UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2006

 

Commission file number 1-1063

 

Dana Corporation

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code: (419) 535-4500

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to section 12(g) of the Act:

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act  Yes o  No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ  No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The aggregate market value of the voting common stock held by non-affiliates of the registrant computed by reference to the average high and low trading prices of the common stock on the OTC Bulletin Board as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2006) was approximately $409,000,000.

 

There were 150,346,688 shares of registrant’s common stock, $1 par value, outstanding at March 1, 2007.

 

 

 

DANA CORPORATION — FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

 

 

TABLE OF CONTENTS

 

 

Statements in this report that are not entirely historical constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forwarding-looking statements are indicated by words such as “anticipates,” “expects,” “believes,” “intends,” “plans,” “estimates,” “projects” and similar expressions. These statements represent the present expectations of Dana Corporation (Dana, we or us) based on our current information and assumptions. Forward-looking statements are inherently subject to risks and uncertainties. Our plans, actions and actual results could differ materially from our present expectations due to a number of factors, including the following and those discussed in Items 1A, 7 and 7A and elsewhere in this report (our 2006 Form 10-K), and in our other filings with the Securities and Exchange Commission (SEC).

 

Bankruptcy-Related Risk Factors

 

 

Risk Factors in the Vehicle Markets We Serve

 

 

Company-Specific Risk Factors

 

 

General

 

Dana Corporation, a Virginia corporation organized in 1904, is headquartered in Toledo, Ohio. We are a leading supplier of axle, driveshaft, structural, and sealing and thermal management products for global vehicle manufacturers. Our people design and manufacture products for every major vehicle producer in the world. We employ approximately 45,000 people and operate 121 major facilities in 28 countries.

 

Reorganization Proceedings under Chapter 11 of the Bankruptcy Code

 

On March 3, 2006 (the Filing Date), Dana and forty of our wholly-owned domestic subsidiaries (collectively, the Debtors) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court). These Chapter 11 cases are collectively referred to as the “Bankruptcy Cases.” Neither Dana Credit Corporation (DCC) and its subsidiaries nor any of our non-U.S. affiliates are Debtors.

 

The wholly-owned subsidiaries included in the Bankruptcy Cases are Dakota New York Corp., Brake Systems, Inc., BWDAC, Inc., Coupled Products, Inc., Dana Atlantic LLC f/k/a Glacier Daido America, LLC, Dana Automotive Aftermarket, Inc., Dana Brazil Holdings I LLC f/k/a Wix Filtron LLC, Dana Brazil Holdings LLC f/k/a/ Dana Realty Funding LLC, Dana Information Technology LLC, Dana International Finance, Inc., Dana International Holdings, Inc., Dana Risk Management Services, Inc., Dana Technology Inc., Dana World Trade Corporation, Dandorr L.L.C., Dorr Leasing Corporation, DTF Trucking, Inc., Echlin-Ponce, Inc., EFMG LLC, EPE, Inc., ERS LLC, Flight Operations, Inc., Friction Inc., Friction Materials, Inc., Glacier Vandervell Inc., Hose & Tubing Products, Inc., Lipe Corporation, Long Automotive LLC, Long Cooling LLC, Long USA LLC, Midland Brake, Inc., Prattville Mfg., Inc., Reinz Wisconsin Gasket LLC, Spicer Heavy Axle & Brake, Inc., Spicer Heavy Axle Holdings, Inc., Spicer Outdoor Power Equipment Components LLC, Torque-Traction Integration Technologies, LLC, Torque-Traction Manufacturing Technologies, LLC, Torque-Traction Technologies, LLC and United Brake Systems Inc.

 

While we continue our reorganization under Chapter 11 of the Bankruptcy Code, investments in our securities are highly speculative. Although shares of our common stock continue to trade on the OTC Bulletin Board under the symbol “DCNAQ,” the trading prices of the shares may have little or no relationship to the actual recovery, if any, by the holders under any eventual court-approved reorganization plan. The opportunity for any recovery by holders of our common stock under such reorganization plan is uncertain, and shares of our common stock may be cancelled without any compensation pursuant to such plan.

 

The Bankruptcy Cases are being jointly administered, with the Debtors managing their business in the ordinary course as debtors in possession subject to the supervision of the Bankruptcy Court. We are continuing normal business operations during the Bankruptcy Cases while we evaluate our businesses both financially and operationally and implement comprehensive improvements to enhance performance. We are proceeding with previously announced divestiture and reorganization plans, which include the sale of several non-core businesses, the closure of certain facilities and the shift of production to lower-cost locations. In addition, we are taking steps to reduce costs, increase efficiency and enhance productivity so that we can emerge from bankruptcy as a stronger, more viable company. We have the exclusive right to file a plan of reorganization in the Bankruptcy Cases until September 3, 2007, by order of the Bankruptcy Court.

 

In March 2006, the Bankruptcy Court granted final approval of our debtor-in-possession (DIP) credit facility (DIP Credit Agreement) under which we may borrow up to $1,450, consisting of a $750 revolving credit facility and a $700 term loan facility. The DIP Credit Agreement provides funding to continue our operations without disruption to our obligations to suppliers, customers and employees during the Chapter 11 reorganization process. In January 2007, the Bankruptcy Court approved an amendment to the DIP Credit

Agreement to increase the term loan facility by $200, subject to certain terms and conditions discussed below under “DIP Credit Agreement” in Item 7. Also, in January 2007, we permanently reduced the aggregate commitment under the revolving credit facility from $750 to $650.

 

The Bankruptcy Court has also entered a variety of orders designed to permit us to continue to operate on a normal basis post-petition (i.e., after the Filing Date). These include orders authorizing us to continue our consolidated cash management system, pay employees their accrued pre-petition (i.e., before the Filing Date) wages and salaries, honor our obligations to our customers and pay some of the pre-petition claims of foreign vendors and certain suppliers that are critical to our continued operation, subject to certain restrictions.

 

Official committees of the Debtors’ unsecured creditors (Creditors Committee or UCC) and retirees not represented by unions (Retiree Committee) have been appointed in the Bankruptcy Cases. Among other things, the Creditors Committee consults with the Debtors regarding the administration of the Bankruptcy Cases; investigates matters relevant to these cases or to the formulation of a plan of reorganization, participates in the formulation of, and advises the unsecured creditors regarding, such plan; and generally performs other services in the interest of the Debtors’ unsecured creditors. The Retiree Committee acts as the authorized representative of those persons receiving certain retiree benefits who are not covered by an active or expired collective bargaining agreement in instances where the Debtors seek to modify or not pay certain retiree benefits. The Debtors are required to bear certain of the committees’ costs and expenses, including those of their counsel and other professional advisors. An official committee of Dana’s equity security holders had been appointed but was disbanded effective February 9, 2007.

 

Under the Bankruptcy Code, the Debtors have the right to assume or reject executory contracts (i.e., contracts that are to be performed by the contract parties after the Filing Date) and unexpired leases, subject to Bankruptcy Court approval and other limitations. In this context, “assuming” an executory contract or unexpired lease means that the Debtors will agree to perform their obligations and cure certain existing defaults under the contract or lease and “rejecting” it means that the Debtors will be relieved of their obligations to perform further under the contract or lease, which may give rise to a pre-petition claim for damages for the breach thereof. Since the Filing Date, the Bankruptcy Court has authorized the Debtors to reject certain unexpired leases and executory contracts.

