It's rare for a company to report a quarterly loss that is larger than its share price, but that's exactly what Dana
The $1.27 billion loss is primarily made up of a few one-time items. The largest is a $920 million valuation allowance created for its deferred tax assets in the U.S. and U.K. While this is a non-cash charge, investors should know what it signifies: Dana doesn't expect to generate profits that could be sheltered by these deferred tax assets. It's important to note that if the company turns out to be more profitable than it currently expects, it can still use the deferred tax assets.
The other charges Dana took were related to a $275 million after-tax writedown of assets for its non-core engine hard parts, fluid products, and pump products businesses, which it will be classifying as discontinued businesses in its next quarter. That will most likely lead to additional charges; however, the eventual sale of the businesses should bring in some cash to help Dana with its debt load. A $16 million loss on the sale of its fuel rail business rounded out the one-time charges the company took this quarter.
This leaves Dana with a loss of $63 million from operations. As you might expect, this means the company also turned in negative free cash flow and cash flow from operations. The company expects this situation to improve in 2006 as it sells its non-core businesses and focuses on its core segments, which are currently profitable on an earnings-before-interest-and-taxes basis (EBIT).
I don't recommend extrapolating the EBIT profitability as a large positive, because Dana still has a number of obstacles to overcome. The first is becoming free-cash-flow positive. Assuming its core businesses allow it to do so, the company is still heavily dependent on domestic auto manufacturers such as Ford
In tough times, a strong balance sheet becomes a company's lifeline. Unfortunately, I don't currently see Dana's balance sheet as a strong point. The company's $730 million in cash should help to stem the short-term operating losses, but its total short- and long-term debt load of $2.58 billion is a bit daunting, considering that $2.3 billion of it is short-term debt due in a year. Of that debt, $1.7 billion was reclassified in the second quarter as short term because the company fell outside of the covenants on its bank loan agreement.
That situation could improve if the company is successful in selling its non-core businesses, driving efficiency in its remaining businesses, or restructuring some of its debt. As it currently stands, Dana has a waiver for the covenants on its bank loan agreement until May 31, 2006. That breathing space, and the asset sales, should buy the company some time to get its footing again, but it looks to be an uphill climb.
Foolishness to spare: