1
FINANCIAL Exhibit 13
Results
DEAR SHAREHOLDERS:
Dana Corporation enjoyed a truly outstanding year in 1997.
Exceptionally strong markets in North and South America, together with the
realignment of our company into market-focused business units, restructuring
activities at selected operations, and the largest acquisition and divestiture
program in company history led to record sales and profits.
Amid a year of unprecedented change, record capital spending,
improved operating margins, and tighter inventory control, Dana continued its
strong cash generation. At the same time, excluding Dana Commercial Credit, the
company also held its debt-to-capital ratio at 45 percent -- the same level as
1996.
Through closer customer relationships with our manufacturing
units globally, we have cut lead times, reduced inventories, and improved
customer service. As we continue to improve the operating efficiencies of our
businesses, we serve our customers better while improving return on invested
capital.
Asset management, global expansion, strong cash flow, improved
customer service, and better margins -- these are the fundamentals for
delivering added value to customers and shareholders alike. They are also the
result of the successful execution of our long-term strategic plan for
continuous improvement in all facets of our business.
[PHOTO]
Sincerely,
/s/ John S. Simpson
John S. Simpson
Chief Financial Officer
GROWTH IN SHAREHOLDER EQUITY
(in millions)
1993 $ 801
1994 940
1995 1,165
1996 1,429
1997 1,701
21
2
MANAGEMENT AND INDEPENDENT ACCOUNTANT'S REPORT
- -------------------------------------------------------------------------------
RESPONSIBILITY FOR FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
We have prepared the accompanying consolidated financial statements and
related information included herein for the three years ended December 31, 1997.
The management of Dana Corporation is primarily responsible for the
accuracy of the financial information that is presented in this annual report.
These statements were prepared in accordance with generally accepted accounting
principles and, where appropriate, we used our estimates and judgement with
consideration to materiality.
To meet management's responsibility for financial reporting, we have
established internal control systems which we believe are adequate to provide
reasonable assurance that our assets are protected from loss. These systems
produce data used for the preparation of financial information.
We believe internal control systems should be designed to provide
accurate information at a reasonable cost which is not out of line with the
benefits to be received. These systems and controls are reviewed by our internal
auditors in order to ensure compliance, and by our independent accountants to
support their audit work.
The Audit Committee of the Board of Directors meets regularly with
management, internal auditors and our independent accountants to review
accounting, auditing and financial matters. Our Audit Committee is composed of
only outside directors. This committee and the independent accountants have free
access to each other with or without management being present.
We believe people are Dana's most important asset. The proper selection,
training and development of our people is a means of ensuring that effective
internal controls and fair, uniform reporting are maintained as standard
practice throughout the Corporation.
/s/ John S. Simpson
John S. Simpson
Chief Financial Officer
/s/ James H. Woodward, Jr.
James H. Woodward, Jr.
Vice President and Corporate Controller
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
[Price Waterhouse Logo]
To the Board of Directors and Shareholders
of Dana Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' equity and of cash flows,
including pages 23 through and including Note 25 on page 40, present fairly, in
all material respects, the financial position of Dana Corporation and its
subsidiaries at December 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Toledo, Ohio
January 21, 1998
A copy of the Annual Report as filed with the Securities and Exchange
Commission on Form 10-K will be mailed at no charge upon request to the
Secretary, Dana Corporation, P.O. Box 1000, Toledo, Ohio 43697.
22
3
STATEMENT OF INCOME
in millions except per share amounts DANA CORPORATION
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------
NET SALES $ 7,597.7 $7,686.3 $ 8,290.8
Revenue from lease financing and other income 189.0 203.2 478.6
Foreign currency adjustments 7.8 1.2 .9
- ----------------------------------------------------------------------------------------------------------------------------
7,794.5 7,890.7 8,770.3
- ----------------------------------------------------------------------------------------------------------------------------
Costs and expenses
Cost of sales 6,449.7 6,525.2 7,180.4
Selling, general and administrative expenses 685.2 714.8 739.7
Interest expense 146.4 159.0 196.1
- ----------------------------------------------------------------------------------------------------------------------------
7,281.3 7,399.0 8,116.2
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 513.2 491.7 654.1
Estimated taxes on income 181.2 166.3 293.6
- ----------------------------------------------------------------------------------------------------------------------------
Income before minority interest and equity in earnings
(losses) of affiliates 332.0 325.4 360.5
Minority interest (40.4) (32.8) (23.5)
Equity in earnings (losses) of affiliates (3.5) 13.4 32.1
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 288.1 $ 306.0 $ 369.1
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE
Basic income per share $ 2.84 $ 3.01 $ 3.54
- ----------------------------------------------------------------------------------------------------------------------------
Diluted income per share $ 2.83 $ 2.99 $ 3.49
- ----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared and paid per common share $ .90 $ .98 $ 1.04
- ----------------------------------------------------------------------------------------------------------------------------
Average shares outstanding 101.3 101.8 104.3
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
23
4
BALANCE SHEET
in millions except par value DANA CORPORATION
- ---------------------------------------------------------------------------------------
December 31
1996 1997
- ---------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------
Cash $ 105.3 $ 93.3
Marketable securities, at cost which approximates market 122.5 301.0
Accounts receivable
Trade, less allowance for doubtful accounts
of $26.0 - 1996 and $29.6 - 1997 1,026.7 1,032.4
Other 42.4 130.5
Inventories 912.9 909.8
Lease financing 1,167.3 1,330.1
Investments and other assets 810.6 1,164.7
Deferred income tax benefits 147.5 112.1
Property, plant and equipment, net 1,824.8 2,044.8
- ---------------------------------------------------------------------------------------
Total assets $6,160.0 $7,118.7
- ---------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------
Short-term debt $ 640.3 $ 504.2
Accounts payable 460.3 535.6
Other liabilities 736.5 982.8
Deferred employee benefits 1,025.6 1,062.5
Long-term debt 1,697.7 2,178.3
- ---------------------------------------------------------------------------------------
Total liabilities 4,560.4 5,263.4
Minority interest in consolidated subsidiaries 170.9 154.1
Shareholders' equity
Common stock, $1 par value, shares authorized, 240.0;
shares issued, 103.0 - 1996 and 105.1 - 1997 103.0 105.1
Additional paid-in capital 106.0 164.6
Retained earnings 1,304.9 1,565.4
Deferred pension and translation adjustments (85.2) (133.9)
- ---------------------------------------------------------------------------------------
Total shareholders' equity 1,428.7 1,701.2
- ---------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $6,160.0 $7,118.7
- ---------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
24
5
STATEMENT OF CASH FLOWS
in millions DANA CORPORATION
- ---------------------------------------------------------------------------------------------
Year Ended December 31
1995 1996 1997
- ---------------------------------------------------------------------------------------------
Net cash flows from operating activities $387.9 $704.4 $697.7
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (409.7) (356.5) (426.0)
Purchases of assets to be leased (400.3) (426.3) (452.3)
Purchase of minority interest of Hayes-Dana Inc. (92.4)
Acquisitions (111.2) (88.4) (475.8)
Divestitures 10.9 394.0
Additions to investments and other assets (26.0) (41.3) (85.6)
Loans made to customers and partnerships (25.4) (98.5) (115.3)
Payments received on leases 201.0 209.7 250.4
Proceeds from sales of certain assets 93.4 73.1 33.6
Proceeds from sales of leased assets 48.8 20.3 26.0
Payments received on loans 16.6 20.8 155.0
Other 63.5 26.5 (37.7)
- ---------------------------------------------------------------------------------------------
Net cash flows - investing activities (641.7) (649.7) (733.7)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in short-term debt 191.0 (163.6) (170.6)
Issuance of long-term debt 418.1 734.9 914.0
Payments on long-term debt (314.9) (372.5) (461.2)
Dividends paid (91.2) (99.7) (108.6)
Other 5.2 7.4 28.9
- ---------------------------------------------------------------------------------------------
Net cash flows - financing activities 208.2 106.5 202.5
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (45.6) 161.2 166.5
Cash and cash equivalents - beginning of year 112.2 66.6 227.8
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 66.6 $227.8 $394.3
- ---------------------------------------------------------------------------------------------
Reconciliation of net income to net cash flows from
operating activities:
Net income $288.1 $306.0 $369.1
Depreciation and amortization 245.8 278.4 334.5
Unremitted earnings of affiliates 4.3 (13.3) (19.0)
Deferred income taxes 5.2 63.9 57.4
Minority interest 7.0 26.5 15.7
Change in accounts receivable (67.5) 34.2 (56.2)
Change in inventories (81.8) (16.4) 25.4
Change in other operating assets 8.1 49.9 (42.8)
Change in operating liabilities (27.7) (30.5) 125.5
Additions to lease and loan loss reserves 17.2 11.0 12.3
Gains on divestitures (141.1)
Other (10.8) (5.3) 16.9
- ---------------------------------------------------------------------------------------------
Net cash flows from operating activities $387.9 $704.4 $697.7
- ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
25
6
STATEMENT OF SHAREHOLDERS' EQUITY
in millions DANA CORPORATION
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DEFERRED
PENSION
ADDITIONAL AND
COMMON PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENTS EQUITY
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 98.8 $ 61.0 $ 887.7 $ (107.7) $ 939.8
Net income for the year
ended December 31, 1995 288.1 288.1
Cash dividends declared (91.2) (91.2)
Issuance of shares in connection
with acquisitions 2.5 2.9 11.7 17.1
Deferred translation adjustments (3.7) (3.7)
Deferred pension expense
adjustments 9.3 9.3
Cost of shares reacquired (1.0) (1.0)
Issuance of shares for employee
stock plans .2 6.0 6.2
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 101.5 68.9 1,096.3 (102.1) 1,164.6
Net income for the year
ended December 31, 1996 306.0 306.0
Cash dividends declared (99.7) (99.7)
Issuance of shares for defined
benefit pension plans 1.0 30.1 31.1
Deferred translation adjustments 3.4 3.4
Deferred pension expense
adjustments 13.5 13.5
Cost of shares reacquired (.2) (5.1) (5.3)
Issuance of shares for director and
employee stock plans .5 12.1 12.6
Issuance of shares in connection
with acquisitions .2 2.3 2.5
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 103.0 106.0 1,304.9 (85.2) 1,428.7
NET INCOME FOR THE YEAR
ENDED DECEMBER 31, 1997 369.1 369.1
CASH DIVIDENDS DECLARED (108.6) (108.6)
ISSUANCE OF SHARES FOR DEFINED
BENEFIT PENSION PLANS 1.0 30.8 31.8
DEFERRED TRANSLATION ADJUSTMENTS (46.4) (46.4)
DEFERRED PENSION EXPENSE
ADJUSTMENTS (2.3) (2.3)
COST OF SHARES REACQUIRED (.3) (13.1) (13.4)
ISSUANCE OF SHARES FOR
EMPLOYEE STOCK PLANS 1.4 40.9 42.3
- ---------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 105.1 $ 164.6 $ 1,565.4 $ (133.9) $ 1,701.2
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
26
7
NOTES TO FINANCIAL STATEMENTS
in millions except share and per share amounts DANA CORPORATION
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NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
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Dana Corporation is a global leader in the engineering, manufacturing and
distribution of components and systems for worldwide vehicular and industrial
manufacturers. Dana also owns Dana Credit Corporation (DCC), a leading provider
of lease financing services in certain markets.
The preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Some of the more significant estimates include
depreciation and amortization of long-lived assets, deferred tax asset and
inventory valuations, environmental and warranty reserves, postemployment and
postretirement benefits, residual values of leased assets and allowances for
doubtful accounts. Actual results could differ from those estimates.
The following summary of significant accounting policies of Dana Corporation
is presented to assist the reader in evaluating the financial statements. Where
appropriate, certain amounts in 1995 and 1996 have been reclassified to conform
with the 1997 presentation.
PRINCIPLES OF CONSOLIDATION
Dana's financial statements include all subsidiaries in which Dana has the
ability to exercise significant influence over operating and financial policies.
Affiliated companies (20% to 50% ownership) are generally recorded in the
statements using the equity method of accounting. Operations of affiliates
outside North America accounted for on the equity method of accounting are
generally included for periods ended within two months of Dana's year end to
ensure preparation of financial statements on a timely basis. Less than
20%-owned companies are included in the financial statements at the cost of
Dana's investment. Dividends, royalties and fees from these cost basis
affiliates are recorded in Dana's financial statements when received.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's subsidiaries and equity affiliates
outside the United States (U.S.), located in non-highly inflationary economies,
are measured using the local currency as the functional currency. Income and
expense items are translated at average monthly rates of exchange. Gains and
losses from currency transactions of these affiliates are included in net
earnings. Assets and liabilities of these affiliates are translated at the rates
of exchange at the balance sheet date. The resultant translation adjustments are
deferred as a separate component of shareholders' equity. For affiliates
operating in highly inflationary economies, non-monetary assets are translated
at historical exchange rates and monetary assets are translated at current
exchange rates. Translation adjustments are included in the determination of
income.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
generally on the last-in, first-out basis for U.S. inventories and on the
first-in, first-out or average cost basis for international inventories.