 

The Debtors filed their initial schedules of assets and liabilities existing on the Filing Date with the Bankruptcy Court in June 2006 and have since then made amendments to these schedules. In July 2006, the Bankruptcy Court set September 21, 2006 as the general bar date (the date by which most entities that wished to assert a pre-petition claim against a Debtor had to file a proof of claim in writing). Asbestos-related personal injury and wrongful death claimants were not required to file proofs of claim by the bar date, and such claims will be addressed as part of the Chapter 11 proceedings. The Debtors are now in the process of evaluating the claims that were submitted and establishing procedures to reconcile and resolve them. The Debtors have objected to multiple claims and expect to file additional claim objections with the Bankruptcy Court. Our Liabilities subject to compromise represent our current estimate of claims under generally accepted accounting principles in the United States (GAAP or U.S. GAAP) expected to be resolved by the Bankruptcy Court based on our evaluation to date. See Note 2 to our consolidated financial statements in Item 8 for more information about Liabilities subject to compromise.

 

In August 2006, the Bankruptcy Court entered an order establishing procedures for trading in claims and equity securities which is designed to protect the Debtors’ potentially valuable tax attributes (such as net operating loss carryforwards). Under the order, holders or acquirers of 4.75% or more of Dana stock are subject to certain notice and consent procedures prior to acquiring or disposing of Dana common shares. Holders of claims against the Debtors that would entitle them to more than 4.75% of the common shares of reorganized Dana under a confirmed plan of reorganization utilizing the tax benefits provided under Section 382(l)(5) of the Internal Revenue Code may be subject to a requirement to sell down the excess claims if necessary to implement such a plan of reorganization.

 

We anticipate that substantially all of the Debtors’ liabilities as of the Filing Date will be resolved under, and treated in accordance with, a plan of reorganization to be proposed to and voted on by creditors in

accordance with the provisions of the Bankruptcy Code. Although we intend to file and seek confirmation of such a plan by September 3, 2007, there is no assurance that we will file the plan by that date or that the plan will be confirmed by the Bankruptcy Court and consummated. Additionally, there is no assurance that we will be successful in achieving our reorganization goals, or that any measures that are achievable will result in sufficient improvement to our financial position to make our business sustainable. Accordingly, until the time that the Debtors emerge from bankruptcy, there will be no certainty about our ability to continue as a going concern. If a reorganization is not completed, we could be forced to sell a significant portion of our assets to retire outstanding debt or, under certain circumstances, to cease operations.

 

Our Business

 

Markets

 

We serve three primary markets:

 

 

We have two primary business units: the Automotive Systems Group (ASG), which sells products mostly into the light vehicle market, and the Heavy Vehicle Technologies and Systems Group (HVTSG), which sells products to the commercial vehicle and off-highway markets. ASG is organized into individual operating segments specializing in product lines, while HVTSG is organized to serve specific markets.

 

Segments

 

Following our bankruptcy filing, senior management and our Board of Directors (Board) began to review our various operations within our primary business units for actions to drive our reorganization initiatives. In the fourth quarter of 2006, senior management and our Board began to formally review these operations as operating segments under the two primary business units. Accordingly, we have expanded our disclosure throughout the 2006 Form 10-K to include the operating segments identified in this section.

 

ASG recorded sales of $5,567 in 2006, with Ford, GM and Chrysler among its largest customers. At December 31, 2006, ASG employed 25,900 people and had 96 facilities in 19 countries. ASG operates with five segments focusing on specific product lines: Light Axle Products (Axle), Driveshaft Products (Driveshaft), Sealing Products (Sealing), Thermal Products (Thermal) and Structural Products (Structures).

 

HVTSG generated sales of $2,914 in 2006. HVTSG is comprised of two operating segments: Commercial Vehicle and Off-Highway, each of which focuses on specific markets. In 2006, the largest Commercial Vehicle customers were PACCAR Inc (PACCAR), Navistar International Inc (Navistar) and Volvo Truck Corporation (Volvo Truck). The largest Off-Highway customers included Deere & Company, Caterpillar, and AGCO Corporation. At December 31, 2006, HVTSG employed 7,600 people and had 21 facilities in 8 countries.

 

The operating segments of our ASG and HVTSG business units provide the core products shown below.

 

 

 

 

These segments also provide a variety of important ancillary products and systems that serve the needs of our global customers in the automotive, commercial vehicle and off-highway markets.

 

Alliances

 

We have strategic alliances that strengthen our marketing, manufacturing and product-development capabilities, broaden our product portfolio, and help us to better serve our diverse and global customer base. Among them are:

 

 

 

Divestitures

 

In March 2007, we sold our engine hard parts business to MAHLE GmbH (MAHLE). Of the $97 of cash proceeds, $5 has been escrowed pending completion of closing conditions in certain countries which are expected to occur in 2007, and $20 was escrowed pending completion of customary purchase price adjustments and indemnification provisions.

 

We are currently in negotiations with parties interested in purchasing the fluid products business and our pump products business. The sale of the pump products business is not subject to Bankruptcy Court approval since the business is located outside the U.S. and held by a non-Debtor. We expect to complete the sale of the fluid products and pump businesses during the second quarter of 2007.

 

During January 2007, we completed the sale of our trailer axle manufacturing business to Hendrickson USA L.L.C., a subsidiary of The Boler Company. This business generated sales of approximately $150 in 2006 and employed about 180 people.

 

We were previously a large supplier of light vehicle products to the North American aftermarket. Nearly all of our automotive aftermarket operations were conducted through our Automotive Aftermarket Group (AAG). The sale of substantially all of AAG was completed in November 2004.

 

DCC

 

We have been a provider of lease financing services in selected markets through DCC. However, in 2001, we determined that the sale of DCC’s businesses would enable us to more sharply focus on our core businesses. Over the last five years, DCC has sold significant portions of its asset portfolio and we recorded asset impairments, reducing this portfolio from $2,200 in December 2001 to approximately $200 at the end of 2006. In September 2006, DCC adopted a plan of liquidation providing for the disposition of substantially all its assets over an 18 to 24 month period, and in December 2006, DCC signed a Forbearance Agreement with its Noteholders which allows DCC to sell its remaining asset portfolio and use the proceeds to pay the forbearing noteholders a pro rata share of the cash generated. See Notes 2 and 10 to our consolidated financial statements in Item 8 for additional information.

 

Presentation

 

The engine hard parts, fluid products and pump products businesses are presented in our financial statements as discontinued operations, as was the aftermarket business prior to its sale. The trailer axle business and DCC did not meet the requirements for treatment as discontinued operations. Consequently their results are included with continuing operations. See Note 4 to our consolidated financial statements in Item 8 for additional information on discontinued operations.

 

Geographic

 

We maintain administrative organizations in four regions — North America, Europe, South America and Asia Pacific — to facilitate financial and statutory reporting and tax compliance on a worldwide basis and to support our business units. Our operations are located in the following countries:

 

 

Our international subsidiaries and affiliates manufacture and sell products similar to those we produce in the U.S. Operations outside the U.S. may be subject to a greater risk of changing political, economic and social environments, changing governmental laws and regulations, currency revaluations and market fluctuations than our domestic operations.

 

Non-U.S. sales were $4,300 of our 2006 consolidated sales of $8,504. Non-U.S. net loss for 2006 was $51 while on a consolidated basis we had a net loss of $739. Non-U.S. net income includes $13 of equity in earnings of international affiliates. A summary of sales and long-lived assets by region can be found in Note 20 to our consolidated financial statements in Item 8.

 

Customer Dependence

 

We have thousands of customers around the world and have developed long-standing business relationships with many of them. Our ASG segments are largely dependent on North American light vehicle original equipment manufacturer (OEM) customers, while our HVTSG segments have a broader and more geographically diverse customer base, including machinery and equipment manufacturers in addition to medium and heavy duty vehicle OEM customers.

