Amendment No. 1
to our Registration Statement No. 333-123924 filed on
April 25, 2005 |
136
|
|
|
|
|
|
|
No. |
|
Description |
|
Method of Filing |
|
|
|
|
|
|
4-S(1) |
|
|
First Supplemental Indenture between Dana Corporation, as
Issuer, and Citibank, N.A., as Trustee, dated as of
December 10, 2004 |
|
Filed by reference to Exhibit 4-T(1) to Amendment
No. 1 to our Registration Statement No. 333-123924
filed on April 25, 2005 |
|
|
4-S(2) |
|
|
Form of Rule 144A Global Notes and Regulation S Global
Notes (form of exchange securities) for 5.85% Notes due
January 15, 2015 |
|
Filed by reference to Exhibit 4-T(2) to Amendment
No. 1 to our Registration Statement No. 333-123924
filed on April 25, 2005 |
|
|
10-A |
|
|
Additional Compensation Plan, as amended and restated |
|
Filed by reference to Exhibit A to our Proxy Statement
dated March 12, 2004 |
|
|
10-A(1) |
|
|
First Amendment to Additional Compensation Plan as amended and
restated |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on December 6, 2005 |
|
|
10-B |
|
|
Amended and Restated Stock Incentive Plan |
|
Filed by reference to Exhibit B to our Proxy Statement
dated March 5, 2003 |
|
|
10-B(1) |
|
|
First Amendment to Amended and Restated Stock Incentive Plan |
|
Filed by reference to Exhibit 10-B(1) to our Form 10-K
for the fiscal year ended December 31, 2003 |
|
|
10-B(2) |
|
|
Second Amendment to Amended and Restated Stock Incentive Plan |
|
Filed by reference to Exhibit C to our Proxy Statement
dated March 12, 2004 |
|
|
10-C |
|
|
Excess Benefits Plan |
|
Filed by reference to Exhibit 10-F to our Form 10-K
for the year ended December 31, 1998 |
|
|
10-C(1) |
|
|
First Amendment to Excess Benefits Plan |
|
Filed by reference to Exhibit 10-C(1) to our Form 10-Q
for the quarter ended September 30, 2000 |
|
|
10-C(2) |
|
|
Second Amendment to Excess Benefits Plan |
|
Filed by reference to Exhibit 10-C(2) to our Form 10-Q
for the quarter ended June 30, 2002 |
|
|
10-C(3) |
|
|
Third Amendment to Excess Benefits Plan |
|
Filed by reference to Exhibit 10-C(3) to our Form 10-K
for the fiscal year ended December 31, 2003 |
|
|
10-C(4) |
|
|
Fourth Amendment to Excess Benefits Plan |
|
Filed by reference to Exhibit 10-C(4) to our Form 10-K
for the fiscal year ended December 31, 2003 |
|
|
10-D |
|
|
Director Deferred Fee Plan, as amended and restated |
|
Filed by reference to Exhibit C to our Proxy Statement
dated March 5, 2003 |
|
|
10-D(1) |
|
|
First Amendment to Director Deferred Fee Plan, as amended and
restated |
|
Filed by reference to Exhibit 10-D(1) to our Form 10-Q
for the quarter ended March 31, 2004 |
|
|
10-D(2) |
|
|
Second Amendment to Director Deferred Fee Plan, as amended and
restated |
|
Filed by reference to Exhibit 10-D(2) to our Form 10-Q
for the quarter ended September 30, 2004 |
|
|
10-D(3) |
|
|
Third Amendment to Director Deferred Fee Plan, as amended and
restated |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on April 12, 2005 |
|
|
10-E |
|
|
Employment Agreement between Dana and M.J. Burns |
|
Filed by reference to Exhibit 10-E(2) to our Form 10-K
for the fiscal year ended December 31, 2003 |
137
|
|
|
|
|
|
|
No. |
|
Description |
|
Method of Filing |
|
|
|
|
|
|
10-F |
|
|
Change of Control Agreement between Dana and M.J. Burns. There
are substantially similar agreements between Dana and M.L.
