Dana Corporation Analysis - Corporate Financial Management - Notes | FIN 4360, Study notes of Finance

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Dana Corporation FIN 4360 2:00pm MWF Spring 2006 Martin, Kevin Ortolf, Paul R Reyes, Jesus Thompson, Brandon Walt, Jd Dana Corporation Analysis Group 1 Table of Contents Table of Contents.................................................................................................................2 Executive Summary.............................................................................................................3 Introduction..........................................................................................................................4 Recommendations................................................................................................................4 Light Consumer Platforms...............................................................................................4 Contracts with Foreign Manufacturers............................................................................5 Accounts Receivable Collection......................................................................................6 Current Status.......................................................................................................................7 SEC Filing Update...........................................................................................................8 Appendixes........................................................................................................................10 A: Market Overview......................................................................................................10 B: Company Overview..................................................................................................13 C: Platform Analysis......................................................................................................15 D: Steel Analysis............................................................................................................16 E: Fuel Analysis.............................................................................................................17 F: Earnings Projection....................................................................................................18 G: Accounts Receivable Analysis......................................................................................19 Works Cited.......................................................................................................................20 Page 2 of 20 Dana Corporation Analysis Group 1 process called Hydroforming, Dana Corp. has taken an aluminum space frame and made a light metal incredibly durable (“How Hydroforming, or Water-Molded Metal, is Reshaping the Structure of Today’s Vehicles”). Another new patented technology that they have created called AtmoPlasTM, which allows Dana Corp. to heat metal faster and more cost efficient. This AtmoPlasTM technology creates structural changes to surfaces that deliver anti-corrosive benefits without expense of additional plating (Dana Corp. Home Page). This allows Dana Corp. to make their major parts for small passenger vehicles stronger and more rapidly than existing competition. With these new processes Dana Corp. can meet the new demand for smaller, and more fuel efficient, vehicle in a world of ever increasing gasoline prices. Due to the effect of the negatively correlated segments (SUV and light vehicles), Dana Corp’s overall platform portfolio risk will diminish. As with the diversification of stocks, Dana Corp.’s overall platform portfolio return should level off (more so than it has to date) to produce a more stable and predictable cash flow. This is preferable to a highly focused platform portfolio in the automotive market because the overall consumer preferences change quickly depending on many factors (e.g. gas prices, design, features). With a diversified platform portfolio, Dana Corp. can avoid huge swings in net cash flow. Contracts