 

Ford and GM were the only individual customers accounting for 10% or more of our consolidated sales in 2006. We have been supplying products to these companies and their subsidiaries for many years. As a percentage of total sales from continuing operations, our sales to Ford were approximately 23% in 2006 and 26% in each of 2005 and 2004, and our sales to General Motors were approximately 10% in 2006 and 11% in each of 2005 and 2004.

 

We also have significant sales to Chrysler. As a percentage of total sales from continuing operations, our sales to Chrysler were 6% in 2006, 5% in 2005 and 8% in 2004. In 2006, PACCAR and Navistar became our third and fourth largest customers. PACCAR, Navistar, Toyota Motor Corporation (Toyota), the Renault-Nissan Alliance (Renault-Nissan), and Volvo Truck collectively accounted for approximately 24% of our revenues in 2006, 20% in 2005 and 18% in 2004.

 

Loss of all or a substantial portion of our sales to Ford, GM or other large volume customers would have a significant adverse effect on our financial results until such lost sales volume could be replaced and there is no assurance that any such lost volume would be replaced. We continue to work to diversify our customer base and geographic footprint.

 

Products

 

The mix of our sales by product for the last three years is as follows:

 

 

See Note 20, “Segments, Geographical Areas and Major Customer Information,” in Item 8 for additional segment information including revenues from external customers, segment profitability, capital spending, depreciation and amortization and total assets.

 

Sources and Availability of Raw Materials

 

We use a variety of raw materials in the production of our products, including steel and products containing steel, stainless steel, forgings, castings and bearings. Other commodity purchases include aluminum, brass, copper and plastics. Prior to 2005, our operating units purchased most of the raw materials they required from suppliers located within their local geographic regions. Since then, we have been combining and centralizing our purchases to give us greater leverage with our suppliers in order to manage and reduce our production costs. These materials are usually available from multiple qualified sources in quantities sufficient for our needs. However, some of our operations remain dependent on single sources for certain raw materials. While our suppliers have generally been able to support our needs, our operations may experience shortages and delays in the supply of raw material from time to time, due to strong demand, capacity limitations and other problems experienced by the suppliers. A significant or prolonged shortage of critical components from any of our suppliers could adversely impact our ability to meet our production schedules and to deliver our products to our customers when they have requested them.

 

High steel and other raw material costs, primarily resulting from limited capacity and high demand, had a major adverse effect on our results of operations in recent years, as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

 

Our bankruptcy has created supplier concerns over non-payment for pre-petition services and products and other uncertainties. To date, this has not had a significant effect on our ability to negotiate new contracts and terms with our suppliers on an ongoing basis. However, some supplier relationships have been strained as a result of our bankruptcy filing, our non-payment of their pre-petition billings and the related ongoing uncertainty.

 

Seasonality

 

Our businesses are generally not seasonal. However, our sales are closely related to the production schedules of our OEM customers and, historically, those schedules have been weakest in the third quarter of the year due to a large number of model year change-overs which occur during this period. Additionally, third quarter production schedules in Europe are typically impacted by the summer holiday schedules and fourth quarter production by year end holidays.

 

Backlog

 

Our products are not sold on a backlog basis since most orders may be rescheduled or modified by our customers at any time. Our product sales are dependent upon the number of vehicles that our customers actually produce as well as the timing of such production. A substantial amount of the new business we are awarded by OEMs is granted well in advance of a program launch. These awards typically extend through the life of the given program. We estimate future revenues from new business on the projected volume under these programs. See “New Business” in Item 7 for additional explanations related to new business awarded.

 

Competition

 

Within each of our markets, we compete with a variety of independent suppliers and distributors, as well as with the in-house operations of certain OEMs. We compete primarily on the basis of price, product quality, technology, delivery and service.

 

Automotive Systems Group

 

We are one of the primary independent suppliers in axle and driveshaft technologies, structural solutions (frames) and system integration technologies (including advanced modularity concepts and systems). Our primary competitors in the Axle segment are American Axle, in-house operations of Chrysler and Ford, Magna International Inc. (Magna) and ZF Friedrichshafen AG (ZF Group). Our primary competitor in the Driveshaft segment is GKN Driveline, and in the Structures segment, our primary competition is from Magna and Tower Automotive Inc. (Tower Automotive).

 

We are also one of the leading independent suppliers of sealing systems (gaskets, seals and cover modules) and thermal management products (heat exchangers, valves and small radiators). On a global basis, our primary competitors in the Sealing segment are Elring Klinger, Federal-Mogul and Freudenberg NOK. Competitors in the Thermal segment are Behr GmbH & Co., Delphi Corporation (Delphi), Modine Manufacturing Company and Valeo.

 

Heavy Vehicle Technologies and Systems Group

 

We are one of the primary independent suppliers of axles, driveshafts and other products for both the medium- and heavy-truck markets, as well as various specialty and off-highway segments. We also specialize in the manufacture of off-highway transmissions. Our primary competitor in North America is ArvinMeritor in the medium- and heavy-truck markets. Major competitors in Europe include OEMs’ vertically integrated operations in the heavy-truck markets, as well as Carraro Group, ZF Group and OEMs’ vertically integrated operations in the off-highway markets.

 

Patents and Trademarks

 

Our proprietary drivetrain, engine parts, chassis, structural components, fluid power systems and industrial power transmission product lines have strong identities in the markets we serve. Throughout these product lines, we manufacture and sell our products under a number of patents that have been obtained over a period of years and expire at various times. We consider each of these patents to be of value and aggressively protect our rights throughout the world against infringement. We are involved with many product lines, and the loss or expiration of any particular patent would not materially affect our sales and profits.

 

We own or have licensed numerous trademarks that are registered in many countries, enabling us to market our products worldwide. For example, our Spicer^®, Victor Reinz^® and Long^® trademarks are widely recognized in their market segments.

 

Research and Development

 

From our introduction of the automotive universal joint in 1904, Dana has been focused on technological innovation. Our objective is to be an essential partner to our customers and remain highly focused on offering superior product quality, technologically advanced products and competitive prices. To enhance quality and reduce costs, we use statistical process control, cellular manufacturing, flexible regional production and assembly, global sourcing and extensive employee training.

 

We engage in ongoing engineering, research and development activities to improve the reliability, performance and cost-effectiveness of our existing products and to design and develop innovative products that meet customer requirements for new applications. We are integrating related operations to create a more innovative environment, speed product development, maximize efficiency and improve communication and information sharing among our research and development operations. At December 31, 2006, ASG had four technical centers and HVTSG had one. Our spending on engineering, research and development and quality control programs was $221 in 2006, $275 in 2005 and $269 in 2004.

 

Our engineers are helping to develop and commercialize our fuel cell components and sub-systems by working with a number of leading light-vehicle manufacturers. Specifically, we are developing fuel-cell stack components, such as metallic and composite bipolar plates; balance-of-plant technologies, particularly thermal management sub-systems with heat exchangers and electric pumps; and fuel-processor components and sub-systems.

 

Employment

 

Our worldwide employment (including consolidated subsidiaries) was approximately 45,000 at December 31, 2006 including 2,500 employees of the Mexican operations that we acquired in the third quarter of 2006. Also included are approximately 9,800 employees in the businesses which have been or will be divested in 2007.

 

Environmental Compliance

 

We make capital expenditures in the normal course of business as necessary to ensure that our facilities are in compliance with applicable environmental laws and regulations. The cost of environmental compliance was not a material part of our capital expenditures and did not have a materially adverse effect on our earnings or competitive position in 2006. We do not anticipate that future environmental compliance costs will be material. See Notes 1 and 17 to our consolidated financial statements in Item 8 for additional information.

 

Executive Officers of the Registrant

 

We currently have six executive officers:

 

 

 

Our executive officers were designated as such by our Board.