LEASE FINANCING
Lease financing consists of direct financing leases, leveraged leases and
equipment on operating leases. Income on direct financing leases is recognized
by a method which produces a constant periodic rate of return on the outstanding
investment in the lease. Income on leveraged leases is recognized by a method
which produces a constant rate of return on the outstanding net investment in
the lease, net of the related deferred tax liability, in the years in which the
net investment is positive. Initial direct costs are deferred and amortized
using the interest method over the lease period. Equipment under operating
leases is recorded at cost, net of accumulated depreciation. Income from
operating leases is recognized ratably over the term of the leases.
ALLOWANCE FOR LOSSES ON LEASE FINANCING
Provisions for losses on lease financing receivables are determined on the
basis of loss experience and assessment of prospective risk. Resulting
adjustments to the allowance for losses are made to adjust net investment in
lease financing to an estimated collectible amount. Income recognition is
generally discontinued on accounts which are contractually past due and where no
payment activity has occurred within 120 days. Accounts are charged against the
allowance for losses when determined to be uncollectible. Accounts for which
equipment repossession has commenced as the primary means of recovery are
classified within other assets at their estimated realizable value.
GOODWILL
Cost in excess of net assets of companies acquired is generally amortized
over the estimated period of expected benefit, ranging from 10 to 40 years.
LOANS RECEIVABLE
Loans receivable consist primarily of loans to partnerships in which DCC has
an interest and loans secured by equipment and first mortgages on real property.
The loans to partnerships are secured by the partnerships' assets. Income on all
loans is recognized using the interest method. Interest income on impaired loans
is recognized either as cash is collected or on a cost recovery basis as
conditions warrant.
ALLOWANCE FOR LOSSES ON LOANS RECEIVABLE
Provisions for losses on loans receivable are determined on the basis of loss
experience and assessment of prospective risk. Resulting adjustments to the
allowance for losses are made to adjust loans receivable to an estimated
collectible amount. Income recognition is generally discontinued on accounts
which are contractually past due and where no
27
8
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
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NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONT.)
- -------------------------------------------------------------------------------
payment activity has occurred within 120 days. Accounts are charged against the
allowance for losses when determined to be uncollectible.
INCOME TAXES
Current tax liabilities and assets are recognized for the estimated taxes
payable or refundable on the tax returns for the current year. Deferred tax
liabilities or assets are recognized for the estimated future tax effects
attributable to temporary differences and carryforwards that result from events
that have been recognized differently between the financial statements and the
tax returns. The measurement of current and deferred tax liabilities and assets
is based on provisions of enacted tax laws. Deferred tax assets are reduced, if
necessary, by the amount of any tax benefits that are not expected to be
realized. Dana uses the "flow-through" method of accounting for investment tax
credits, except for investment tax credits arising from leveraged leases and
certain direct financing leases for which the deferred method is used for
financial statement purposes.
PROPERTIES AND DEPRECIATION
Property, plant and equipment are valued at historical costs. Depreciation is
recognized over the estimated useful lives of property, plant and equipment
using primarily the straight-line method for financial reporting purposes and
primarily accelerated depreciation methods for federal income tax purposes.
FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of
factors. Where available, fair values represent quoted market prices for
identical or comparable instruments. Where quoted market prices are not
available, fair values have been estimated based on assumptions concerning the
amount and timing of estimated future cash flows and assumed discount rates
reflecting varying degrees of credit risk. Accordingly, the fair values may not
represent actual values of the financial instruments that could have been
realized as of December 31, 1996 and 1997, or that will be realized in the
future.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into various types of interest rate and foreign currency
agreements but does not trade in derivative financial instruments. Gains and
losses relating to qualifying hedges of firm commitments or anticipated
transactions are deferred and recognized as adjustments of carrying amounts when
the hedged transaction occurs. Interest rate swaps and caps are primarily used
to manage exposure to fluctuations in interest rates. Differentials paid or
received on interest rate agreements are accrued and recognized as adjustments
to interest expense. Premiums paid on interest rate caps are amortized to
interest expense over the terms of the agreements and unamortized premiums are
included in other assets.
DCC has one interest rate-based option which is marked to market and included
in other liabilities. Changes in the fair value of this instrument are reported
in other income.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to existing conditions
caused by past operations which do not contribute to current or future revenue
generation are expensed. Liabilities are recorded when environmental assessments
and/or remedial efforts are probable and the costs can be reasonably estimated.
Estimated costs are based upon currently enacted laws and regulations, existing
technology and the most probable method of remediation. The costs determined are
not discounted and exclude the effects of inflation and other societal and
economic factors. Where the cost estimates result in a range of equally probable
amounts, the lower end of the range is accrued.
PENSION PLANS
Annual net periodic pension costs under the Company's defined benefit pension
plans are determined on an actuarial basis. Dana's policy is to fund these costs
as accrued, including amortization of the initial unrecognized net obligation
over 15 years and obligations arising due to plan amendments over the period
benefited, through deposits with trustees. Benefits are determined based upon
employees' length of service, wages and a combination of length of service and
wages.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Annual net postretirement benefits liability and expense under the Company's
benefit plans are determined on an actuarial basis. Dana's current policy is to
pay these benefits as they become due. Benefits are determined primarily based
upon employees' length of service and include applicable employee cost sharing.
POSTEMPLOYMENT BENEFITS
Annual net postemployment benefits liability and expense under the Company's
benefit plans are accrued as service is rendered for those obligations that
accumulate or vest and can be reasonably estimated. Obligations that do not
accumulate or vest are recorded when payment of the benefits is probable and the
amounts can be reasonably estimated.
NET INCOME PER COMMON SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," is effective for periods ending after December 15, 1997. Accordingly,
basic and diluted income per share have been computed in accordance with this
statement. Prior periods have been adjusted to conform with the provisions of
this statement.
28
9
NOTES TO FINANCIAL STATEMENTS
in millions except share and per share amounts DANA CORPORATION
- -------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, the Company considers highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does
not require, companies to record compensation for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
NOTE 2. COMMON SHARES
- -------------------------------------------------------------------------------
In connection with employee stock plans, Dana reacquired 36,372 shares in
1995, 169,981 in 1996 and 344,697 in 1997. In 1996 and in 1997, Dana
contributed 1,000,000 shares of common stock to the Dana Corporation Pension
Plans Trust.
The following summarizes the common stock transactions for 1995, 1996 and
1997:
1995 1996 1997
- -------------------------------------------------------------------------------------------
Outstanding at
beginning of year 98,793,591 101,512,681 103,025,765
Issued for acquisitions 2,456,979 163,370
Issued for director and
employee stock plans 298,483 519,695 1,426,166
Issued for defined benefit
pension plans 1,000,000 1,000,000
Reacquired and retired (36,372) (169,981) (344,697)
- -------------------------------------------------------------------------------------------
Outstanding at end of year 101,512,681 103,025,765 105,107,234
- -------------------------------------------------------------------------------------------
Average outstanding
for the year 101,296,858 101,799,543 104,339,650
- -------------------------------------------------------------------------------------------
Plus: Incremental shares
from assumed
conversion of -
Deferred
compensation units 39,007 19,971 424,615
Deferred restricted
stock units 6,357
Stock options 361,996 548,008 1,036,576
- -------------------------------------------------------------------------------------------
Potentially dilutive shares 401,003 567,979 1,467,548
- -------------------------------------------------------------------------------------------
Adjusted average shares
outstanding for the year 101,697,861 102,367,522 105,807,198
- -------------------------------------------------------------------------------------------
There are 5,000,000 common shares reserved for issuance in the event that the
Company issues debt securities with exchange, conversion or redemption rights
under its 1997 universal shelf registration.
NOTE 3. PREFERRED SHARE
PURCHASE RIGHTS
- -------------------------------------------------------------------------------
Under Dana's Preferred Share Purchase Rights Plan (Rights Plan), which is
designed to deter coercive or unfair takeover tactics, one Preferred Share
Purchase Right (Right) has been issued on each share of Dana common stock
outstanding on and after July 25, 1996. Each Right entitles the holder to
purchase 1/1000th of a share of Dana Series A Junior Participating Preferred
Stock, no par value, under certain circumstances. The Rights have no voting
rights and will expire on July 15, 2006, unless exercised, redeemed or exchanged
sooner.
Generally, the Rights will not be exercisable (or transferable apart from the
Dana common shares to which they are attached) unless a person or group
(Acquiring Person) becomes the beneficial owner of 15% or more of Dana's
outstanding common shares or commences a tender offer that would result in its
acquisition of a 15% position. In that event, the Rights will become exercisable
(except those owned by the Acquiring Person, which will become void), entitling
the holder of each Right to purchase, for $110 per share (subject to adjustment,
the Purchase Price), a number of Dana common shares having a market value equal
to two times the Purchase Price.
In addition, if Dana engages in certain mergers with or sells 50% or more of
its assets or earning power to an Acquiring Person (or persons acting for or
with an Acquiring Person), or engages in similar transactions, the Rights will
become exercisable (except those owned by the Acquiring Person, which will
become void), entitling the holder of each Right to purchase a number of common
shares of the acquiring or surviving company having a market value (as
determined under the Rights Plan) equal to two times the Purchase Price.
Dana's Board may redeem the Rights at a price of $.01 each at any time before
any person or group acquires 15% or more of Dana's common shares. If any person
or group becomes an Acquiring Person, but acquires less than 50% of Dana's
common shares, the Board may exchange each Right for one share of Dana common
stock.
NOTE 4. PREFERRED SHARES
- -------------------------------------------------------------------------------
Dana has authorized 5,000,000 shares of preferred stock, without par value,
including 1,000,000 shares which have been reserved for issuance under the
Rights Plan. At December 31, 1997, no shares of preferred stock had been issued.
29
10
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
- -------------------------------------------------------------------------------
NOTE 5. INVENTORIES
- -------------------------------------------------------------------------------
The components of inventory are as follows:
December 31
1996 1997
- -------------------------------------------------------------------------------
Raw materials $ 209.9 $ 252.9
Work in process and finished goods 703.0 656.9
- -------------------------------------------------------------------------------
$ 912.9 $ 909.8
- -------------------------------------------------------------------------------
Inventories amounting to $437.2 and $467.7 at December 31, 1996 and 1997,
respectively, were valued using the LIFO method. If all inventories were valued
at replacement cost, inventories would be increased by $121.4 and $125.4 at
December 31, 1996 and 1997, respectively.
NOTE 6. INTERNATIONAL OPERATIONS
- -------------------------------------------------------------------------------
The following is a summary of the significant financial information of Dana's
consolidated international subsidiaries:
December 31
1995 1996 1997
- -------------------------------------------------------------------------------
Assets $1,948.3 $ 2,306.7 $ 2,493.9
Liabilities 1,133.0 1,340.6 1,468.7
Net sales 2,121.9 2,167.1 2,296.4
Net income 119.5 108.9 135.2
Dana's equity in:
Net assets 662.0 796.7 873.4
Net income 81.7 77.7 113.5
Cumulative undistributed earnings of international subsidiaries for which
U.S. income taxes, exclusive of foreign tax credits, have not been provided
approximated $496.5 at December 31, 1997. Management intends to permanently
reinvest undistributed earnings of Dana's international subsidiaries;
accordingly, no U.S. income taxes have been provided on these undistributed
earnings. If the total undistributed earnings of international subsidiaries had
been remitted in 1997, a significant amount of the additional tax provision
would have been offset by foreign tax credits.
Dana's consolidated international subsidiaries are located throughout the
world with no individual subsidiary or the aggregate of all subsidiaries within
a given country accounting for more than 10% of consolidated sales or assets.
With the exception of certain subsidiaries located in Brazil, the functional
currency of the Company's international subsidiaries is the local currency.
Beginning in 1998, Brazil will report using the local currency as the functional
currency. Certain subsidiaries have transactions in currencies other than their
functional currencies and from time to time enter into forward and option
contracts to hedge the purchase of inventory and fixed assets or to sell
nonfunctional currency receipts. Currency forward and option contracts in the
aggregate are not material.
Dana has equity interests in a number of affiliated companies in Mexico,
South America, Asia and other areas of the world. The following is a summary of
the significant financial information of affiliated companies accounted for on
the equity method:
December 31
1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
Current assets $ 343.3 $ 371.4 $ 355.8
Other assets 244.2 272.6 276.4
Current liabilities 463.4 349.3 243.2
Other liabilities 54.8 180.3 132.4
Shareholders' equity 69.3 114.4 256.6
Net sales 682.5 743.1 803.9
Gross profit 140.8 125.2 159.2
Net income (loss) (22.1) 21.1 56.2
Dana's equity in:
Net assets 44.8 61.1 114.4
Net income (loss) (8.4) 10.7 26.8
NOTE 7. INVESTMENTS IN
PARTNERSHIPS
- ------------------------------------------------------------------------------
DCC has ownership interests in several partnerships which are accounted for
under the equity method. In certain of these partnerships, DCC has ownership
interests exceeding 50%; however, they are not consolidated because DCC has no
general partner interest and only limited ability to control the partnerships'
activities. The partnerships are involved primarily in the leasing or financing
of equipment or real estate to commercial entities. DCC's share of earnings of
partnerships is included in income as earned. The investment in partnerships is
reduced as distributions are received.