with Foreign Manufacturers Another opportunity at hand for Dana Corp. is to go after new business with the major foreign car makers. As mentioned earlier, only a small, yet increasing, factor of their Page 5 of 20 Dana Corporation Analysis Group 1 business is done with these corporations. Who Dana Corp. does business with is essential to its success. Now this may seem like a difficult task, but with Dana Corp.’s ability to create such advanced technology, they will be able to have a competitive advantage over their domestic as well as global competitor’s. One of their biggest assets for Dana Corp. is their employee’s sense of creativity and ingenuity. Since 1904, when Dana Corp. invented the first universal joint to power the automobile, they have continuously been creative (Dana Corp. Home Page). With this creativity they create a strong demand for their products. With their newest technologies in place, it’s not only an advantage to foreign car makers as far as the ability to produce cars faster, but also more cost effectively. With that in mind, no matter what country you’re from or what industry you’re in, the ability to produce units faster for less money per unit is should always a goal of the firm, but not at the expense of long term sales. Accounts Receivable Collection One thing that Dana Corp. can work on internally is the speed in which they collect their receivables. Based on their 2004 10-K their accounts receivable went up nearly two- hundred million to a total of a little over 1.2 billion, with thirty-nine million in estimated uncollectible accounts. When you have 1.2 billion dollars of revenue sitting in outstanding accounts, a company needs to take action to decrease the days that money sits in the account as receivables and convert the notes into cash. Page 6 of 20 Dana Corporation Analysis Group 1 In order to do this, Dana Corp. will need to increase receivable turnover which will generate more cash. If Dana Corp. can reduce their receivables by 10% they will generate $125 million in cash, by 15% they will generate 188 million, and by 20% they could generate as much as 251 million (Appendix G). A straight decrease in accounts receivable of 20% is most likely an over aggressive figure for a one year turnaround, however a three year goal of 20% is feasible. Dana Corp. must aim for 8-10% reduction in receivables within one fiscal year to aid in the reorganization costs they will incur. Current Status On Friday, March 3, 2006, Dana Corporation and its subsidiaries filed for Ch 11 bankruptcy in New York. However, none of Dana Corp.’s foreign affiliates are included in this filing. “Auto parts suppliers over the last year have been sandwiched by rising energy costs that have driven up the costs of raw materials and driven down demand for gas guzzling sport utility vehicles and pickup trucks. Suppliers say the restructuring moves also are being forced by automakers increasing pressure to sell them parts at lower prices.” (“Dana Corp. Files For Bankruptcy”) A Chapter 11 filing is an attempt to stay in business while a bankruptcy court supervises the "reorganization" of the company's contractual and debt obligations. The court can grant various levels of relief from most of the company's debts and its contracts, so that the company can “start over”. If the company is insolvent, then at the completion of bankruptcy the company's stockholders all end up with nothing, all their rights and interests are terminated by the court. The company's creditors end up with ownership of Page 7 of 20 Dana Corporation Analysis Group 1 Appendixes A: Market Overview Lately the domestic US manufacturers have been facing slumping auto sales. General Motors (GM) has lost nearly 75% of its market value in the past 6 years which may result in the company having to file for chapter 11 bankruptcy if it can not turn itself around. Ford Motor Company, Dana Corp’s number one customer at more than 21% of sales, is in danger of closing 8 plants. Ford recently met in December to discuss alternatives strategies to