 

Messrs. Burns, DeBacker, Hiltz, Miller and Stanage are also among the members of Dana’s Executive Committee, which is responsible for our corporate strategies and partnership relations and for the development of our people, policies and philosophies.

 

Available Information

 

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) are available on or through our Internet website (http://www.dana.com/investors) as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC. We also post our Board Governance Principles, Directors’ Code of Conduct, Board Committee membership lists and charters, Standards of Business Conduct and other corporate governance materials at this website address. Copies of these posted materials are available in print, free of charge, to any shareholder upon request from: Investor Relations Department, P.O. Box 1000, Toledo, Ohio 43697 or via telephone at 419-535-4635 or e-mail at InvestorRelations@dana.com.

Item 1A.  Risk Factors

 

General

 

We are impacted by events and conditions that affect the light vehicle, commercial vehicle and off-highway industries that we serve, as well as by factors specific to our company. Among the risks that could materially adversely affect our business, financial condition or results of operations are the following, many of which are interrelated.

 

Bankruptcy-Related Risk Factors

 

We are operating under Chapter 11 of the Bankruptcy Code and are subject to the risks and uncertainties of bankruptcy

 

For the duration of the Bankruptcy Cases, our operations and our ability to execute our business strategy will be subject to the risks and uncertainties associated with bankruptcy, including our ability to (i) operate within the restrictions and the liquidity limitations of our DIP Credit Agreement; (ii) resolve issues with creditors and other third parties whose interests may differ from ours; (iii) obtain Bankruptcy Court approval with respect to motions we file from time to time, including timely approval of transactions outside the ordinary course of business that may present opportunities for us; (iv) resolve the claims made against us in bankruptcy for amounts not exceeding our recorded liabilities subject to compromise; (v) attract and retain customers; (vi) retain critical suppliers and service providers on acceptable terms; (vii) attract, motivate and retain key employees; (viii) fund and execute our business plan; and (ix) develop, prosecute, confirm and consummate a plan of reorganization. Because of these risks and uncertainties, we cannot predict the ultimate outcome of the reorganization process and there is no certainty about our ability to continue as a going concern.

 

As a result of our bankruptcy filing, realization of our assets and liquidation of our liabilities are subject to uncertainty. During the bankruptcy proceedings, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in our consolidated financial statements with Bankruptcy Court approval or as permitted in the normal course of business. Further, our plan of reorganization could materially change the amounts and classifications reported in our historical consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of confirmation of a plan of reorganization.

 

We may be unable to emerge from bankruptcy as a sustainable, viable business unless we successfully implement our reorganization initiatives

 

It is critical to our successful emergence from bankruptcy that we (i) achieve positive margins for our products by obtaining substantial price increases from our customers; (ii) recover or otherwise provide for increased material costs through renegotiation or rejection of various customer programs; (iii) restructure our wage and benefit programs to create an appropriate labor and benefit cost structure; (iv) address the excessive cash requirements of the legacy pension and other postretirement benefit liabilities that we have accumulated over the years; and (v) achieve a permanent reduction and realignment of our overhead costs. We are taking actions to achieve those objectives, but there is no assurance that we will be successful.

 

We may be unable to comply with the financial covenants in our DIP Credit Agreement unless we improve our profitability

 

Our DIP Credit Agreement contains financial covenants that require us to achieve certain levels of earnings before interest, taxes, depreciation, amortization and restructuring and reorganization related costs (EBITDAR), as defined in the agreement. If we are unable to achieve the results that are contemplated in our business plan, we may be unable to comply with the EBITDAR covenants. A failure to comply with these or other covenants in the DIP Credit Agreement could, if we were unable to obtain a waiver or an amendment of the covenant terms, cause an event of default that would accelerate our loans under the agreement.

 

Risk Factors in the Vehicle Markets We Serve

 

We may be adversely impacted by changes in national and international economic conditions

 

Our sales depend, in large part, on economic conditions in the global light vehicle, commercial vehicle and off-highway original equipment (OE) markets that we serve. Demand in these markets fluctuates in response to overall economic conditions, including changes in general economic indicators, interest rate levels and, in our vehicular markets, fuel costs. For example, higher gasoline prices in 2006 contributed to

weaker demand in North America for certain vehicles for which we supply products, especially full-size SUVs. If gasoline prices remain high or continue to rise, the demand for such vehicles could weaken further and recent consumer interest in passenger cars and CUVs, in preference to SUVs, could be accelerated. This would have an adverse effect on our business, as our product content on CUVs is less significant than our content on SUVs.

 

We may be adversely affected by evolving conditions in the supply base for light and commercial vehicles

 

The competitive environment among suppliers to the global OE vehicle manufacturers has been changing in recent years, as these manufacturers seek to outsource more components, modules and systems and to develop low-cost suppliers, primarily outside the U.S. As a result, suppliers in these sectors have experienced substantial consolidation and new or larger competitors may emerge who could significantly impact our business.

 

In addition, an increasing number of North American suppliers are now operating in bankruptcy and supplier bankruptcies could disrupt the supply of components to our OEM customers and adversely affect their demand for our products.

 

Company-Specific Risk Factors

 

We could be adversely impacted by the loss of any of our significant customers or changes in their requirements for our products

 

We are reliant upon sales to a few significant customers. Sales to Ford and GM were 32% of our overall revenue in 2006, while sales to Chrysler, PACCAR, Navistar, Renault-Nissan, Volvo Truck and Toyota in the aggregate accounted for another 30%. Changes in our business relationships with any of our large customers or in the timing, size and continuation of their various programs could have an adverse impact on us. The loss of any of these customers, the loss of business with respect to one or more of their vehicle models on which we have a high component content, or a further significant decline in the production levels of such vehicles would impact our business, results of operations and financial condition. We are continually bidding on new business with these customers, as well as seeking to diversify our customer base, but there is no assurance that our efforts will be successful.

 

We could be adversely affected if we are unable to recover portions of our high commodity costs (including costs of steel, other raw materials, and energy) from our customers

 

For some time, high commodity costs have significantly impacted our earnings, as well as the results of others in our industry. As part of our reorganization initiatives, we are working with our customers to recover a greater portion of our commodity costs. While we have achieved some success in these efforts to date, there is no assurance that commodity costs will not continue to adversely impact our profitability.

 

We could be adversely affected if we experience shortages of components from our suppliers

 

We spend over $4,000 annually for purchased goods and services. To manage and reduce these costs, we have been consolidating our supply base. As a result, we are dependent on single sources of supply for some components of our products. We select our suppliers based on total value (including price, delivery and quality), taking into consideration their production capacities and financial condition, and we expect that they will be able to support our needs. However, there is no assurance that strong demand, capacity limitations or other problems experienced by our suppliers will not result in occasional shortages or delays in their supply of components to us. If we were to experience a significant or prolonged shortage of critical components from any of our suppliers, particularly those who are sole sources, and were unable to procure the components from other sources, we would be unable to meet our production schedules for some of our key products and to ship such products to our customers in timely fashion, which would adversely affect our revenues, margins and customer relations.

 

We may be unable to complete the divestiture of our non-core fluid products and pump products businesses as contemplated

 

We announced plans to divest our fluid products and pump products businesses and classified them as discontinued operations in our financial statements in 2005. The abundance of assets currently available for sale in the light vehicle industry could affect our ability to complete these divestitures and/or impact the proceeds that we receive. Moreover, during our bankruptcy proceedings, there may be limitations on the terms and conditions that we can offer to potential purchasers of these operations. Failure to complete these strategic divestitures would place further pressure on our profitability and cash flow and would divert our focus from our core businesses.