Summarized financial information of the partnerships on a combined basis is
as follows:
December 31
1995 1996 1997
- -------------------------------------------------------------------------------
Assets $ 932.4 $ 900.3 $ 1,076.0
Liabilities 757.7 797.1 964.7
Partners' capital 174.7 103.2 111.3
Revenue 116.2 78.0 106.8
Net income 9.0 7.0 8.8
DCC's investments in
partnerships 44.5 25.8 75.1
DCC's earnings from investments
in partnerships 4.9 2.7 3.2
The investments in partnerships include $19.2 representing amounts invested
in excess of DCC's share of the partnerships' book basis in net assets. These
amounts are amortized against earnings from partnerships over the expected
investment lives of the partnerships.
30
11
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
- ------------------------------------------------------------------------------
NOTE 8. SHORT-TERM DEBT
- ------------------------------------------------------------------------------
Short-term funds for certain U.S. and international operations are obtained
through the issuance of commercial paper, short-term notes payable to banks and
bank overdrafts.
At December 31, 1997, Dana, excluding DCC, had no commercial paper
outstanding, $108.8 borrowed against uncommitted bank lines and $70.5 of notes
payable at its international subsidiaries. DCC had $178.6 of commercial paper
issued, $120.9 of notes payable and $25.4 borrowed against committed borrowing
lines.
Dana, excluding DCC, and DCC had committed borrowing lines of $475.0 and
$442.1, respectively, and uncommitted borrowing lines of $905.0 and $479.2. The
banks providing committed lines are compensated with facility or commitment
fees. Amounts paid are not considered to be material and no fees are required
for the uncommitted bank lines.
Selected details of short-term borrowings are as follows:
WEIGHTED
AVERAGE
INTEREST
AMOUNT RATE
- -------------------------------------------------------------------------------
Balance at December 31, 1996 $ 640.3 5.9%
Average during 1996 777.0 6.0
Maximum during 1996 (month end) 891.2 5.9
BALANCE AT DECEMBER 31, 1997 $ 504.2 4.8%
AVERAGE DURING 1997 518.9 5.4
MAXIMUM DURING 1997 (MONTH END) 652.1 6.0
NOTE 9. LONG-TERM DEBT
- -------------------------------------------------------------------------------
December 31
1996 1997
- -------------------------------------------------------------------------------
Dana, excluding consolidated
subsidiaries, indebtedness --
Unsecured notes payable,
fixed rates, 5.44% - 7.39%,
due 1998 to 2002 $ 875.0 $ 1,120.0
Unsecured notes payable,
variable rates, 6.45% - 6.54%,
due 1998 60.0 60.0
Various industrial revenue bonds and other 9.0 7.8
DCC indebtedness --
Various notes payable, unsecured,
variable rates, 4.03% - 8.05%,
due 1998 to 2002 381.5 525.1
Various notes payable, unsecured,
fixed rates, 5.98% - 9.68%,
due 1998 to 2006 303.1 378.6
Various notes payable, non-recourse to issuer,
fixed rates averaging 6.80% - 12.05%,
due 1998 to 2010 23.7 58.2
Indebtedness of other consolidated subsidiaries 45.4 28.6
- -------------------------------------------------------------------------------
$1,697.7 $ 2,178.3
- -------------------------------------------------------------------------------
Interest paid on short-term and long-term debt was $143.0, $148.8 and $181.3
during 1995, 1996 and 1997, respectively.
The aggregate amounts of maturities of all long-term debt for each of the
five years succeeding December 31, 1997 are as follows: 1998, $432.7; 1999,
$393.3; 2000, $469.9; 2001, $416.1 and 2002, $272.7.
Under a universal shelf registration filed in December 1997, the Company may
issue debt or equity securities, or a combination thereof, in an aggregate
amount not to exceed $600.
NOTE 10. INTEREST RATE
AGREEMENTS
- -------------------------------------------------------------------------------
Dana and DCC enter into interest rate agreements to manage interest rate
risk, thereby reducing exposure to future interest rate movements. Under
interest rate swap agreements, Dana agrees with other parties to exchange, at
specific intervals, the difference between fixed rate and floating rate interest
amounts calculated by reference to an agreed notional amount. At December 31,
1997, Dana was committed to pay an average fixed rate of 6.6% and receive a
variable rate of 6.4% on notional amounts of $60. These interest rate swaps
expire in 1998.
At December 31, 1997, DCC was committed to pay an average variable rate of
5.83% and receive a fixed rate of 5.14% on notional amounts of $15 and to
receive an average variable rate of 6.2% and pay an average fixed rate of 7.1%
on notional amounts of $420. DCC's notional amounts of interest rate swaps
expire as follows: 1998, $81.5; 1999, $98.7; 2000, $156.8; 2001, $46.5 and 2002,
$51.5.
To reduce its interest rate obligations under an existing swap agreement
having a notional amount of $70.0, DCC granted the counterparty an option,
expiring in 2000, to extend the original maturity to 2007 at a fixed rate to DCC
of 9%. This option has been marked to market.
NOTE 11. STOCK OPTION PLANS
- -------------------------------------------------------------------------------
The Company's 1997 Amended Stock Option Plan (1997 Plan) provides for the
granting of options to designated employees at prices no less than 100% of the
market value at the date of grant. The options are exercisable for a period not
to exceed ten years from date of grant. The 1997 Plan provides for the granting
of stock appreciation rights separately or in conjunction with all or any part
of an option, either at the time of grant or at any subsequent time during the
term of the option.
31
12
NOTES TO FINANCIAL STATEMENTS
in millions share and per share amounts DANA CORPORATION
- -------------------------------------------------------------------------------
NOTE 11. STOCK OPTION PLANS
(CONT.)
- -------------------------------------------------------------------------------
The following summarizes the stock option transactions under the 1997 Plan
and former employee stock option plans for the years ended December 31, 1995,
1996 and 1997:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------
Outstanding at
December 31, 1994 4,111,403 $ 23.17
Granted - 1995 991,000 31.06
Exercised - 1995 (223,430) 17.93
Cancelled - 1995 (10,600) 24.18
- -------------------------------------------------------------------------------
Outstanding at
December 31, 1995 4,868,373 $ 25.01
Granted - 1996 1,396,250 28.13
Exercised - 1996 (417,260) 19.46
Cancelled - 1996 (10,075) 24.13
- ------------------------------------------------------------------------------
Outstanding at
December 31, 1996 5,837,288 $ 26.15
Granted - 1997 1,067,900 38.44
Exercised - 1997 (1,332,210) 22.90
Cancelled - 1997 (66,195) 28.23
- ------------------------------------------------------------------------------
Outstanding at
December 31, 1997 5,506,783 $ 29.30
- ------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
- -------------------------------------------------------------------------------
$16.38-$18.75 257,168 2.4 $17.74 257,168 $17.74
$20.16-$29.06 3,283,090 6.7 26.76 2,087,596 25.87
$31.06-$38.44 1,966,525 8.6 35.05 473,375 31.06
- -------------------------------------------------------------------------------
5,506,783 2,818,139
- -------------------------------------------------------------------------------
At December 31, 1997, 3,478,026 shares were available for future grants. The
total shares available for future grants include 350,000 shares which may, at
the discretion of a committee of the Board of Directors, be issued for stock
distributions under the Company's Additional Compensation Plan (ACP).
No expense has been charged to income relating to stock options. If the fair
value method of accounting for stock options prescribed by SFAS No. 123 had been
used, the expense relating to the stock options would have been $.6 in 1995,
$1.9 in 1996 and $3.4 in 1997. Pro forma net income and earnings per share would
have been as follows:
1995 1996 1997
- -------------------------------------------------------------------------------
Net Income $ 287.5 $ 304.1 $ 365.7
Basic EPS 2.84 2.99 3.51
Diluted EPS 2.83 2.97 3.45
The above pro forma effect on net income is not representative of the pro
forma effect on net income that will be disclosed in future years because it
does not take into consideration pro forma compensation expense relating to
grants made prior to 1995.
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes model with the following assumptions:
1995 1996 1997
- -------------------------------------------------------------------------------
Risk-free interest rate 6.0% 6.5% 6.2%
Dividend yield 3.0% 3.0% 2.6%
Expected life 5.4 years 5.4 years 5.3 YEARS
Stock price volatility 29.3% 27.3% 19.6%
The Company also has a Directors' Stock Option Plan for non-employee
directors. The Plan provides for the automatic granting of options at prices
equal to the market value at the date of grant. The options are exercisable
after one year for a period not to exceed ten years from date of grant. In 1995,
options were granted to purchase 24,000 shares at $24.81 per share. No options
were exercised under this Plan during 1995. During 1996, options were granted to
purchase 21,000 shares at $32.25 per share, options to purchase 6,000 shares
were exercised at $26.56 per share and 3,000 options were forfeited. During
1997, options were granted to purchase 24,000 shares at $31.81 per share. No
options were exercised under this Plan during 1997. At December 31, 1997, there
were 99,000 options outstanding at exercise prices ranging from $24.25 to $32.25
per share, options for 75,000 shares were exercisable and there were 22,000
shares available for future grants.
NOTE 12. STOCK PURCHASE PLAN
- -------------------------------------------------------------------------------
All full-time U.S. and certain non-U.S. employees are eligible to participate
in Dana's Employees' Stock Purchase Plan (SPP). The SPP provides that
participants may authorize Dana to withhold up to 15% of their earnings and
deposit such amounts with an independent custodian. The custodian, as nominee
for the participants, causes Dana common stock to be purchased at prevailing
market prices. The shares purchased are allocated to the participants' accounts
and upon request are distributed to the participants.
Under the SPP, Dana contributes on behalf of each participant up to 50% of
the participant's contributions. The Company's contributions will accumulate
over a five-year period, provided that the shares are left in the SPP. If any
shares are withdrawn by a participant before the end of five years, the amount
of the Company match toward those shares will depend on the period of time that
the shares have been in the SPP. The custodian has caused to be purchased
1,025,354 shares in 1995, 1,069,720 shares in 1996 and 947,950 shares in 1997 of
Dana's common stock on behalf of the participants and the Company's charge to
expense amounted to $5.2 in 1995, $6.3 in 1996 and $7.4 in 1997.
NOTE 13. ADDITIONAL COMPENSATION PLANS
- ------------------------------------------------------------------------------
Dana has numerous additional compensation plans, including gain sharing and
group incentive plans, which provide for payments computed under formulas which
recognize increased productivity and improved performance.
32
13
NOTES TO FINANCIAL STATEMENTS
in millions share and per share amounts DANA CORPORATION
- -------------------------------------------------------------------------------
The total amount earned by Dana employees from all such plans amounted to
$116.7, $112.1 and $136.4 in 1995, 1996 and 1997, respectively.
Under the ACP, in which certain officers and other key employees participate,
a percentage of participants' compensation is accrued for additional
compensation if certain profit levels are attained. Awards under the ACP are
paid in cash immediately or, at the discretion of the Board's Compensation
Committee, are deferred. Deferred awards may be paid in cash, stock or a
combination of both. Dana awarded (based on prior period performance) $10.6 in
1995, $14.2 in 1996 and $11.3 in 1997; in addition, 16,891, 16,438 and 7,074
shares of Dana's common stock were issued and amounts equivalent to dividends
and interest of $.6, $.7 and $.9 were credited to deferred awards in 1995, 1996
and 1997, respectively. Total charges to expense relating to the ACP amounted to
$16.1 in 1995, $13.2 in 1996 and $20.4 in 1997.
The Company also has a Restricted Stock Plan (RSP) whereby certain key
employees are granted restricted shares of common stock subject to forfeiture
until the restrictions lapse or terminate. With certain exceptions, the employee
must remain with the Company for a period of years after the date of grant to
receive the full number of shares granted. Shares granted in 1995, 1996 and 1997
were 24,000, 25,000 and 47,245, respectively. In 1997, the RSP was amended to
allow the participants to convert restricted stock into restricted stock units
under certain conditions. During 1997, 27,491 restricted shares were converted
to restricted units. The restricted units are payable in unrestricted stock upon
retirement or termination of employment. Total charges to expense for the RSP
amounted to $.6, $.8 and $.9 in 1995, 1996 and 1997, respectively. At December
31, 1997, 564,948 shares were available for future issuance under the RSP.
NOTE 14. PENSIONS
- -------------------------------------------------------------------------------
Dana provides retirement benefits for substantially all of its employees
under several defined benefit and defined contribution pension plans. Pension
expense approximated $62.4 in 1995, $74.0 in 1996 and $70.5 in 1997.