overcome the slumping sales and the loss of market share to competitors Toyota and Nissan. (“Ford Motor Co.'s Board of Directors Begin 2-Day Meeting to Consider Sweeping Restructuring Plan”) The downturn in US auto sales can be attributed to many factors, mainly foreign competition and rising oil prices. GM and Ford have been pushing out Sport Utility Vehicles since the segment took off in the mid to late 90’s. SUV’s have long been the cash cows for manufacturers due to their high profit margin. (Goldman Sachs: Industrial Investment Strategy Oct 5, 2005) Over time the SUV’s kept getting bigger, while simultaneously consuming more gas. “Large SUV sales are down 10% through the end of August, with some models down as much as 30%. We see the phenomenon as being due largely to changing fashion, but high gas prices will likely accelerate the move away from especially the largest SUVs.” (Goldman Sachs: Industrial Investment Strategy Oct 5, 2005) Page 10 of 20 Dana Corporation Analysis Group 1 When the SUV segment took off the average price per gallon of gas was approx. $1.20. The price of oil continued on a slow but steady downward trend towards sub-$1 prices near the end of the decade. Consequently, consumers were less apt to look at the miles per gallon sticker on the window of a car and rather were more concerned about the features, size, and hauling capacity of SUV’s. As 1999 progressed the price of oil started to recover and continued on a steady pace where it leveled off around $1.50 per gallon. The price hung around $1.50 until 9/11 when it took a sharp decline but soon recovered as the US entered Afghanistan and later into Iraq. As time progressed oil became ever more expensive, and then in 2004 the price per gallon began to shoot through the roof due to uncertainty around supply channels in Africa and the Middle East. The problems surrounding the oil industry were further compounded by hurricanes Rita and Katrina which devastated the Gulf Coast in 2005. (Appendix E) Due to rising oil prices, customers began cutting back on driving and looking away from the gas guzzling SUV’s and to the lower margin vehicles. The downward spiral of domestically manufactured automotive sales is not enough to explain the financial distress the US automotive market is experiencing. The Detroit Big 3 are also facing increasing labor and material prices. The labor unions are giving automotive manufacturers a very rough time with their demands for higher wages, high pension benefits, and threatening with strikes. Page 11 of 20 Dana Corporation Analysis Group 1 As retired employees are living longer, as well as having to employ more people, pension plan costs to automotive manufacturers are sky rocketing due to the nature in which the plans are configured. “G.M. and other Detroit auto companies face heavy burdens for pension and health care expenses, which they refer to as legacy costs. The companies estimate these expenses cost them $1,800 per vehicle.” (“G.M. to Freeze Pension Plan for Salaried Workers”) “By contrast, foreign automakers like Toyota, Honda, Nissan and others with factories in the United States generally do not offer defined-benefits pension plans, relying more heavily on 401(k) programs that require employees to contribute for retirement.” (“G.M. to Freeze Pension Plan for Salaried Workers”) With these legacy costs holding margins down, GM and Ford in turn put pressure on their suppliers to give them even larger discounts so that they can maintain their own margin. The outlook for pension expense, or the so-called legacy costs, does not appear to fall any time soon. “Falling long-term rates and weak market returns will raise 2006 pension and OPEB expense and dampen or push out a long-anticipated earnings recovery.” (Goldman Sachs: Industrial Investment Strategy Oct 5, 2005) These pension costs drive deeply into the Detroit Big 3’s margins. To add insult to injury material costs have been on the rise as well. Steel, on average, has increased by more than 35% in the past twenty four months. (Appendix