Debacker and 4 other individuals. There were substantially
similar agreements between Dana and B.N. Cole and R.C. Richter
until their respective retirements on 1/1/06 and 3/1/06, and
J.M. Laisure until he left active employment on 4/12/05 |
|
Filed by reference to Exhibit 10-F(1) to our Form 10-K
for the fiscal year ended December 31, 2003 |
|
|
10-G |
|
|
Supplemental Benefits Plan |
|
Filed by reference to Exhibit 10-H to our Form 10-Q
for the quarter ended September 30, 2002 |
|
|
10-G(1) |
|
|
First Amendment to Supplemental Benefits Plan |
|
Filed by reference to Exhibit 10-H(1) to our Form 10-K
for the fiscal year ended December 31, 2003 |
|
|
10-H |
|
|
1999 Restricted Stock Plan, as amended and restated |
|
Filed by reference to Exhibit A to our Proxy Statement
dated March 5, 2002 |
|
|
10-H(1) |
|
|
First Amendment to 1999 Restricted Stock Plan, as amended and
restated |
|
Filed by reference to Exhibit 10-I(1) to our Form 10-K
for the fiscal year ended December 31, 2003 |
|
|
10-I |
|
|
1998 Directors’ Stock Option Plan |
|
Filed by reference to Exhibit A to our Proxy Statement
dated February 27, 1998 |
|
|
10-I(1) |
|
|
First Amendment to 1998 Directors’ Stock Option Plan |
|
Filed by reference to Exhibit 10-J(1) to our Form 10-Q
for the quarter ended June 30, 2002 |
|
|
10-J |
|
|
Supplementary Bonus Plan |
|
Filed by reference to Exhibit 10-N to our Form 10-Q
for the quarter ended June 30, 1995 |
|
|
10-K |
|
|
Change of Control Severance Plan |
|
Filed by reference to Exhibit L to our Form 10-K for
the fiscal year ended December 31, 2003 |
|
|
10-K(1) |
|
|
First Amendment to Change of Control Severance Plan |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on October 25, 2004 |
|
|
10-L |
|
|
Agreement between Dana Corporation and B.N. Cole |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on December 17, 2004 |
|
|
10-M |
|
|
Form of Award Certificate for Stock Options granted under the
Amended and Restated Stock Incentive Plan |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on February 18, 2005 |
|
|
10-N |
|
|
Form of Award Certificate for Restricted Stock granted under the
1999 Restricted Stock Plan |
|
Filed by reference to Exhibit 99.2 to our Form 8-K
filed on February 18, 2005 |
|
|
10-O |
|
|
Award Certificate for Restricted Stock granted to B.N. Cole
under the 1999 Restricted Stock Plan |
|
Filed by reference to Exhibit 99.3 to our Form 8-K
filed on February 18, 2005 |
|
|
10-P |
|
|
Form of Award Certificate for Performance Stock Awards granted
under the Amended and Restated Stock Incentive Plan |
|
Filed by reference to Exhibit 99.4 to our Form 8-K
filed on February 18, 2005 |
|
|
10-Q |
|
|
Separation Agreement, General Release and Covenant Not to Sue
between Dana Corporation and James Michael Laisure |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on June 20, 2005 |
|
|
10-R |
|
|
Supplemental Executive Retirement Plan for Nick Stanage |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on January 9, 2006 |
138
|
|
|
|
|
|
|
No. |
|
Description |
|
Method of Filing |
|
|
|
|
|
|
10-S |
|
|
Annual Incentive Plan |
|
Filed with this Report |
|
|
10-T |
|
|
Agreement dated March 6, 2006 between Dana Corporation and
AP Services, LLC |
|
Filed with this Report |
|
|
10-U |
|
|
Purchase Agreement between Dana Corporation and Banc of America
Securities LLC and J.P. Morgan Securities Inc. as of
December 7, 2004, relating to $450 of 5.85% Notes due
January 15, 2015 |
|
Filed by reference to Exhibit 99.1 to our Form 8-K
filed on December 10, 2004 |
|
|
10-V(1) |
|
|
Sales and Purchase Agreement for the Acquisition of Fifty
Percent (50%) of the Registered Capital of Dongfeng Axle Co.,
Ltd. among Dongfeng Motor Co., Ltd., Dongfeng (Shiyan)
Industrial Company, Dongfeng Motor Corporation and Dana
Mauritius Limited, dated March 10, 2005 |
|
Filed by reference to Exhibit 10-U(1) to our
Form 10-Q/A for the quarter ended March 31, 2005 |
|
|
10-V(2) |
|
|
Equity Joint Venture Contract between Dongfeng Motor Co., Ltd.
and Dana Mauritius Limited, dated March 10, 2005 |
|
Filed by reference to Exhibit 10-U(2) to our
Form 10-Q/A for the quarter ended March 31, 2005 |
|
|
10-W |
|
|
Human Resources Management and Administration Master Services
Agreement between Dana Corporation and International Business
Machines Corporation, dated March 31, 2005 |
|
Filed by reference to Exhibit 10-V to our Form 10-Q/A
for the quarter ended March 31, 2005 |
|
|
10-X |
|
|
Senior Secured Superpriority Debtor-In- Possession Credit
Agreement among Dana Corporation; Citicorp North America Inc.;
Bank of America N.A.; and JPMorgan Chase Bank, N.A., as of
March 3, 2006 |
|
Filed with this Report |
|
|
10-X(1) |
|
|
Amendment No. 1 to Senior Secured Superpriority
Debtor-In-Possession Credit Agreement among Dana Corporation;
Citicorp North America Inc.; Bank of America N.A.; and JPMorgan
Chase Bank, N.A., as of March 30, 2006 |
|
Filed with this Report |
|
|
10-X(2) |
|
|
Amendment No. 2 to Senior Secured Superpriority
Debtor-In-Possession Credit Agreement among Dana Corporation;
Citicorp North America Inc.; Bank of America N.A.; and JPMorgan
Chase Bank, N.A., as of April 12, 2006 |
|
Filed with this Report |
|
|
21 |
|
|
Subsidiaries of Dana |
|
Filed with this Report |
|
|
23 |
|
|
Consent of PricewaterhouseCoopers LLP |
|
Filed with this Report |
|
|
24 |
|
|
Power of Attorney |
|
Filed with this Report |
|
|
31-A |
|
|
Rule 13a-14(a)/15d-14(a) Certification by Chief Executive
Officer |
|
Filed with this Report |
|
|
31-B |
|
|
Rule 13a-14(a)/15d-14(a) Certification by Chief Financial
Officer |
|
Filed with this Report |
|
|
32 |
|
|
Section 1350 Certifications |
|
Furnished with this Report |
139