In 1996 and in 1997, in addition to cash contributions, 1,000,000 shares of
Dana common stock, with a market value of $31.1 in 1996 and $31.8 in 1997, were
contributed to the Dana Corporation Pension Plans Trust.
Net periodic pension cost for defined benefit plans is computed as follows:
- -------------------------------------------------------------------------------
Year Ended December 31
1995 1996 1997
- -------------------------------------------------------------------------------
Service cost $ 36.4 $ 48.3 $ 47.5
Interest cost 123.5 127.0 131.1
Actual return on
plan assets (407.9) (186.0) (394.6)
Amortization of
unrecognized prior
service cost 9.0 16.1 14.9
Amortization of initial
unrecognized net
obligation 5.0 4.2 4.2
Unrecognized gain 285.0 53.0 250.2
- -------------------------------------------------------------------------------
Net periodic
pension cost $ 51.0 $ 62.6 $ 53.3
- -------------------------------------------------------------------------------
The funded status of defined benefit plans at December 31, 1996 was as
follows:
ACCUMULATED ASSETS
BENEFITS EXCEED
EXCEED ACCUMULATED
ASSETS BENEFITS TOTAL
- -------------------------------------------------------------------------------
Actuarial present
value of:
Vested benefits $ 486.0 $ 1,103.3 $ 1,589.3
Non-vested benefits 46.0 90.1 136.1
- -------------------------------------------------------------------------------
Accumulated benefit
obligation $ 532.0 $ 1,193.4 $ 1,725.4
- -------------------------------------------------------------------------------
Actuarial present value
of projected benefit
obligation $ (548.8) $(1,286.9) $ (1,835.7)
Plan assets at fair value 442.5 1,492.8 1,935.3
- -------------------------------------------------------------------------------
Funded status $ (106.3) $ 205.9 $ 99.6
- -------------------------------------------------------------------------------
Unrecognized prior
service cost $ (15.7) $ (57.2) $ (72.9)
Unrecognized net gain
(loss) (6.9) 238.3 231.4
Accrued pension cost (68.0) 26.2 (41.8)
Unrecognized initial
obligation (15.7) (1.4) (17.1)
- -------------------------------------------------------------------------------
$ (106.3) $ 205.9 $ 99.6
- -------------------------------------------------------------------------------
The funded status of defined benefit plans at December 31, 1997 was as
follows:
ACCUMULATED ASSETS
BENEFITS EXCEED
EXCEED ACCUMULATED
ASSETS BENEFITS TOTAL
- ------------------------------------------------------------------------------
Actuarial present
value of:
Vested benefits $ 58.1 $ 1,614.3 $ 1,672.4
Non-vested benefits 6.5 93.9 100.4
- ------------------------------------------------------------------------------
Accumulated benefit
obligation $ 64.6 $ 1,708.2 $ 1,772.8
- ------------------------------------------------------------------------------
Actuarial present value
of projected benefit
obligation $ (71.6) $ (1,806.3) $ (1,877.9)
Plan assets at fair value .3 2,147.2 2,147.5
- ------------------------------------------------------------------------------
Funded status $ (71.3) $ 340.9 $ 269.6
- ------------------------------------------------------------------------------
Unrecognized prior
service cost $ (4.1) $ (64.5) $ (68.6)
Unrecognized net gain
(loss) (10.8) 376.9 366.1
Accrued pension cost (54.9) 39.8 (15.1)
Unrecognized initial
obligation (1.5) (11.3) (12.8)
- ------------------------------------------------------------------------------
$ (71.3) $ 340.9 $ 269.6
- ------------------------------------------------------------------------------
33
14
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
- ------------------------------------------------------------------------------
NOTE 14. PENSIONS (CONT.)
- ------------------------------------------------------------------------------
The assumptions used to determine pension costs and projected benefit
obligations are as follows:
U.S. Plans
1995 1996 1997
- -------------------------------------------------------------------------------
Expected long-term rate
of return on plan assets 8.5 % 8.5% 8.75%
Discount rate 6.75% 7.5% 7.0 %
Rate of increase in future
compensation levels 5% 5% 5%
International Plans
1995 1996 1997
- -------------------------------------------------------------------------------
Expected long-term rates
of return on plan assets 8 - 9% 8 - 9% 7.5 - 9%
Discount rates 7 - 8% 7 - 8% 5 - 8%
Rates of increase in future
compensation levels 3 - 7.5% 3 - 7.5% 3 - 7.5%
Plan assets are invested in a diversified portfolio that consists primarily
of equity and debt securities.
NOTE 15. MEDICAL CARE AND
OTHER BENEFITS
- ------------------------------------------------------------------------------
Dana and certain of its subsidiaries provide medical and life insurance
benefits for certain active and retired employees. These benefits are provided
through various insurance carriers whose charges to Dana are based on the
benefits paid during the year. Substantially all of the retiree medical cost
relates to North American retirees since most international retirees are covered
by government-sponsored programs.
Net annual postretirement benefit cost is computed as follows:
Year Ended December 31
1995 1996 1997
- -------------------------------------------------------------------------------
Service cost $ 9.2 $ 11.2 $ 12.6
Interest cost 58.4 58.7 67.0
Net amortization and
deferral (17.2) (13.8) (8.1)
- -------------------------------------------------------------------------------
Net annual postretirement
benefit cost $ 50.4 $ 56.1 $ 71.5
- -------------------------------------------------------------------------------
Postretirement benefit obligations, none of which are funded, are summarized
as follows:
December 31
1996 1997
- -------------------------------------------------------------------------------
Accumulated postretirement benefit
obligations:
Retirees and dependents $ 590.5 $ 670.4
Active participants eligible to
retire and receive benefits 117.5 143.7
Active participants not yet fully
eligible 143.5 177.5
- -------------------------------------------------------------------------------
Total accumulated postretirement
benefit obligation 851.5 991.6
Unamortized plan amendments 59.7 50.9
Unamortized net loss (67.1) (153.0)
- -------------------------------------------------------------------------------
Accrued postretirement benefits
other than pensions $ 844.1 $ 889.5
- -------------------------------------------------------------------------------
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.75% in 1996 and 7% in 1997. The assumed medical costs trend
rates result in per capita net incurred medical claims increasing 7.8% in 1998.
The rate decreases to 5% over an 11-year period. If the assumed medical costs
trend rates were increased by 1%, the accumulated postretirement benefit
obligation as of December 31, 1997 would increase by $78.9 and the aggregate of
the service and interest cost components of the net annual postretirement
benefit cost would be increased by $6.9.
NOTE 16. BUSINESS SEGMENTS
- -------------------------------------------------------------------------------
Dana operates principally in three business segments: Vehicular, Industrial and
Lease Financing. The Vehicular segment consists primarily of operations which
manufacture and market axles, structural components, joints and shafts and
engine parts (such as pistons, piston rings, filters and gaskets). The
Industrial segment operations manufacture and market various products, including
those for off-highway motor vehicles. The Lease Financing segment consists of
DCC, whose primary operating subsidiaries are engaged in leasing and finance
operations.
Lease financing revenue includes lease financing income, fees and interest.
Other income includes dividends, interest and the gains recorded on
divestitures. Charges relating to restructuring and rationalization were charged
to operating income. Other expense includes interest and corporate expenses.
Corporate assets include cash, marketable securities, accounts receivable and
investments (excluding assets which can be identified to lease financing).
The "Other International" geographic area is comprised primarily of Brazil
and Canada, neither of which exceeds 10% of the consolidated amounts. Interarea
transfers between countries are transferred at the prevailing market price.
Export sales from the U.S. to customers outside the U.S. amounted to $554.6 in
1995, $675.6 in 1996 and $696.8 in 1997. Total export sales (including sales to
Dana's international subsidiaries which are eliminated for financial state-
34
15
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
- -------------------------------------------------------------------------------
ment presentation) were $735.1, $847.3 and $927.3 in 1995, 1996 and 1997,
respectively.
Worldwide sales to Ford Motor Company and subsidiaries amounted to $1,299.3,
$1,263.5 and $1,372.6 in 1995, 1996 and 1997, respectively, which represented
17%, 16% and 17% of Dana's consolidated sales. Sales to Chrysler Corporation and
subsidiaries in 1995, 1996 and 1997 amounted to $968.0, $1,104.1 and $1,181.1,
respectively, representing 13%, 14% and 14% of Dana's consolidated sales. Sales
to Ford and Chrysler were primarily from the Company's Vehicular segment. No
other customer accounted for more than 10% of Dana's consolidated sales.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued in June 1997, is effective for fiscal years beginning after
December 15, 1997. This statement, which requires expanded disclosure of segment
information, will be adopted in 1998.
LEASE
VEHICULAR INDUSTRIAL FINANCING CONSOLIDATED
- -----------------------------------------------------------------------------------------------------
Year Ended December 31, 1995
Sales to customers $ 6,069.8 $ 1,526.5 $ 1.4 $ 7,597.7
Lease financing revenue 155.3 155.3
- -----------------------------------------------------------------------------------------------------
Total revenue $ 6,069.8 $ 1,526.5 $ 156.7 $ 7,753.0
- -----------------------------------------------------------------------------------------------------
Operating income $ 585.9 $ 103.7 $ 22.8 $ 712.4
- -----------------------------------------------------------------------------------------------------
Other income 33.7
Other expense (232.9)
- -----------------------------------------------------------------------------------------------------
Income before income taxes $ 513.2
- -----------------------------------------------------------------------------------------------------
Assets identified to segments $ 2,077.5 $ 614.8 $ 1,468.4 $ 4,160.7
- -----------------------------------------------------------------------------------------------------
Corporate assets 1,552.8
- -----------------------------------------------------------------------------------------------------
Total assets $ 5,713.5
- -----------------------------------------------------------------------------------------------------
Depreciation $ 177.0 $ 44.2 $ 2.0
- -----------------------------------------------------------------------------------------
Capital expenditures $ 332.9 $ 61.4 $ 10.7
- -----------------------------------------------------------------------------------------
Year Ended December 31, 1996
Sales to customers $ 6,130.5 $ 1,555.8 $ 7,686.3
Lease financing revenue $ 176.5 176.5
- -----------------------------------------------------------------------------------------------------
Total revenue $ 6,130.5 $ 1,555.8 $ 176.5 $ 7,862.8
- -----------------------------------------------------------------------------------------------------
Operating income $ 574.7 $ 109.9 $ 39.6 $ 724.2
- ------------------------------------------------------------------------------------------
Other income 26.7
Other expense (259.2)
- -----------------------------------------------------------------------------------------------------
Income before income taxes $ 491.7
- -----------------------------------------------------------------------------------------------------
Assets identified to segments $ 2,255.9 $ 654.0 $ 1,669.1 $ 4,579.0
- ------------------------------------------------------------------------------------------
Corporate assets 1,581.0
- -----------------------------------------------------------------------------------------------------
Total assets $ 6,160.0
- -----------------------------------------------------------------------------------------------------
Depreciation $ 192.0 $ 54.5 $ 5.8
- ------------------------------------------------------------------------------------------
Capital expenditures $ 262.0 $ 65.8 $ 12.7
YEAR ENDED DECEMBER 31, 1997
SALES TO CUSTOMERS $ 6,323.2 $ 1,967.6 $ 8,290.8
LEASE FINANCING REVENUE $ 193.6 193.6
- -----------------------------------------------------------------------------------------------------
TOTAL REVENUE $ 6,323.2 $ 1,967.6 $ 193.6 $ 8,484.4
- -----------------------------------------------------------------------------------------------------
OPERATING INCOME $ 483.3 $ 141.5 $ 35.7 $ 660.5
- ------------------------------------------------------------------------------------------
OTHER INCOME 285.0
OTHER EXPENSE (291.4)
- -----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 654.1
- -----------------------------------------------------------------------------------------------------
ASSETS IDENTIFIED TO SEGMENTS $ 2,733.6 $ 844.7 $ 1,860.9 $ 5,439.2
- ------------------------------------------------------------------------------------------
CORPORATE ASSETS 1,679.5
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 7,118.7
- -----------------------------------------------------------------------------------------------------
DEPRECIATION $ 225.2 $ 63.7 $ 4.5
- -----------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES $ 338.5 $ 75.4 $ 12.1
35
16
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
- --------------------------------------------------------------------------------
NOTE 16. BUSINESS SEGMENTS (CONT.)
ADJUSTMENTS
UNITED OTHER AND
STATES EUROPE INTERNATIONAL ELIMINATIONS TOTAL
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995
Sales to customers $ 5,475.9 $ 977.0 $ 1,144.8 $ 7,597.7
Lease financing revenue 104.0 37.3 14.0 155.3
Interarea transfers 180.5 12.6 118.7 $ (311.8)
- -------------------------------------------------------------------------------------------------------------------------
$ 5,760.4 $ 1,026.9 $ 1,277.5 $ (311.8) $ 7,753.0
- -------------------------------------------------------------------------------------------------------------------------
Operating income $ 573.7 $ 36.7 $ 102.0 $ 712.4
Other income 10.3 23.4 33.7
Other expense (223.8) (9.1) (232.9)
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 360.2 $ 27.6 $ 125.4 $ 513.2
- -------------------------------------------------------------------------------------------------------------------------
Assets identified $ 2,631.3 $ 863.8 $ 665.6 $ 4,160.7
Corporate assets 1,244.7 135.4 172.7 1,552.8
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 3,876.0 $ 999.2 $ 838.3 $ 5,713.5
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Sales to customers $ 5,519.2 $ 1,086.3 $ 1,080.8 $ 7,686.3
Lease financing revenue 122.4 45.2 8.9 176.5
Interarea transfers 171.7 19.2 128.6 $ (319.5)
- -------------------------------------------------------------------------------------------------------------------------
$ 5,813.3 $ 1,150.7 $ 1,218.3 $ (319.5) $ 7,862.8
- -------------------------------------------------------------------------------------------------------------------------
Operating income $ 589.4 $ 60.7 $ 74.1 $ 724.2
Other income 26.7 26.7
Other expense (240.8) (24.2) 5.8 (259.2)
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 375.3 $ 36.5 $ 79.9 $ 491.7
- -------------------------------------------------------------------------------------------------------------------------
Assets identified $ 2,824.0 $ 1,004.0 $ 751.0 $ 4,579.0
Corporate assets 1,294.4 120.8 165.8 1,581.0
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 4,118.4 $ 1,124.8 $ 916.8 $ 6,160.0
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
SALES TO CUSTOMERS $ 5,994.4 $ 1,124.8 $ 1,171.6 $ 8,290.8
LEASE FINANCING REVENUE 134.5 50.9 8.2 193.6
INTERAREA TRANSFERS 396.4 72.2 198.6 $ (667.2)
- -------------------------------------------------------------------------------------------------------------------------
$ 6,525.3 $ 1,247.9 $ 1,378.4 $ (667.2) 8,484.4
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 551.5 $ 26.7 $ 82.3 $ 660.5
OTHER INCOME 205.2 76.4 3.4 285.0
OTHER EXPENSE (349.1) 49.1 8.6 (291.4)
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES $ 407.6 $ 152.2 $ 94.3 $ 654.1
- -------------------------------------------------------------------------------------------------------------------------
ASSETS IDENTIFIED $ 3,466.2 $ 1,112.6 $ 860.4 $ 5,439.2
CORPORATE ASSETS 1,582.7 (18.6) 115.4 1,679.5
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 5,048.9 $ 1,094.0 $ 975.8 $ 7,118.7
- -------------------------------------------------------------------------------------------------------------------------
36
17
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
- -------------------------------------------------------------------------------
NOTE 17. ESTIMATED INCOME TAXES
- -------------------------------------------------------------------------------
Income tax expense (benefit) consisted of the
following components:
Year Ended December 31
1995 1996 1997
- -------------------------------------------------------------------------------
Current
U.S. Federal $ 68.0 $ 53.7 $ 147.5
U.S. State and Local 32.2 22.5 43.4
International 46.0 16.0 53.4
- -------------------------------------------------------------------------------
146.2 92.2 244.3
Deferred
U.S. Federal 48.6 80.0 71.6
International (13.6) (5.9) (22.3)
- -------------------------------------------------------------------------------
35.0 74.1 49.3
- -------------------------------------------------------------------------------
Total expense $ 181.2 $ 166.3 $ 293.6
- -------------------------------------------------------------------------------
Deferred tax benefits (liabilities) are comprised of the following:
December 31
1995 1996 1997
- -------------------------------------------------------------------------------
Postretirement benefits
other than pensions $ 373.1 $ 362.4 $ 351.4
Postemployment benefits 44.9 47.3 55.2
Expense accruals 116.2 100.2 162.6
Inventory reserves 4.2 7.0 8.0
Pension accruals 4.9 1.9
Net operating loss
carryforwards 24.3 39.0 46.3
Other 9.6 26.0 32.2
- -------------------------------------------------------------------------------
Deferred tax benefits 577.2 583.8 655.7
- -------------------------------------------------------------------------------
Depreciation -
non-leasing (105.6) (129.9) (139.1)
Leasing activities (243.6) (299.0) (357.6)
Valuation allowances (4.8) (30.4)
Pension accruals (12.3)
Other (2.6) (2.6) (4.2)
- -------------------------------------------------------------------------------
Deferred tax liabilities (351.8) (436.3) (543.6)
- -------------------------------------------------------------------------------
Net deferred tax benefits $ 225.4 $ 147.5 $ 112.1
- -------------------------------------------------------------------------------
The Company has traditionally been a taxpayer in the U.S. and accordingly
expects to realize substantially all of the deferred tax benefits attributable
to the Company's U.S. operations in the future. Valuation allowances are
provided for deferred benefits if the likelihood of future earnings is not
determinable. During 1997, the Company increased the valuation allowance by
$25.6, including $22.6 to reflect uncertainties related to the rationalization
of its operations in France. Income taxes paid during 1995, 1996 and 1997
amounted to $119.5, $107.6 and $185.7, respectively.
The effective tax rates differ from the U.S. Federal income tax rate for the
following reasons:
Year Ended December 31
1995 1996 1997
- -----------------------------------------------------------------------------
U.S. Federal income
tax rate 35.0% 35.0% 35.0%
Increase (reductions) in
taxes resulting from:
International income (2.8) (4.3) 6.0
Capital loss utilization (1.0) (.3) (.8)
Investment tax credits (.3) (.3) (.3)
Amortization of
goodwill .6 .6 .4
State and local income
taxes, net of Federal
income tax benefit 4.0 3.0 4.3
Miscellaneous items (.2) .1 .3
- -------------------------------------------------------------------------------
Estimated taxes on income 35.3% 33.8% 44.9%
- -------------------------------------------------------------------------------
NOTE 18. COMPOSITION OF CERTAIN
BALANCE SHEET AMOUNTS
- -------------------------------------------------------------------------------
The following items comprise the net amounts indicated in the respective
balance sheet captions:
December 31
1996 1997
- ------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS
Goodwill $ 285.3 $ 546.2
Investments at equity 86.9 197.9
Loans receivable 208.2 168.8
Intangible pension asset 35.0 20.4
Other 195.2 231.4
- ------------------------------------------------------------------------------
$ 810.6 $ 1,164.7
- ------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET
Land and improvements to land $ 90.4 $ 86.9
Buildings and building fixtures 684.6 771.1
Machinery and equipment 2,867.0 3,053.3
- -------------------------------------------------------------------------------
3,642.0 3,911.3
Less: Accumulated depreciation 1,817.2 1,866.5
- ------------------------------------------------------------------------------
$ 1,824.8 $ 2,044.8
- ------------------------------------------------------------------------------
DEFERRED EMPLOYEE BENEFITS
Postretirement other than pension $ 844.1 $ 889.7
Postemployment 81.9 81.9
Pension 79.4 57.3
Compensation 20.2 33.6
- ------------------------------------------------------------------------------
$ 1,025.6 $ 1,062.5
- ------------------------------------------------------------------------------
LEASE FINANCING
Direct financing leases $ 583.4 $ 665.8
Leveraged leases 594.6 655.3
Property on operating leases,
net of accumulated depreciation 40.1 61.6
Allowance for credit losses (50.8) (52.6)
- ------------------------------------------------------------------------------
$ 1,167.3 $ 1,330.1
- ------------------------------------------------------------------------------
37
18
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
- -------------------------------------------------------------------------------
NOTE 18. COMPOSITION OF CERTAIN
BALANCE SHEET AMOUNTS
(CONT.)
- -------------------------------------------------------------------------------
The components of the net investment in direct financing leases are as
follows:
December 31
1996 1997
- -------------------------------------------------------------------------------
Total minimum lease payments $ 638.1 $ 743.7
Residual values 66.0 89.5
Deferred initial direct costs 14.2 15.5
- -------------------------------------------------------------------------------
718.3 848.7
Less: Unearned income 134.9 182.9
- -------------------------------------------------------------------------------
$ 583.4 $ 665.8
- -------------------------------------------------------------------------------
The components of the net investment in leveraged leases are as follows:
December 31
1996 1997
- -------------------------------------------------------------------------------
Rentals receivable $ 4,883.8 $ 5,280.4
Residual values 698.5 865.2
Nonrecourse debt service (4,197.4) (4,629.1)
Unearned income (777.9) (849.0)
Deferred investment tax credit (12.4) (12.2)
- -------------------------------------------------------------------------------
594.6 655.3
Less: Deferred taxes arising from
leveraged leases 252.1 303.7
- -------------------------------------------------------------------------------
$ 342.5 $ 351.6
- -------------------------------------------------------------------------------
The following is a schedule, by year, of total minimum lease payments
receivable on direct financing leases as of December 31, 1997:
Year Ending December 31:
1998 $ 290.3
1999 192.2
2000 114.2
2001 59.6
2002 25.7
Later years 61.7
- -------------------------------------------------------------------------------
Total minimum lease payments receivable $ 743.7
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE 19. FAIR VALUE OF FINANCIAL
INSTRUMENTS
- -------------------------------------------------------------------------------
The estimated fair values of Dana's financial instruments are as follows:
December 31
1996 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------
FINANCIAL ASSETS
Cash and marketable
securities $ 227.8 $ 227.8 $ 394.3 $ 394.3
Loans receivable (net) 208.2 207.2 168.8 168.9
FINANCIAL LIABILITIES
Short-term debt 640.3 640.3 504.2 504.2
Long-term debt 1,697.7 1,754.7 2,178.3 2,303.9
Security deposits --
leases 16.8 14.8 16.1 14.7
Deferred funding
commitments under
leveraged leases 5.9 5.9 4.9 5.0
Interest rate-based
option 7.2 7.2 9.9 9.9
UNRECOGNIZED FINANCIAL
INSTRUMENTS
Interest rate
derivatives:
Assets .7 1.0
Liabilities (12.9) (10.6)
NOTE 20. COMMITMENTS AND
CONTINGENCIES
- -------------------------------------------------------------------------------
At December 31, 1997, the Company had purchase commitments for property,
plant and equipment aggregating approximately $151.7. Future minimum rental
commitments under operating leases aggregated $229.5, with rental payments
during the five succeeding years of $44.0, $37.6, $29.3, $25.0 and $22.0,
respectively. Net rental expense amounted to $70.4, $72.6 and $69.7 for 1995,
1996 and 1997, respectively.
In July of 1997, Dana signed an agreement to purchase the global axle and
brake business of Eaton Corporation for $287. The regulatory approval was
granted in December 1997 and the acquisition was completed in January 1998.
The Company and its consolidated subsidiaries are parties to various pending
judicial and administrative proceedings arising in the ordinary course of
business. These include, among others, proceedings based on product liability
claims and alleged violations of various environmental laws.
Management and its legal counsel periodically review the probable outcome of
pending proceedings, the costs and expenses reasonably expected to be incurred,
the availability
38
19
NOTES TO FINANCIAL STATEMENTS
in millions DANA CORPORATION
- -------------------------------------------------------------------------------
and limits of the Company's insurance coverage, and the Company's established
accruals for uninsured liabilities. While the outcome of pending proceedings
cannot be predicted with certainty, management believes, based on these reviews
and the information currently available, that any liabilities that may result
from these proceedings are not reasonably likely to have a material effect on
the Company's liquidity, financial condition or results of operations.
NOTE 21. ACQUISITIONS
- -------------------------------------------------------------------------------
In 1995, Dana acquired the European axle group of GKN plc., a manufacturer of
axles for cars, light trucks and heavy-duty trucks, along with axles for
agricultural, industrial and construction equipment. Dana also acquired M.
Friesen GmbH in Germany, a supplier of remanufactured rotating electrics, a 70%
share of Industrias Serva S.A. in Spain, a manufacturer and distributor of
vehicular gaskets and Mohawk Plastics, Inc., a manufacturer of custom molded
plastics for the OE market in the United States.
During 1996, Dana acquired Thompson Ramco Argentina S.A. (Thompson), J.B.
Morgan and Co. Pty., Ltd. (Morgan), James N. Kirby Pty., Ltd., (Kirby),
Thermoplast+Apparatebau GmbH (Thermoplast) and Industrias Orlando Stevaux Ltda.
(Stevaux) and a majority interest in Centrust S.A. (Centrust). Centrust is an
Argentine company whose subsidiaries manufacture modular systems, brakes and
structural components. Thompson, also an Argentine company, manufactures and
distributes chassis parts and piston rings. Morgan and Kirby are both Australian
manufacturers of filters. Morgan produces oil, air, and fuel filters for
automobiles while Kirby produces radial and panel air filters for automobiles
and medium-duty trucks. Thermoplast is a German manufacturer of high-precision
injection-molded plastic components and systems for automotive applications.
Stevaux, a Brazilian company, manufactures gaskets and oil seals. Dana acquired
a 70% interest in Centrust while 100% of all other companies was purchased. Also
during 1996, Dana completed the acquisition of the light axle manufacturing
business of Rockwell do Brasil, an indirect subsidiary of Rockwell
International.