D) “Steel costs and resin pricing are likely to keep pressure on supplier and OEM cost of goods sold.” (Goldman Sachs: Industrial Investment Strategy Oct 5, 2005) Steel prices have leveled off in the past two Page 12 of 20 Dana Corporation Analysis Group 1 C: Platform Analysis 2005 2006 Make Model Production % YOY CPV Revenu e Productio n % YOY CPV Revenu e Ford F-Series 1,028,278 0.00% $500 $514,139 983,034 -4.40% $500 $491,517 Ford Explorer 227,505 -18.00% $545 $123,990 211,580 -7.00% $545 $115,311 Ford Escape 215,371 -5.00% $545 $117,377 182,204 -15.40% $545 $99,301 Ford Econoline 203,071 2.00% $545 $110,674 180,733 -11.00% $545 $98,500 GM Savanna/Express 191,062 7.00% $945 $180,554 201,379 5.40% $945 $190,303 Toyota Tacoma 168,931 NEW $495 $83,621 365,229 8.10% $495 $180,788 Toyota Tundra 127,420 5.00% $495 $63,073 128,567 0.90% $495 $63,641 GM Colorado 119,872 -18.00% $495 $59,337 129,582 8.10% $495 $64,143 Ford Ranger 118,660 -25.00% $545 $64,670 140,019 18.00% $545 $76,310 Ford Expedition 107,594 -28.70% $500 $53,797 96,835 -10.00% $500 $48,417 Nissan Titan 99,775 -5.00% $1,200 $119,730 88,800 -11.00% $1,200 $106,560 Jeep Wrangler 96,381 0.00% $545 $52,528 80,478 -16.50% $545 $43,861 Ford Freestar 79,365 -15.00% $500 $39,683 64,524 -18.70% $500 $32,262 Nissan Xterra 78,677 15.00% $450 $35,405 57,041 -27.50% $450 $25,668 Nissan Frontier 71,514 -2.00% $450 $32,181 62,861 -12.10% $450 $28,287 Nissan Armada 50,365 35.00% $1,200 $60,438 43,717 -13.20% $1,200 $52,460 Toyota Sequoia 44,848 -15.00% $495 $22,200 44,848 0.00% $495 $22,200 Mazda Tribute 40,677 25.00% $545 $22,169 40,677 0.00% $545 $22,169 Ford F-Series Super 38,951 0.00% $1,045 $40,704 33,809 -13.20% $1,045 $35,331 GM Canyon 32,633 0.00% $495 $16,153 34,395 5.40% $495 $17,026 Ford Navigator 31,106 -28.70% $500 $15,553 27,995 -10.00% $500 $13,998 Ford Mountaineer 27,570 -17.00% $545 $15,026 33,277 20.70% $545 $18,136 Ford Excursion 15,257 -30.00% $1,045 $15,944 - -100.00% $1,045 $0 Ford Aviator 9,716 -13.00% $545 $5,295 13,564 39.60% $545 $7,392 Source: The Goldman Sachs Group, Inc. :Dana Corporation January 18, 2006 Page 15 of 20 Dana Corporation Analysis Group 1 D: Steel Analysis Hot Rolled Plate Cold Rolled Coil Drawn Bar 304 316 304 316 304 316 4-Feb 105.2 115.4 124.2 128 105.2 110 Mar 112.1 123.7 132.6 136.9 110.3 115.7 Apr 113.4 123.7 134.2 136.9 116.1 121.5 May 114 126.6 134.6 139.4 113.1 121.2 Jun 110.1 131.5 129.9 144.9 109.2 124.4 Jul 102.6 121.6 120.7 133.8 101.5 115.8 Aug 102.6 121.6 120.7 133.8 101.5 115.8 Sep 120.8 142.7 143.1 157.5 121.4 138.4 Oct 116.7 143 137.9 157.9 117.2 139.1 Nov 122.7 146.8 135.2 157.2 118.6 140.4 Dec 128.1 157.3 141.7 169.1 123.7 150.4 5-Jan 126 160.3 139.7 172.8 122.8 154.6 Feb 124.2 169.9 137.6 183.5 121.1 163.9 Mar 126 173.3 139.8 187.4 122.8 167.5 Apr 127.7 168.2 141.8 181.7 124.6 162.5 May 130.1 181.6 144.7 196.8 127 175.2 Jun 131.1 180.4 146 195.3 127.9 174.4 Jul 132.5 189.5 147.7 205.6 129.6 183 Aug 132.5 189.5 147.7 205.6 129.6 183 Sep 117.9 164.5 130.6 177.5 113.4 158.1 Oct 120 164.8 133.2 177.8 116 158.1 Nov 121 172.2 134.4 186.2 114.3 163.1 Dec 113.4 162.5 125.1 175.2 104.7 152.1 Jam-06 113.4 160.2 125.1 172.7 104.6 149.9 Rise (Decline) 7.79% 38.82% 0.72% 34.92% -0.57% 36.27% Source: MEPS (International) LTD. http://www.meps.co.uk/Stainless%20Index.htm Page 16 of 20 Dana Corporation Analysis Group 1 E: Fuel Analysis U.S. Regular Conventional Retail Gasoline Prices (Cents per Gallon) 0 50 100 150 200 250 300 350 8/ 20 /1 99 0 2/ 20 /1 99 1 8/ 20 /1 99 1 2/ 20 /1 99 2 8/ 20 /1 99 2 2/ 20 /1 99 3 8/ 20 /1 99 3 2/ 20 /1 99 4 8/ 20 /1 99 4 2/ 20 /1 99 5 8/ 20 /1 99 5 2/ 20 /1 99 6 8/ 20 /1 99 6 2/ 20 /1 99 7 8/ 20 /1 99 7 2/ 20 /1 99 8 8/ 20 /1 99 8 2/ 20 /1 99 9 8/ 20 /1 99 9 2/ 20 /2 00 0 8/ 20 /2 00 0 2/ 20 /2 00 1 8/ 20 /2 00 1 2/ 20 /2 00 2 8/ 20 /2 00 2 2/ 20 /2 00 3 8/ 20 /2 00 3 2/ 20 /2 00 4 8/ 20 /2 00 4 2/ 20 /2 00 5 8/ 20 /2 00 5 2/ 20 /2 00 6 Date C en ts /G al lo n Source: Energy Information Agency http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_history.html Page 17 of 20