 

We may be unable to renegotiate expiring collective bargaining agreements with U.S. and Canadian unionized employees on satisfactory terms

 

The achievement of our reorganization goals will depend in large part on the labor and benefits costs that we are able to reduce through negotiations with our U.S. and Canadian union organizations and through the bankruptcy process. There is no assurance that we will be able to reduce this significant part of our cost structure. In addition, our efforts to secure these cost savings could result in work stoppages by our unionized employees or similar disturbances which could disrupt our ability to meet our customers’ supply requirements.

 

We could be adversely affected by the costs of our asbestos-related product liability claims

 

We have exposure to asbestos-related claims and litigation because some of our automotive products in the past contained asbestos. At the end of 2006, we had approximately 73,000 active pending asbestos-related product liability claims, including 6,000 that were settled and awaiting documentation and payment. A substantial increase in the costs to resolve these claims or changes in the amount of available insurance could adversely impact us, as could the enactment of U.S. federal legislation relating to asbestos personal injury claims.

 

We could be adversely impacted by the costs of environmental compliance

 

Our operations are subject to environmental laws and regulations in the U.S. and other countries that govern emissions to the air; discharges to water; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the cleanup of contaminated properties. Currently, environmental costs with respect to our former and existing operations are not material. However, there is no assurance that the costs of complying with current environmental laws and regulations, or those that may be adopted in the future, will not increase and adversely impact us.

 

-None-

 

Facilities by Segment and Geographic Region

 

 

At December 31, 2006, we had 121 major manufacturing/distribution, engineering and office facilities in 28 countries worldwide. While we lease 39 manufacturing and distribution operations, we own the remainder of our facilities. We believe that all of our property and equipment is properly maintained. We have significant excess capacity in our facilities based on our current manufacturing and distribution needs, especially in the United States. Accordingly, we are taking steps to address this as discussed in Item 7, under “Business Strategy.”

 

Our corporate headquarters facilities are located in Toledo, Ohio and include three office facilities housing functions that have global responsibility for finance and accounting, treasury, risk management, legal, human resources, procurement and supply chain management and information technology. Our obligations under the DIP Credit Agreement are secured by, among other things, mortgages on all of our domestic plants that we own.

 

We and forty of our wholly owned subsidiaries are operating under Chapter 11 of the Bankruptcy Code. Under the Bankruptcy Code, the filing of the petitions for reorganization automatically stayed most actions against the Debtors, including most actions to collect on pre-petition indebtedness or to exercise control over the property of the bankruptcy estates. Substantially all of our pre-petition liabilities will be addressed under our plan of reorganization, if not otherwise addressed pursuant to orders of the Bankruptcy Court.

 

As previously reported and as discussed in Item 7 and in Note 17 to our consolidated financial statements in Item 8, we are a party to a pending pre-petition securities class action and pending shareholder

derivative actions, as well as various pending judicial and administrative proceedings that arose in the ordinary course of business (including both pre-petition and subsequent proceedings), and we are cooperating with a formal investigation by the SEC with respect to matters related to the restatement of our financial statements for the first two quarters of 2005 and fiscal years 2002 through 2004. After reviewing the currently pending lawsuits and proceedings (including the probable outcomes, reasonably anticipated costs and expenses, availability and limits of our insurance coverage and surety bonds and our established reserves for uninsured liabilities), we do not believe that any liabilities that may result are reasonably likely to have a material adverse effect on our liquidity, financial condition or results of operations.

 

-None-

 

Since March 3, 2006, our common stock has been traded on the OTC Bulletin Board under the symbol “DCNAQ.” Our stock was formerly traded on the New York and Pacific Exchanges. At March 1, 2007, there were approximately 39,100 shareholders of record.

 

While we continue our reorganization under Chapter 11 of the Bankruptcy Code, investments in our securities are highly speculative. Although shares of our common stock continue to trade on the OTC Bulletin Board under the symbol “DCNAQ,” the trading prices of the shares may have little or no relationship to the actual recovery, if any, by the holders under any eventual court-approved reorganization plan. The opportunity for any recovery by holders of our common stock under such reorganization plan is uncertain, and shares of our common stock may be cancelled without any compensation pursuant to such plan.

 

The following table shows the quarterly ranges of our stock price during 2005 and 2006. Dividends were declared and paid during 2005 at a rate of $0.12 per share for the first three quarters, and $0.01 per share for the fourth quarter. No dividends were declared or paid in 2006. The terms of our DIP Credit Agreement do not allow the payment of dividends on shares of capital stock and we do not anticipate paying any dividends while we are in reorganization. We anticipate that any earnings will be retained to finance our operations and reduce debt during this period.

 

 

 

 

We purchased no Dana equity securities during the quarter ended December 31, 2006.

 

A stock performance graph has not been provided in this report because it need not be provided in any filings other than an annual report to security holders required by Exchange Act Rule 14a-2 that precedes or accompanies a proxy statement relating to an annual meeting of security holders at which directors are to be elected.

 

 

 

 

 

We adopted SFAS Nos. 123(R) and 158 in 2006. SFAS 123(R), “Share-Based Payment,” requires that we measure compensation cost arising from the grant of share-based awards to employees at fair value and recognize such costs in income over the period during which the service is provided. The adoption of SFAS No. 158, “Employers’ Accounting for Defined-Benefit Pension and Other Postretirement Plans,” resulted in a

decrease in total shareholders’ equity of $818 as of December 31, 2006. For further information regarding the impact of the adoption of SFAS No. 158, see Note 15 to our consolidated financial statements in Item 8.

 

We previously reported a change in accounting for warranty expense in 2005 and also adopted new accounting guidance related to recognition of asset retirement obligations.

 

See Note 1 to our consolidated financial statements in Item 8 for additional information related to these changes in accounting, as well as a discussion regarding our ability to continue as a going concern.

 

 

General

 

We are a leading supplier of axle, driveshaft, structures, sealing and thermal products, and we design and manufacture products for every major vehicle producer in the world. We are focused on being an essential partner to automotive, commercial truck and off-highway vehicle customers. We employ 45,000 people in 28 countries. Our world headquarters are in Toledo, Ohio. Our Internet address is www.dana.com.

 

Dana and forty of our wholly-owned domestic subsidiaries are currently operating under Chapter 11 of the Bankruptcy Code. The Bankruptcy Cases are discussed in detail in Note 2 to our consolidated financial statements in Item 8. Our reorganization goals are to maximize enterprise value during the reorganization process and to emerge from Chapter 11 as soon as practicable as a sustainable, viable company.

 

Business Strategy

 

Since the commencement of the Chapter 11 proceedings, we have been evaluating our strategy and thoroughly analyzing our business to identify the changes necessary to achieve our reorganization goals. We are utilizing the reorganization process to improve our distressed U.S. operations by effecting fundamental change. This is critical to us, as our worldwide operations are highly integrated for the manufacture and assembly of our products. A significant portion of the production of our non-Debtor operations overseas is comprised of components that are assembled by our U.S. operations. Therefore, while we are continuing to grow overseas, our long-term viability depends on our ability to return our U.S. operations to sustainable profitability.

 

Our U.S. operations are currently generating significant losses and consuming significant cash. This situation will not improve in 2007. Even with significantly improved domestic operating results, we will be dependent upon realizing expected divestiture proceeds, repatriating available cash from our overseas operations, and loans under our DIP Credit Agreement to meet our liquidity needs in 2007. While we currently believe that asset sales and repatriation of overseas cash will address our liquidity needs for 2007, such sources cannot be relied upon in future periods.