These acquisitions were accounted for as purchases and the results of their
operations have been included in the consolidated financial statements since the
dates of acquisition. The price and the results of operations of these companies
prior to acquisition were not material to the consolidated financial statements.
In 1997, Dana acquired the piston ring and cylinder liner operations of SPX
Corporation (SPD), the assets of Clark-Hurth Components (CH) from
Ingersoll-Rand, a 75% share of Wix Filtron Sp.zo.o and 50% of the shares of
Estampados Argentina S.A. (EASA), bringing Dana's effective ownership in this
affiliate to 85%. SPD manufactures and sells piston rings and cylinder liners
primarily for internal combustion engines. CH manufactures and sells
transmissions and axles for use in off-highway vehicles and equipment. Wix
Filtron is a Polish manufacturer of filtration products and EASA is an Argentine
manufacturer of heavy-duty structural components.
These acquisitions were accounted for as purchases and the results of their
operations have been included in the consolidated financial statements since the
dates of acquisition. Sales in 1997 were $595 higher than 1996 as a result of
acquisitions and total assets of companies acquired in 1997 amounted to $694.
In addition to the above acquisitions, in 1995 Dana purchased the remaining
shares of Hayes-Dana Inc., a Canadian subsidiary that manufactures new and
replacement parts for trucks, automobiles, off-highway vehicles and industrial
equipment and increased its equity ownership in R.O.C. Spicer from 49% to 51%.
R.O.C. Spicer manufactures axles and driveshafts in Taiwan.
In 1995, Dana acquired Plumley Companies, a U.S. manufacturer and distributor
of extruded and molded rubber and silicone sealing products, primarily for
automotive applications. Dana acquired Flexon, Inc., a U.S. manufacturer of fuel
filters in 1996. Both Plumley and Flexon were accounted for as poolings of
interests. Prior years' financial statements have not been restated since the
amounts are not material to the consolidated financial statements.
NOTE 22. DIVESTITURES
- -------------------------------------------------------------------------------
In March 1997, Dana completed the sale of its automotive warehouse
distribution business in the United Kingdom, the Netherlands and Portugal. In
August 1997, the sale of Dana's worldwide vehicular clutch operations was
completed. In September 1997, the vehicular transmission operations were sold to
a subsidiary of Dana's 49%-owned Mexican affiliate, Spicer S.A. de C.V. In
October 1997, the Company sold its flat rubber products operations and in
November 1997 completed the sale of its 49% interest in Korea Spicer
Corporation. In December 1997, as part of the rationalization plan announced in
the first quarter, Dana completed the sale of its automotive warehouse
distribution operation in France. Net gains recorded on these sales totaled
$134. These operations contributed sales of $525 in 1996; through the dates of
divestiture, 1997 sales for these operations totaled $236.
39
20
NOTES TO FINANCIAL STATEMENTS
in millions except share amounts DANA CORPORATION
- -------------------------------------------------------------------------------
NOTE 23. RESTRUCTURING OF
OPERATIONS
- -------------------------------------------------------------------------------
During 1997, Dana initiated various restructuring plans. The cost of these
plans included a charge of $36 to initiate a rationalization plan at its Perfect
Circle Europe operations resulting in a workforce reduction of 368 people; a
charge of $39 relating to rationalizing its Reading, Pa., structural components
plant, with an expected workforce reduction of 1,140 people; a charge of $20 to
reduce deferred income tax benefits that were anticipated to be realized from
operating losses in France; a charge of $14 relating to the closure of its
Vimercate, Italy plant, with an anticipated workforce reduction of 120 people;
and $54 relating to downsizing or closing various facilities and exiting several
unprofitable lines of business, with an estimated workforce reduction of 440
people.
At December 31, 1997, $123 of restructuring charges remained in accrued
liabilities. The balance was comprised of $77 for the reduction of approximately
1,760 employees to be completed in 1998, $12 for closing excess facilities and
$34 for other non-cash write-downs of recorded assets. The estimated annual cash
expenditures will be approximately $59 in 1998, $16 in 1999 and $14 thereafter.
Dana's liquidity and cash flows will not be materially impacted by these
actions. It is anticipated that Dana's operations over the long term will
benefit from these realignment strategies. Following is a schedule of the
restructuring activity for 1997:
1997 Restructuring charges $ 162.4
1997 Activity:
Employee separation 2.0
Non-cash write-downs 37.3
- -------------------------------------------------------------------------------
Balance at December 31, 1997 $ 123.1
- -------------------------------------------------------------------------------
Employee reductions in 1997 306
NOTE 24. NONCASH INVESTING AND
FINANCING ACTIVITIES
- -------------------------------------------------------------------------------
In leveraged leases, the issuance of nonrecourse debt financing, and
subsequent repayments thereof, is transacted between the lessees and lending
parties to the transactions. During 1995, 1996 and 1997, $339.1, $452.9 and
$388.5 of nonrecourse debt was issued to finance leveraged leases and $164.3,
$80.9 and $158.4 of nonrecourse debt obligations were repaid, respectively.
In 1996 and in 1997, in addition to cash contributions, 1,000,000 shares of
Dana common stock, with a market value of $31.1 in 1996 and $31.8 in 1997, were
contributed to the Dana Corporation Pension Plans Trust.
NOTE 25. SIGNIFICANT SUBSIDIARY
- -------------------------------------------------------------------------------
DCC is a wholly-owned subsidiary of Dana whose primary operating subsidiaries
are engaged in leasing and finance operations. The following is a summary of
DCC's results of operations and financial position:
Year Ended December 31
1995 1996 1997
- -------------------------------------------------------------------------------
Revenue from products
and services $ 180.4 $ 229.6 $ 254.4
- -------------------------------------------------------------------------------
Interest expense 62.8 74.4 80.9
General and administrative
expenses 103.1 115.6 137.8
- -------------------------------------------------------------------------------
165.9 190.0 218.7
- -------------------------------------------------------------------------------
Income before income taxes 14.5 39.6 35.7
Estimated income tax
provision (benefit) (8.0) 11.8 7.7
- -------------------------------------------------------------------------------
Income before equity
in earnings of affiliates 22.5 27.8 28.0
Equity in earnings of
affiliates 4.9 2.7 3.2
- -------------------------------------------------------------------------------
Net income $ 27.4 $ 30.5 $ 31.2
- -------------------------------------------------------------------------------
December 31
1996 1997
- -------------------------------------------------------------------------------
Assets
Cash $ 3.5 $ 12.3
Loans receivable 208.1 168.8
Lease financing 1,327.9 1,498.4
Other assets 129.7 181.4
- -------------------------------------------------------------------------------
Total assets $ 1,669.2 $ 1,860.9
- -------------------------------------------------------------------------------
Liabilities and Shareholder's Equity
Notes payable $ 1,164.7 $ 1,286.9
Other liabilities 380.6 435.4
Shareholder's equity 123.9 138.6
- -------------------------------------------------------------------------------
Total liabilities and shareholder's
equity $ 1,669.2 $ 1,860.9
- -------------------------------------------------------------------------------
40
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS DANA CORPORATION
in millions
- --------------------------------------------------------------------------------
Dana took a number of major steps in 1997 to focus more sharply on its core
businesses in order to better serve its customers worldwide. These moves
included acquisitions, divestitures, the restructuring of certain operations,
and a reorganization of the Company's operations into six customer and
market-focused global Strategic Business Units -- automotive components, engine
components, heavy truck components, off-highway components, industrial
components, and leasing services.
In February, Dana acquired the assets of Clark-Hurth Components (CH), a
worldwide manufacturer of off-highway vehicle and equipment components, and the
worldwide piston ring and cylinder liner operations of SPX Corporation (SPD). In
March, Dana completed the sale of its automotive warehouse distribution business
in the United Kingdom, the Netherlands and Portugal to Partco Group plc. In
July, Dana announced, subject to regulatory approval, agreements to purchase
Eaton Corporation's worldwide axle and brake business and to sell its global
vehicular clutch business to Eaton. The sale of the vehicular clutch business
was completed at the end of August; regulatory approval of the axle and brake
purchase was received in December and the purchase was completed in January of
1998. In September, the Company completed the sale of its transmission business
to a unit of Dana's Mexican affiliate, Spicer S.A. de C.V. In October, the
Company sold its flat rubber business to a unit of Coltec Industries Inc. In
November, the Company sold its 49% share of Korea Spicer Corporation and
finally, in December, the automotive warehouse distribution business in France
was sold. Pre-tax gains on the sales of the operations mentioned above totaled
$227.
In addition to these acquisition and divestiture activities, Dana initiated
various restructuring plans in 1997. The Company implemented a rationalization
at its engine products operations in France, which resulted in a charge of $36.
The plan included the sale of a piston manufacturing facility, the
reorganization of a separate piston ring machining operation, the sale of its
Distribution France operation, and the downsizing and relocation of its division
office. A charge of $20 was recorded reducing deferred income tax benefits from
operating losses in France. A charge of $39 was incurred for restructuring the
Company's structural components facilities in Reading, Pa. A charge of $14 was
incurred relating to the closure of the Vimercate, Italy plant as part of the
rationalization of capacity in the off-highway components group resulting from
the acquisition of the assets of CH. Other restructuring and rationalization
plans announced throughout the year amounted to $54 for the downsizing or
closing of various facilities and exiting several unprofitable lines of
business.
These activities were a part of Dana's strategy to realign and strengthen
its worldwide business portfolio. During the year the Company also announced the
sales of its brakehose and cylinder businesses. These sales are expected to
close in early 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate its largest source of cash from operating
activities. Net cash provided by operating activities in 1997 was $698, slightly
below the record level of $704 in 1996. Higher net income and depreciation and
amortization expenses in 1997 were offset by increased working capital
requirements. The gains of $141 from divestitures are included in cash flow from
investing activities.
1995 1996 1997
NET CASH FLOWS
FROM OPERATING
ACTIVITIES $388 $704 $698
Net cash of $734 used in investing activities was $84 higher than in 1996.
The most significant use of cash in 1997 was for the acquisitions described
previously; divestitures provided cash of $394 in 1997.
Reflecting the Company's growth strategy in its core businesses and its
ongoing commitment to product improvement through research and technology,
capital expenditures were a record $426 in 1997. Capital spending in 1998 is
anticipated to be slightly less than in 1997. DCC's net purchases of leased
assets (purchases less principal payments) were $47 in 1997, $149 lower than in
1996.
1995 1996 1997
CAPITAL SPENDING $410 $357 $426
Financing activities provided net cash of $203. Dana's net debt position
(short- and long-term debt less cash and cash equivalents) increased $178 over
December 31, 1996. Total consolidated debt increased $344 while cash and cash
equivalents increased $166. The debt increase was incurred early in 1997
primarily to fund the acquisitions of CH and SPD. Cash received from
divestitures was used partially to reduce debt and to accumulate funds for the
acquisition of Eaton Corporation's worldwide axle and brake business, which
closed in January 1998.
1995 1996 1997
NEW DEBT POSITION $2,040 $2,110 $2,288
41
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS DANA CORPORATION
in millions except per share amounts
- -------------------------------------------------------------------------------
Year End Debt Analysis Short-Term Long-Term Total
- --------------------------------------------------------------------
DCC
1996 $ 456 $ 708 $ 1,164
1997 325 961 1,286
- --------------------------------------------------------------------
Change $ (131) $ 253 $ 122
- --------------------------------------------------------------------
DANA (EXCLUDING DCC)
1996 $ 184 $ 990 $ 1,174
1997 179 1,217 1,396
- --------------------------------------------------------------------
Change $ (5) $ 227 $ 222
- --------------------------------------------------------------------
DANA CONSOLIDATED
1996 $ 640 $ 1,698 $ 2,338
1997 504 2,178 2,682
- --------------------------------------------------------------------
Change $ (136) $ 480 $ 344
- --------------------------------------------------------------------
Cash dividends paid in 1997 were $109. Cash dividends per share increased 6%
over 1996. Dividends have been paid for 240 consecutive quarters with a current
annual dividend rate of $1.08 per share, an 8% increase over the 1996 year end
dividend rate.
In 1997, Dana filed a universal shelf registration statement with the U.S.
Securities and Exchange Commission to register common stock and/or debt
securities having a maximum aggregate offering price of $600. Dana plans to
offer the registered securities from time to time at prices and on terms to be
determined at the time of offering. The Company expects to use the net proceeds
from the sale of the securities for general corporate purposes, including the
repayment or refinancing of existing indebtedness. The Company does not intend
to issue equity in the immediate future.
Dana utilizes short-term committed and uncommitted bank lines for the
issuance of commercial paper and bank direct borrowings. Dana (excluding DCC)
had committed and uncommitted borrowing lines of credit totaling approximately
$1,400 at year end 1997, while DCC's lines were $921. Dana's strong cash flows
from operations, together with its worldwide credit facilities, is expected to
provide adequate liquidity to meet the Company's debt service obligations,
projected capital expenditures and working capital requirements.
Dana's management and legal counsel have reviewed the legal proceedings to
which the Company and its subsidiaries were parties as of December 31, 1997
(including, among others, those involving product liability claims and alleged
violations of environmental laws) and concluded that neither the liabilities
that may result from these legal proceedings nor the cash flows related to such
liabilities are reasonably likely to have a material adverse effect on the
Company's liquidity, financial condition or results of operations. The Company
estimates its contingent environmental and product liabilities based upon the
most probable method of remediation or outcome considering currently enacted
laws and regulations and existing technology. Measurement of liabilities is made
on an undiscounted basis and excludes the effects of inflation. In those cases
where there is a range of equally probable remediation methods or outcomes, the
Company accrues at the lower end of the range. At December 31, 1997, the Company
had accrued $50 for product liability costs (products) and $55, including $11
relating to acquisitions, for environmental liability costs (environmental),
compared to $65 for products and $47 for environmental at December 31, 1996. The
difference between the Company's minimum and maximum estimates for contingent
liabilities, while not considered material, was $15 for products and $1 for
environmental at December 31, 1997, compared to $17 for products and $1 for
environmental at December 31, 1996. At December 31, 1997, the Company had
recorded (as assets) probable recoveries from insurance or third parties in the
amounts of $29 for products and $10 for environmental, compared to $39 for
products and $10 for environmental at December 31, 1996.
RESTRUCTURING AND RATIONALIZATION EXPENSES
The Company's management evaluates its operations on an ongoing basis to
identify non-strategic and under-performing assets. Pursuant to these
evaluations, restructuring and rationalization plans are developed which may
result in abandonment, consolidation or relocation of operations. Upon approval
of these strategies (and, where appropriate, communication to affected
employees), the estimated costs of implementation (including employee benefits,
losses on disposal of assets and other expenses incidental to the restructuring
activities) are charged to expense. Restructuring and rationalization charges of
$162 were recorded in 1997. An accrued liability of $123 remained at December
31, 1997. The Company expects to settle $89 of this accrual in cash ($59 in
1998, $16 in 1999 and $14 thereafter). This amount generally represents employee
separation costs for the approximately 1,760 workers affected by these
activities. The balance of the accrual is non-cash and will be utilized to write
down the affected assets. Dana's liquidity and cash flows will not be materially
impacted by these actions. It is anticipated that Dana's operations over the
long term will benefit from these realignment strategies.
IMPACT OF THE YEAR 2000
The Company is currently developing a plan and timetable for assessing
whether its computer systems (including those which interface with customers,
suppliers and other third parties) will function properly when processing data
for the year 2000. At present, the Company has not determined the costs of this
assessment and of modifications that may be required to correct any "Year 2000"
problems, or the impact that such problems could have on its business, financial
condition, or results of operations.
RESULTS OF OPERATIONS 1997 VS. 1996
Dana achieved record worldwide sales in 1997 of $8,291, an 8% increase over
1996. Excluding the effect of acquisitions and divestitures, sales were $322 or
4% ahead of 1996. U.S. sales increased 9% over 1996 with acquisitions, net of
divestitures, adding $206 or 4%. Excluding the effect of acquisitions and
divestitures, U.S. sales increased $270 or 5%. Dana's international operations
increased sales 6% over 1996, with acquisitions, net of divestitures, adding $77
or 4%. Excluding these items, sales were $52 or 2% above last year's levels.
Exports from the U.S. increased 3% over 1996.
Fueled by Dana's first-quarter acquisition of CH, sales to global
manufacturers of off-highway vehicles were up 50%. Additionally, worldwide sales
to passenger car makers were up 9% over the comparable period last year.
Excluding the
42
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS DANA CORPORATION
in millions
- -------------------------------------------------------------------------------
effect of acquisitions, worldwide original equipment (OE) sales to
global manufacturers of off-highway vehicles increased 2% and worldwide sales to
passenger car makers declined 7% from last year.
Dana's worldwide sales from the Vehicular segment, which includes sales of
components for trucks, sport utility vehicles, trailers, vans and automobiles,
increased 3% or $193 over 1996. The OE portion of this increase was $382 or 9%
over 1996 ($300 or 7% excluding acquisitions, net of divestitures), while the
aftermarket portion decreased $189 or 11% ($36 or 2% excluding acquisitions, net
of divestitures).
SEGMENT SALES 1996 1997 % CHANGE
- ----------------------------------------------------------------
Vehicular $6,130 $ 6,323 +3
Industrial 1,556 1,968 +26
------- --------
Total $7,686 $ 8,291 +8
------- --------
U.S. sales of light truck components to OE manufacturers were up 8%
(acquisitions accounting for 1%) over a strong 1996 due to the ongoing demand
for light trucks and sport utility vehicles. U.S. medium and heavy truck OE
sales increased 7% (10% excluding the net effect of acquisitions and
divestitures) as truck production levels rebounded from 1996. Sales to the U.S.
OE passenger car market increased 17%, in large part due to the acquisition of
SPD in early 1997.
In the Industrial segment, which includes sales to the mobile off-highway
equipment market, Dana's worldwide sales rose 26% or $412 over 1996 (18% U.S.
and 42% international). Excluding the effect of acquisitions and divestitures,
sales increased $27 or 2% (4% increase in the U.S. and a 3% reduction
internationally). Worldwide sales to the mobile off-highway OE market increased
50%, while industrial OE sales improved 12% worldwide (2% and 9%, respectively,
excluding impact of acquisitions and divestitures). Mobile off-highway and
industrial distribution sales increased 9%, largely due to the acquisition of CH
in 1997.
Dana's worldwide distribution business decreased 5% over 1996. U.S.
distribution sales increased 1% while the international distribution sales
decreased 16%, primarily due to the sale of the European warehouse distribution
business. Worldwide automotive distribution sales were down 17% due to the
disposition. Truck parts distribution sales were up 3% and
off-highway/industrial distribution sales increased 9%.
The North American, European and South American regions all reported
increased sales over 1996. Asia Pacific, despite financial turmoil in the fourth
quarter, had comparable sales with 1996.
SALES BY REGION 1996 1997 % CHANGE
- ----------------------------------------------------------------
North America $ 5,875 $ 6,342 +8
Europe 1,086 1,125 +4
South America 536 635 +18
Asia Pacific 189 189 --
North American sales were up $467 or 8% over 1996. Acquisitions, net of
divestitures, accounted for $206 or 4% of the increase. Continued demand for
light trucks and sport utility vehicles helped fuel the increase. European and
South American sales continued to grow in 1997 as the Company concentrated on
international growth of its core businesses, particularly through acquisitions.
Excluding the effect of acquisitions and divestitures, European sales were
comparable to 1996 while South America saw an 11% increase.
Revenue from lease financing and other income increased $275 over 1996.
Contributing to the increase were gains of $240 from the sale of the European
warehouse distribution operations ($76), the vehicular clutch business ($119),
the flat rubber products business ($14), the 49% share of Korea Spicer
Corporation ($18), and the sale of an investment in a leveraged lease by DCC
($13). Lease financing revenue at DCC increased 7% over 1996 as a result of
continued asset growth.
Dana's gross margin of 13.3% for 1997 was adversely affected by the $129 of
charges to cost of sales relating to restructuring and rationalization plans.
These charges included rationalizing the Company's Perfect Circle Europe
operations in France ($26), restructuring Dana's Parish facilities in Reading,
Pa. ($39), closing its off-highway axle plant in Vimercate, Italy ($14) and
downsizing and closing various facilities and exiting several unprofitable lines
of business ($50). Excluding these charges, Dana's gross margin would have been
14.9% versus a reported 15.1% in 1996. The net impact of acquisitions and
divestitures in 1997 also had a negative impact on gross margin.
Selling, general and administrative expenses (SG&A) increased $25 in 1997.
The net impact of acquisitions, divestitures and restructuring charges accounted
for $9 of the increase. SG&A expenses at DCC were $22 higher than in 1996 due to
increased asset levels and start-up costs associated with new product
development and market expansion. SG&A expenses as a percentage of sales
improved from 9.3% in 1996 to 8.9% in 1997.
Dana's operating income for 1997 was adversely affected by $132 of
restructuring charges, including those previously identified. Excluding these
charges, Dana's 1997 operating margin would have been 6.1% versus 5.8% in 1996.
Dana's operating margin as reported for 1997 was 4.5%. Operating margin was not
affected by the acquisitions and divestitures.
Dana's U.S. operations had a $38 decrease in reported operating income in
1997 over 1996, while international operations were down $26 million. Of the
restructuring and rationalization charges taken throughout 1997, $77 related to
U.S. operations and $55 related to international operations. Excluding these
charges, all regions would have shown an increase in operating income.
Operating income from the Vehicular segment decreased $91, while the
Industrial segment income increased $32. The Vehicular segment recorded
restructuring and rationalization charges of $110 and the Industrial segment
incurred charges of $22. DCC's operating income decreased $4 due primarily to
the increased costs of developing new products and expanding markets.
The Company's interest expense increased $37 over 1996 primarily due to
higher average debt levels associated with acquisitions.
Minority interest in net income of consolidated subsidiaries decreased $9,
primarily due to the lower earnings of Albarus S.A. (a Brazilian subsidiary) and
its majority-owned subsidiaries.
Equity in earnings of affiliates was higher in 1997 by $19, primarily due to
higher earnings of the Company's affiliates in Mexico. Spicer S.A. de C.V.
contributed $14 to the increase while the newly acquired affiliate of SPD
contributed $5.
43
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS DANA CORPORATION
in millions
- -------------------------------------------------------------------------------
Dana's 1997 effective tax rate was 45% compared to 34% for 1996. The
effective rate was higher due to providing a valuation reserve for tax benefits
previously recorded in France, discontinuing the recording of tax benefits on
operating losses in France and providing a valuation reserve for tax benefits
associated with the expenses recorded for the rationalization plan at its
Perfect Circle Europe operations.
The Company reported record earnings in 1997 of $369, a $63 or 21% increase
over 1996. Profits for 1997 included $20 of gains relating to divestitures, net
of restructuring and rationalization charges.
Dana's component sales to producers of light truck and sport utility vehicles
in North America continued strong in 1997; this strength is expected to continue
into 1998. Medium and heavy truck production in North America is expected to be
at or slightly higher than 1997, but Dana's sales to this market are expected to
increase significantly due to the purchase of the axle and brake business of
Eaton Corporation. Sales to the off-highway market should see an increase due to
the first full year of sales from CH.
Dana expects its international business will grow at a modest pace in 1998.
Europe is expected to see increased sales due to the effect of acquisitions. The
financial uncertainty in the Asia Pacific region will continue into 1998 while
the South American economy may see a slight downturn. Recent acquisitions,
previously announced restructuring and rationalization programs, and focusing on
core businesses should provide growth for Dana in the last two regions.
The Company has included in this Annual Report statements about expectations
for 1998 and beyond, including anticipated sales and results of acquisitions,
divestitures, and restructuring and reorganization strategies. These statements
(indicated by such words as "anticipates," "estimates," "expects," and
"believes") represent management's current expectations based on present
information and current assumptions. However, as forward-looking statements,
they are inherently subject to risks and uncertainties. Actual results could
differ materially from those which are anticipated or projected due to a number
of factors, including changes in business relationships with the Company's major
customers, competitive pressures on sales and pricing, increases in production
or material costs that cannot be recouped in product pricing, and changes in
global economic and market conditions.
RESULTS OF OPERATIONS 1996 VS. 1995
Dana achieved record sales and profits in 1996 for the third consecutive
year. Sales were $7,686, up 1% over 1995, while profits increased to $306 or 6%
over last year. The major factors contributing to the Company's sales increase
were recent acquisitions and higher unit volumes of components for light truck
and sport utility vehicles in North America. These increases were partially
offset by a decline in North American medium and heavy truck production and
inclusion of an additional month's sales ($105) in 1995 for non-North American
operations due to a change in reporting periods. Acquisitions accounted for $322
of the 1996 sales increase, with $317 related to operations outside the U.S.
Sales from U.S. operations increased 1%, while international sales were up
2%, due primarily to acquisitions in South America and Europe. Exports from the
U.S. increased 22% over 1995. In 1996, international sales (including U.S.
exports) represented 37% of Dana's consolidated sales, compared to 35% in 1995.
Dana's worldwide sales from the Vehicular segment, which includes sales of
components and parts used on trucks, sport utility vehicles, trailers, vans and
automobiles, increased 1% over 1995.
SEGMENT SALES 1995 1996 % Change
- -----------------------------------------------------------------
Vehicular $6,070 $6,130 +1
Industrial 1,527 1,556 +2
- -----------------------------------------------------------------
Total $7,597 $7,686 +1
- -----------------------------------------------------------------
The Company's U.S. sales from this segment increased 1%, while international
operations increased 2%. Sales to U.S. light truck manufacturers exceeded 1995
by 9% as light trucks and sport utility vehicles continued to be in demand. This
increase was partially offset by lower U.S. medium and heavy truck production,
compared to 1995's record build levels, resulting in lower Dana sales to those
markets of 8% and 17%, respectively. Heavy truck production in 1996, while below
1995's unusually high level, was still above average levels for the last 15
years. International sales from this segment increased, largely due to the
contribution of Dana's European and South American acquisitions.