 

Our successful reorganization as a sustainable, viable business will require the simultaneous implementation of several distinct reorganization initiatives and the cooperation of all of our key business constituencies — customers, vendors, employees and retirees. It is critical to our success that we:

 

 

In the long term, we also must eliminate the costs and inefficiencies associated with our historically decentralized manufacturing operations and optimize our manufacturing “footprint” by substantially repositioning our production to lower cost countries.

 

Achievement of our objectives has been made more pressing by the significantly curtailed production forecasts of some of our largest domestic customers in recent months, particularly in the production of SUVs and pickup trucks that are the primary market for our products in the U.S. These production cuts have already adversely impacted our sales in 2007 in the light vehicle market. Weaker demand in the U.S. heavy-duty and medium-duty truck markets in 2007 as a result of pre-buying in 2006 ahead of new emissions rules will also negatively impact our 2007 performance. We must, therefore, accelerate our efforts to achieve viable long-term U.S. operations in an increasingly troubled U.S. automotive industry and a cyclical commercial vehicle market.

 

Our reorganization strategy contemplates the following initiatives, which will require significant contributions from each of the constituents referred to above in the form of gross margin improvements or cost base reduction. If successful, we estimate that these initiatives will ultimately result in an aggregate annual pre-tax income improvement of $405 to $540.

 

 

Our products have a high commodity material content, and absorbing the significant inflation in the costs of these materials over the past several years has contributed significantly to the decline in our profitability. In addition, we have granted many of our customers downward price adjustments, consistent with their demands and industry practices. In the Bankruptcy Cases, we will have to determine whether to assume or reject certain customer contracts. Since the filing date, we have undertaken a detailed review of our product programs to identify unprofitable contracts and determine appropriate price modifications to address this issue. We have analyzed our pricing needs for each major customer and have held meetings with our customers and their advisors to resolve under-performing programs and obtain appropriate adjustments. Through pricing modifications and contract rejections with customers, we expect to improve our annual pre-tax profit by $175 to $225.

 

Through February 2007, we have reached agreements with customers resulting in price increases of approximately $75 on an annualized basis. The pricing agreements generally extend through the duration of the applicable programs. The pricing agreements are, in some instances, conditioned upon assumption of the existing contracts, as amended for pricing and other terms and conditions through the bankruptcy proceedings. We expect to substantially complete the contract pricing agreements and our decisions as to assumption of contracts, as amended, in the second quarter of 2007. To date, we have not moved to reject any customer contracts. However, we may ultimately be forced to seek rejections of certain contracts if we are unable to reach agreements with our customers. The successful resolution of this initiative is key to our performance in 2007 and our timely emergence from bankruptcy.

 

 

Our current labor and benefit costs, especially in the U.S., impair our financial position and are a significant impediment to our successful reorganization.

 

We have taken steps since late 2005 to reduce our benefit programs and costs. We have reduced the company’s share of the costs of our U.S. medical benefits programs, suspended or limited wage and salary increases worldwide, suspended matching contributions to our U.S. and Canadian defined contribution plans, suspended our educational reimbursement program, eliminated service award programs and modified our severance programs. We have also identified and implemented numerous initiatives at non-union plants to obtain savings while offering appropriate and competitive wages, terms and conditions. These initiatives include modification of overtime pay, two-tier wage and fringe benefits for new hires, health benefit changes, and elimination of gainshare programs.

 

We provide defined contribution and defined benefit pension plans for many of our U.S. employees. We are taking steps to modify the defined benefit pension plans — which were approximately 95% funded at December 31, 2006 — to reduce our pension costs. As of December 31, 2006, we merged most of our numerous U.S. defined benefit pension plans into the Dana Corporation Retirement Plan (our CashPlus Plan) to reduce our funding requirements over the next several years. We expect to freeze participation and future benefit accruals in our U.S. defined benefit pension plans by July 1, 2007, subject to collective bargaining requirements, where applicable. We have proposed to provide a limited employer contribution to our U.S. defined contribution plans for those whose benefit accruals are frozen.

 

We intend to take additional steps — subject to applicable collective bargaining and bankruptcy procedures and Bankruptcy Court approval with respect to union employees — including the elimination of previously granted but not yet effective wage increases, freezing of future wage increases, modification of our short-term disability program, elimination of our existing long term disability insurance program, establishment of inflation limits on the company-paid portion of healthcare programs and reduction in company-provided life insurance. We expect that these labor and benefit cost actions for the union and non-union populations will generate annual cost savings of $60 to $90.

 

We have apprised the primary unions representing our active U.S. employees — the United Auto Workers (UAW), the United Steel Workers (USW) and the International Association of Machinists (IAM) — of our labor cost reduction goals and are engaged in discussions with them about these matters. In motions filed with the Bankruptcy Court in February 2007, we asked the court to permit us to reject our collective bargaining agreements in the event an agreement on proposed changes is not reached. A hearing on this matter began on March 12, 2007 and is set to resume on March 26, 2007. Prior to the March 12 hearing, we resolved our outstanding collective bargaining issues with the IAM and agreed to a new three-year collective bargaining agreement covering hourly employees at our Robinson, Illinois plant. The UAW and USW have objected to our motion to reject their collective bargaining agreements and indicated that their members may strike if we reject their collective bargaining agreements. Our Master Agreement with the UAW, which covers hourly employees in our Lima, Ohio and Pottstown, Pennsylvania plants, has already expired and union workers at those plants are currently working on a day-to-day basis. Prolonged strikes by the UAW and/or USW would not only impact our earnings adversely, but could also prevent us from reorganizing successfully.

 

 

We also provide other postemployment benefits (OPEB), including medical and life insurance, for many U.S. retirees. We have accumulated an OPEB obligation that is disproportionate to the scale of our current business, in part by assuming retiree obligations in the course of acquiring businesses and retaining such obligations when divesting businesses. In addition, the rising cost of providing an extensive retiree healthcare program has become prohibitive to us. At December 31, 2006, we had approximately $1,500 in unfunded OPEB obligations under our domestic postretirement healthcare plans. We estimate that these obligations will require an average cash outlay of $119 in each of the next six years unless they are restructured.

 

To address this issue, we are seeking to terminate our sponsorship of retiree healthcare programs and the funding of ongoing retiree healthcare costs associated with those plans. We anticipate that the elimination of future annual OPEB costs and modification of our U.S. pension programs for union and non-union populations will result in annual cost savings of $70 to $90.

 

In our motions filed with the Bankruptcy Court in February 2007, we asked the court to authorize Dana to exercise its unilateral right to eliminate retiree healthcare benefits for non-union populations in the U.S., both active and retired. On March 12, 2007, the Bankruptcy Court approved the elimination of retiree healthcare benefits coverage for non-union, active employees effective April 1, 2007. We are also negotiating with our unions and the Retiree Committee about these matters. On March 12, 2007, we reached a tentative agreement with the Retiree Committee which provides that we will contribute cash of $78 to a trust for non-pension retiree benefits in exchange for the Debtors being released from

obligations for post-retirement health and welfare benefits for non-union retirees. This tentative agreement is subject to approval by the Bankruptcy Court.

 

On March 12, 2007, we reached a settlement with the IAM union, which represents 215 hourly employees at Dana’s Robinson, Illinois, Sealing Products plant. The IAM settlement, which is subject to Bankruptcy Court approval, includes a payment of $2.25 by Dana to resolve all IAM claims for non-pension retiree benefits with respect to retirees and active employees represented by the union. For those who are covered by the settlement and currently receive such benefits, Dana will not terminate these benefits prior to July 1, 2007. In addition, the parties have agreed to a new three-year collective bargaining agreement covering the Robinson plant.