Worldwide sales from Dana's Industrial segment, which includes sales to the
mobile off-highway (MOH) equipment market, increased 2% over 1995. Sales of
components to MOH manufacturers, primarily agricultural and construction
equipment, increased 6% worldwide, 3% in the U.S. and 10% internationally. The
international increase was principally the result of the acquisition of GKN's
European axle operations in late 1995. MOH and industrial distribution sales
increased 1% over 1995. Those increases were partially offset by a 6% sales
decline of Dana product sold to the Industrial OE market (Dana's smallest
market).
Dana's distribution sales increased 1% on a worldwide basis, with U.S. sales
increasing 3% and international decreasing 1%. Worldwide distribution sales
performances in 1996 versus 1995 by market were as follows: truck parts down 2%,
automotive up 3% and MOH/Industrial up 1%.
Dana's sales, on a regional basis, increased in Europe and South America and
were lower in North America and Asia Pacific.
SALES BY REGION 1995 1996 % Change
- --------------------------------------------------------------
North America $5,917 $5,875 -1
Europe 977 1,086 +11
South America 497 536 +8
Asia Pacific 207 189 -9
The European and South American sales continued to grow in 1996 as the
Company concentrated on international growth of its core businesses,
particularly through acquisitions. North American sales were slightly lower,
reflecting decreases in medium and heavy truck production, which were partially
offset by light truck/sport utility vehicle increases. The lower sales in Asia
resulted from the weakness of Dana's markets in Taiwan and Australia.
Revenue from lease financing and other income increased $14 or 8% in 1996.
Leasing-related revenue and interest on loans were above 1995 by $25 as DCC's
average asset levels and gains on sales of leased assets were higher in 1996.
Other income in 1996 included gains of $5 on sales of certain assets
44
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS DANA CORPORATION
in millions
- -------------------------------------------------------------------------------
and investments, while a $16 gain was recorded in 1995 due to the sale of equity
in three South American affiliates.
Adjustments for translation of foreign currency resulted in a gain of $1,
compared to a gain of $8 in 1995. The adjustments in both years related almost
exclusively to the translation from local currency to U.S. dollars of the
Company's Brazilian operations.
Dana's gross margin was 15.1% in both 1996 and 1995. Margins for U.S.
operations improved to 14.2% from 13.9% in 1995. Margins of the Company's
international operations declined to 17.4% from 18.1% in 1995, in large part due
to costs related to the integration of operations acquired in late 1995.
SG&A increased $30 or 4% in 1996. Operations acquired in the latter half of
1995 and in 1996 accounted for $23 of the increase. After adjusting for the
effect of those acquisitions, SG&A increased 1%.
Dana's operating income increased $12 million in 1996. U.S. operations had a
$16 increase, while international operations were down $4. The international
decrease was comprised of lower operating income at Dana's South American, Asia
Pacific and Canadian operations partially offset by an increase in Europe. The
European increase was primarily due to acquisitions.
Operating income from the Vehicular segment decreased 2%, while the
Industrial segment income increased 6% over 1995. The ratio of operating income
to sales for both segments was comparable in 1996 to 1995. Operating income of
the Lease Financing segment increased $17 over 1995. In 1996, DCC's operating
income increased as a result of higher average lease asset levels outstanding
during the year and improved lease and residual experience.
Interest expense in 1996 was $13 higher than in 1995 due to higher average
debt levels. This higher average debt position resulted from the funding of
acquisitions, capital additions and lease financing assets during 1996.
Equity in earnings of affiliates increased in 1996, primarily due to the
devaluation of the Mexican peso in 1995 which resulted in Dana recording a
non-operating charge of $18 for its proportionate share of translation losses
incurred by the Company's affiliate, Spicer S.A. de C.V.
Minority interest in net income of consolidated subsidiaries decreased $7 in
1996 due to the lower earnings of Albarus S.A. (a Brazilian subsidiary) and the
mid-1995 purchase of the minority interest in Hayes-Dana Inc. The earnings of
Albarus S.A. were lower in part due to the December 1995 sale of equity in one
of its subsidiaries.
Taxes on income decreased $15 in 1996 due to lower pre-tax profitability of
the Company and lower effective rates of Dana's international operations. The
Company's overall effective rate was 34% in 1996, compared to 35% in 1995.
45
26
ADDITIONAL INFORMATION
in millions except per share amounts DANA CORPORATION
- -------------------------------------------------------------------------------
The following table shows the range of market prices of Dana Corporation
common stock on the New York Stock Exchange and the cash dividends declared and
paid for each quarter during 1996 and 1997. At December 31, 1997, the closing
price of Dana common stock was $47.50.
CASH DIVIDENDS
STOCK PRICE DECLARED AND PAID
- -------------------------------------------------------------------------------------------------------------------------
1996 1997 1996 1997
Quarter Ended HI LO CLOSE HI LO CLOSE
- ------------------------------------------------------------------------------------------------------------------------
March 31 $34.13 $27.75 $33.38 $34.63 $30.63 $32.88 $.23 $.25
June 30 35.50 30.13 31.00 39.50 30.63 38.00 .25 .25
September 30 31.13 27.25 30.25 49.50 36.88 49.38 .25 .27
December 31 33.13 29.38 32.63 54.38 43.00 47.50 .25 .27
UNAUDITED QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
The following information has been reviewed by our independent accountants
in accordance with generally accepted auditing standards (GAAS); however, they
have not performed an audit in accordance with GAAS on the quarterly information
to enable them to opine on each quarter.
NET GROSS NET INCOME PER SHARE
QUARTER ENDED SALES PROFIT NET INCOME BASIC DILUTED
- -----------------------------------------------------------------------------------------------------------
For the year ended
December 31, 1995
March 31 $1,924 $ 290 $ 59.2 $ .59 $ .58
June 30 1,969 315 89.1 .88 .88
September 30 1,727 268 60.9 .60 .60
December 31 1,978 275 78.9 .77 .77
- ------------------------------------------------------------------------------------------------------------
For the year ended
December 31, 1996
March 31 $1,973 $ 295 $ 78.7 $ .78 $ .77
June 30 2,020 321 91.5 .90 .89
September 30 1,816 280 65.2 .64 .64
December 31 1,877 265 70.6 .69 .69
- -------------------------------------------------------------------------------------------------------------
For the year ended
December 31, 1997
March 31 $ 2,115 $ 294 $ 92.6 $ .90 $ .89
June 30 2,141 316 93.8 .90 .89
September 30 1,961 245 98.3 .93 .92
December 31 2,074 255 84.4 .81 .79
During the first quarter of 1995, Dana recorded a non-operating charge of
$18.0 (17 cents per share) for its proportionate share of translation losses
incurred by its Mexican affiliate, Spicer S.A. de C.V., due to the devaluation
of the Mexican peso.
In the fourth quarter of 1995, Dana recorded a gain of $12.0 (11 cents per
share) due to the sale of equity in three South American affiliates, a tax
benefit of $5.2 (5 cents) due to the sale of an insurance subsidiary in Bermuda
and a charge of $5.8 (6 cents) relating to a tentative settlement of a lawsuit
filed by the Department of Justice, which was settled in 1996.
During the first quarter of 1997, Dana recorded a gain of $45 (44 cents per
share) relating to the sale of its European warehouse operations. In addition,
the Company initiated a rationalization plan at its Perfect Circle Europe
operations resulting in a charge of $36 (35 cents per share).
50
27
ADDITIONAL INFORMATION
in millions except per share amounts DANA CORPORATION
- -------------------------------------------------------------------------------
During the second quarter of 1997, the Company closed its Berwick, Pa.,
facility and sold certain of the operating assets and recorded a charge of $5 (5
cents per share).
In the third quarter, Dana recorded a gain of $70 (67 cents per share) on the
sale of its worldwide vehicular clutch operations. The Company also recorded
charges of $51 (50 cents per share), including $22 relating to the restructuring
of its Reading, Pa., facility, $20 million in deferred tax benefit valuation
allowances for benefits not expected to be utilized in France, $5 million to
restructure the light axle operations in England and $4 million relating to the
closure of two division offices and the consolidation of filtration operations.
During the fourth quarter of 1997, the Company recorded a gain of $18 (17
cents per share) on the sale of its 49% share of Korea Spicer Corporation and $8
(8 cents per share) relating to the sale of its flat rubber products operations.
Charges of $28 (27 cents per share) were recorded relating to the closure of its
Vimercate, Italy plant, closure of a hydraulic pump facility in Greenville, SC
and exiting several unprofitable lines of business.
ELEVEN YEAR HISTORY
in millions except per share amounts DANA CORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
For the Years 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------------
Net Sales $4,180 $4,936 $4,865 $4,952 $4,398 $4,872 $5,460 $6,614 $7,598 $7,686 $8,291
Net Income (Loss) 142 162 132 76 13 (382) 80 228 288 306 369
Net Income (Loss) per
Common Share +
Basic 1.62 1.99 1.62 .92 .16 (4.35) .86 2.31 2.84 3.01 3.54
Diluted 1.56 1.91 1.56 .92 .16 (4.32) .85 2.30 2.83 2.99 3.49
Cash Dividends per
Common Share .70 .77 .80 .80 .80 .80 .80 .83 .90 .98 1.04
Total Assets 4,914 4,786 5,225 4,513 4,179 4,343 4,632 5,124 5,714 6,160 7,119
Long-Term Debt 1,322 1,324 1,522 1,486 1,541 1,467 1,207 1,187 1,315 1,698 2,178
DANA CORPORATION
(including Dana Credit Corporation on an equity basis)
- -------------------------------------------------------------------------------------------------------------------------------
For the Years 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
NET SALES $4,142 $4,896 $4,857 $4,948 $4,385 $4,863 $5,457 $6,607 $7,596 $7,686 $8,291
Cost of Sales 3,480 4,133 4,104 4,129 3,841 4,282 4,688 5,631 6,469 6,550 7,212
Income (Loss) before
Income Taxes 203 238 217 187 (24) 48 224 380 490 452 619
Tax Rate * 41.4% 45.8% 43.8% 51.9% (12.5)% 54.2% 39.7% 40.8% 36.9% 34.3% 46.2%
NET INCOME ** 142 162 132 76 13 56 129 228 288 306 369
Percentage Pre-tax Profit
on Sales 4.9% 4.9% 4.5% 3.8% (.5)% 1.0% 4.1% 5.8% 6.5% 5.9% 7.5%
Capital Expenditures 164 222 223 226 148 111 176 278 338 284 365
FINANCIAL POSITION
Current Assets $1,516 $1,570 $1,498 $1,489 $1,379 $1,552 $1,779 $1,989 $2,101 $2,366 $2,731
Current Liabilities 1,032 1,060 990 1,002 996 990 1,209 1,456 1,628 1,477 1,827
Current Ratio 1.5-1 1.5-1 1.5-1 1.5-1 1.4-1 1.6-1 1.5-1 1.4-1 1.3-1 1.6-1 1.5-1
Working Capital 484 509 508 487 423 562 569 533 533 889 905
Long-Term Debt 690 681 759 766 786 687 496 389 534 810 992
Total Shareholders' Equity 865 960 1,020 1,049 989 707 801 940 1,165 1,429 1,701
Return on Average
Shareholders' Equity 15.7% 17.8% 13.3% 7.3% 1.3% 6.6% 17.1% 26.2% 27.4% 23.6% 23.6%
COMMON STOCK DATA
Average Number of Shares
Outstanding (in thousands) 87,430 81,353 81,658 81,954 82,171 87,792 92,533 98,689 101,297 101,800 104,340
Book Value per Share $10.64 $11.81 $12.47 $12.79 $12.03 $7.70 $8.14 $9.51 $11.48 $13.87 $16.18
Earnings per Share **+
Basic 1.62 1.99 1.62 .92 .16 .64 1.39 2.31 2.84 3.01 3.54
Diluted 1.56 1.91 1.56 .92 .16 .63 1.38 2.30 2.83 2.99 3.49
Stock Price High 27.13 20.25 21.44 19.06 18.25 24.13 30.13 30.69 32.63 35.50 54.38
Low 13.75 16.25 16.50 9.94 12.31 13.38 22.00 19.63 21.38 27.25 30.63
Close 17.06 19.44 17.31 14.94 13.88 23.50 29.94 23.50 29.25 32.63 47.50
P/E Ratios High 17 10 13 21 114 38 22 13 11 12 15
Low 8 8 10 11 77 21 16 8 8 9 9
- -----------------------------------------------------------------------------------------------------------------------------------
+ Years prior to 1997 have been adjusted to conform with SFAS No. 128.
* Net of the cumulative effect of the change in accounting for income taxes
in 1987.
** Excludes one-time SFAS No. 106 charge of $438 ($4.99 per share) in 1992 and
SFAS No. 112 charge of $49 (53 cents per share) in 1993.
51