 

 

Due to our historically decentralized operating model and the reduction in the overall size of our business resulting from recent and planned divestitures, our overhead costs are too high. Our U.S. headcount was reduced by approximately 9% during 2006 as a result of a general hiring freeze and attrition attributable to our bankruptcy filing. We are in various stages of analysis and implementation with respect to several initiatives in a continuing effort to reduce overhead costs. Additional reductions in overhead will occur as a result of our ongoing divestitures and reorganization activities. We expect our reductions in overhead spending to contribute annual expense savings of $40 to $50.

 

 

Overcapacity and high operating costs at our facilities in the U.S. and Canada are burdening our performance and negatively affecting our financial results. We have completed an analysis of our North American manufacturing footprint and identified a number of manufacturing and assembly plants that carry an excessive cost structure or have excess capacity. We have committed to the closure of certain locations and consolidation of their operations into lower cost facilities in other countries or into U.S. facilities that currently have excess capacity. These actions included moving driveshaft machining operations from Bristol, Virginia, to our recently acquired operations in Mexico and moving axle assembly operations from Buena Vista, Virginia, to our Dry Ridge, Kentucky and Columbia, Missouri facilities. We also began the process of closing three Sealing and Thermal facilities in the U.S. and one in Canada, a Driveshaft facility in Charlotte, North Carolina, and a Structures plant in Canada.

 

During the fourth quarter of 2006, we announced additional closures of two Axle facilities in Syracuse, Indiana, and Cape Girardeau, Missouri, and two Structures facilities in Guelph and Thorold, Ontario. In the first quarter of 2007, we also announced closure of a Driveshaft plant in Renton, Washington, which will be integrated into our Louisville, Kentucky operation. We expect to close four additional facilities, with announcements expected later in 2007. While these plant closures will result in closure costs in the short term and require near-term cash expenditures, they are expected to yield savings and improved cash flow in later years. Long term, we expect the manufacturing footprint actions to reduce our annual operating costs by $60 to $85.

 

The reorganization initiatives referred to above, when fully implemented, are expected to result in annual pre-tax profit improvement of $405 to $540. We began phasing these actions in during 2007 and expect them to contribute between $150 and $200 to our base plan forecast for 2007. The phased-in 2007 contributions from reorganization actions exclude any contributions from reductions of benefits related to employees covered by collective bargaining agreements which are the subject of the March 2007 Bankruptcy Court hearings.

 

We are also continuing to pursue previously announced divestitures and alliances and, as we implement our reorganization initiatives, we may identify additional opportunities to help return our U.S. operations to sustainable viability.

 

On March 9, 2007, we closed the sale of our engine hard parts business to MAHLE. Of the $97 of cash proceeds, $5 has been escrowed pending completion of closing conditions in certain countries which are expected to occur in 2007, and $20 was escrowed pending completion of customary purchase price

adjustments and indemnification provisions. We are currently in negotiations with parties interested in purchasing the fluid and pump products businesses. The sale of the pump products business is not subject to Bankruptcy Court approval since the business is located outside the U.S. and held by a non-Debtor. We expect to complete the sale of the fluid products and pump businesses during the second quarter of 2007.

 

In January 2007, we sold our trailer axle business to Hendrickson USA L.L.C. for $31 in cash. In March 2007, we sold our 30% equity interest in GETRAG to our joint venture partner for approximately $205 in cash. See Note 4 to our consolidated financial statements in Item 8 for additional information on these sales.

 

In addition to the above actions, in February 2007 we announced the restructuring of the pension liabilities of our United Kingdom (U.K.) operations. On February 27, 2007, ten of our subsidiaries located in the U.K. and the trustees of four U.K. defined benefit pension plans entered into an Agreement as to Structure of Settlement and Allocation of Debt to compromise and settle the liabilities owed by our U.K. operating subsidiaries to the pension plans. The agreement provides for the trustees of the plans to release the operating subsidiaries from all such liabilities in exchange for an aggregate cash payment of approximately $93 and the transfer of 33% equity interest in our axle manufacturing and driveshaft assembly businesses in the U.K. for the benefit of the pension plan participants. The agreement was necessitated in part by our planned divestitures of several non-core U.K. businesses which, upon completion, would have resulted in unsustainable pension funding demands on the operating subsidiaries under U.K. pension law, in addition to their ongoing funding obligations. We expect to record a settlement charge in the range of $150 to $170 (including a cash charge of $93) in connection with these transactions. Remaining employees in the U.K. operations will receive future pension benefits pursuant to a defined contribution arrangement similar to our intended actions in the U.S.

 

DCC Notes

 

DCC is a non-Debtor subsidiary of Dana. At the time of our bankruptcy filing, DCC had outstanding notes (the DCC Notes) in the amount of approximately $399. The holders of a majority of the outstanding principal amount of the DCC Notes formed an Ad Hoc Committee which asserted that the DCC Notes had become immediately due and payable. In addition, two DCC noteholders that were not part of the Ad Hoc Committee sued DCC for nonpayment of principal and accrued interest on their DCC Notes. In December 2006, DCC made a payment of $7.7 to these two noteholders in full settlement of their claims. Also in that month, DCC and the holders of most of the DCC Notes executed a Forbearance Agreement and, contemporaneously, Dana and DCC executed a Settlement Agreement relating to claims between them. Together, these agreements provide, among other things, that (i) the forbearing noteholders will not exercise their rights or remedies with respect to the DCC Notes for a period of 24 months (or until the effective date of Dana’s reorganization plan), during which time DCC will endeavor to sell its remaining asset portfolio in an orderly manner and will use the proceeds to pay down the DCC Notes, and (ii) Dana stipulated to a general unsecured pre-petition claim by DCC in the Bankruptcy Cases in the amount of $325 in exchange for DCC’s release of certain claims against the Debtors. Under the Settlement Agreement, Dana and DCC also terminated their intercompany tax sharing agreement under which they had formerly computed tax benefits and liabilities with respect to their U.S. consolidated federal tax returns and consolidated or combined state tax returns. Dana’s stipulation to a DCC claim of $325 was approved by the Bankruptcy Court. Under the Forbearance Agreement, DCC agreed to pay the forbearing noteholders their pro rata share of any excess cash in the U.S. greater than $7.5 on a quarterly basis and, in December 2006, it made a $155 payment to such noteholders, consisting of $125.4 of principal, $28.1 of interest, and a one-time $1.5 prepayment penalty.

 

Business Units

 

We manage our operations globally through two business units — ASG and HVTSG. ASG focuses on the automotive market and primarily supports light vehicle OEMs, with products for light trucks, SUVs, CUVs, vans and passenger cars. ASG also manufactures driveshafts for the Commercial Vehicle and Off-Highway segments of HVTSG. ASG has five operating segments focusing on specific products for the automotive market: Axle, Driveshaft, Structures, Sealing and Thermal.

 

HVTSG supports the OEMs of medium-duty (Classes 5-7) and heavy-duty (Class 8) commercial vehicles (primarily trucks and buses) and off-highway vehicles (primarily wheeled vehicles used in construction and agricultural applications). HVTSG has two operating segments focused on specific markets: Commercial Vehicle and Off-Highway.

 

Trends in Our Markets

 

North American Light Vehicle Market

 

Production Levels

 

Light vehicle production in North America was approximately 15.3 million units in 2006, down from 15.8 million units in 2005. Overall production levels in this market in the first half of 2006 were comparable to those in the first six months of 2005, but this was attributable to increased passenger car production, as light truck production was down about 4%. In the third quarter of 2006, two of our largest light vehicle customers announced significant production cuts for the remainder of the year. In August 2006, Ford announced production cuts of 20,000 units in the third quarter and 168,000 units in the fourth quarter, and in September, Chrysler announced production cuts of 90,000 units in the third quarter and 45,000 units in the fourth quarter. Largely as a result of these cutbacks, North American light truck production in the third and fourth quarters of 2006 was down about 15% and 14% compared to the same periods in 2005 (source: Global Insight).

 

The production cuts by Ford and Chrysler were heavily weighted toward medium and full size pick-up trucks and SUVs, where inventories had built up due to consumer concerns about high fuel prices and increased preferences for models with better fuel economy, such as CUVs and, to a lesser extent, passenger cars. The cuts were mostly on platforms for vehicles on which we have higher content. During the third quarter of 2006, production of the specific platforms with significant Dana content was about 21% lower than in 2005 and, in the fourth quarter, it was down about 25% from 2005.

 

Overall North American light vehicle production in 2007 is forecasted to be approximately 15.2 million units, about the same as in 2006 (source: Global Insight). We anticipate continued consumer focus on fuel economy and do not expect to see production levels of our key platforms rebound significantly in 2007. We expect that 2007 production on these platforms will be down about 12% from 2006.

 

OEM Pricing Pressures

 

The declining sales of light vehicles (especially light trucks, which generally have a higher profit margin than passenger cars) in North America, as well as losses of market share to competitors such as Toyota and Nissan, are putting increased pressure on the financial performance of three of our largest customers: Ford, GM and Chrysler. As a result, these OEMs are continuing to seek pricing concessions from their suppliers, including us. In addition, GM, Ford and Chrysler reported significant losses for 2006. These issues will make it more challenging for us to achieve our reorganization goal of improving product profitability by obtaining price modifications from these and other customers.

 

Commodity Costs

 

Another challenge we face is the high cost of steel and other raw materials, which has had a significant adverse impact on our results, and those of other North American automotive suppliers, for more than two and a half years. Steel suppliers began assessing price surcharges and increasing base prices during the first half of 2004, and prices remained high throughout 2005 and 2006.

 

Two commonly-used market-based indicators — a Tri Cities Scrap Index, for #1 bundled (which represents the monthly average costs in the Chicago, Cleveland, and Pittsburgh ferrous scrap markets, as posted by American Metal Market, and is used by our domestic steel suppliers to determine our monthly surcharge) and the spot market price for hot-rolled sheet steel illustrate the impact. As compared to average prices in 2003, average scrap steel prices on the Tri Cities index during 2006 were more than 70% higher, and spot market hot-rolled sheet steel prices during 2006 were up more than 100% over 2003. At current consumption levels, we estimate that our annualized cost of raw steel is approximately $140 higher than it

would have been using prices at the end of 2003. We have taken actions to mitigate the impact of these increases, including consolidating purchases, taking advantage of our customers’ resale programs where possible, finding new global steel sources, identifying alternative materials and re-designing our products to be less dependent on higher cost steel grades.

 

During the latter part of 2005 and throughout 2006, cost increases for raw materials other than steel have also been significant. Average prices for nickel (which is used to manufacture stainless steel) and aluminum for 2006 were up about 60% and 37% over 2005, resulting in an annualized cost increase to us of about $17 in 2006 at our current consumption levels. In addition, copper and brass prices have increased significantly, impacting, in particular, our businesses that are for sale and classified as discontinued operations. Average prices for these materials in 2006 were up more than 80% against the same period in 2005, resulting in a year-over-year increase in annualized cost to us at current consumption levels of about $22.

 

As discussed above, our reorganization initiatives include working with our customers to recover a greater portion of our commodity materials costs.

 

Automotive Supplier Bankruptcies

 

Several major U.S. automotive suppliers, in addition to Dana, have filed for protection under Chapter 11 of the Bankruptcy Code since early 2005, Tower Automotive, Inc., Collins & Aikman Corporation, Delphi Corporation, and, most recently, Dura Automotive Systems, Inc. These bankruptcy filings indicate stress in the North American light vehicle market which could lead to further filings or to competitor or customer reorganizations or consolidations that could impact the marketplace and our business.

 

North American Commercial Vehicle Market

 

Production Cyclicality

 

The North American commercial vehicle market was strong during 2006, primarily due to pre-buying of heavy-duty (Class 8) and medium-duty (Class 5-7) trucks in advance of the more stringent U.S. emission regulations that took effect at the beginning of 2007 and increased the prices of these trucks. As a result, North American heavy-duty truck build is expected to be approximately 190,000 units in 2007, compared to 369,000 units in 2006 and 334,000 units in 2005, and medium-duty truck build is forecasted at about 200,000 units in 2007, compared to 265,000 units in 2006 and 244,000 units in 2005 (source: ACT).

 

Compared to the same periods in 2005, production of Class 8 vehicles in North America was up about 13% in the fourth quarter of 2006 and 10% for all of 2006, and Class 5-7 production was up about 7% in the fourth quarter of 2006 and about 9% for all of 2006. As a result of the pre-buying in 2006, we anticipate decreases of approximately 49% in North American Class 8 build and 25% in Class 5-7 build for the full year 2007, as compared to 2006.

 

Commodity Costs

 

The high commodity costs affecting the North American light vehicle market have also impacted the commercial vehicle market, but this impact has been partially mitigated by our ability to recover material cost increases from our Commercial Vehicle customers.

 

New Business

 

A continuing major focus for us is growing our revenue through new business. In the light vehicle industry, new business is generally awarded to suppliers well in advance of the expected start of production of a new vehicle model/platform. The specific amount of lead-time varies based on the nature of the supplier’s component, size of the program and required start-up investment. The awarding of new business usually coincides with model changes by the OEMs. Given the OEMs’ cost and service concerns associated with changing suppliers, we expect to retain any awarded business over the model/platform life, typically several years.

 

Net new business is expected to contribute approximately $313 and $126 to our sales in 2007 and 2008. While continuing to support Ford, GM and Chrysler, we are striving to diversify our sales across a broader customer base. We already serve substantially all of the major vehicle makers in the world in the light vehicle, commercial vehicle and off-highway markets. Approximately 80% of our current book of net new business involves customers other than Ford, GM and Chrysler, and approximately 70% of this business is with other automotive manufacturers based outside North America. We have achieved double-digit sales growth with European and Asian light vehicle manufacturers over the past several years. These customers account for six of the top ten product launches for ASG in 2006. Our success on this front has been achieved, in part, through our expanding global operations and affiliates. Our people and facilities around the world are actively supporting the global platforms of our foreign-based customers today. Our Commercial Vehicle segment, which currently operates predominantly in North America, is pursuing sales outside this region, and we expect our joint venture in China with Dongfeng Motor Company, Ltd., when fully implemented, to provide an opportunity to grow the non-U.S. sales in this business. Approximately two-thirds of our Off-Highway sales already occur outside North America, and we are continuing to aggressively pursue new business in this market.

 

United States Profitability

 

Our U.S. operations have generated losses before income taxes during the past five years aggregating more than $2,000. While numerous factors have contributed to our lack of profitability in the U.S., paramount among them are those discussed earlier in this report:

 

 

In the normal course of our business, our major U.S. customers expect prices from their suppliers to decrease over the term of a typical contract due to the “learning-curve” benefits associated with long production runs. Moreover, over the past several years, our major U.S. customers have experienced declining market share and excess assembly capacity. As their profitability has come under pressure, they have intensified their demands for additional price reductions from us and other suppliers. In order to retain existing business and obtain new business, in many cases, we have provided significant price decreases which have significantly reduced our annual gross margin.

 

 

The quality of products now available to vehicle manufacturers from suppliers in countries with lower labor costs has improved significantly over the past several years. The emergence of this supply base has put downward pressure on our pricing to customers.

 

 

We have accumulated retiree healthcare costs disproportionate to the scale of our current business. In 2006, our U.S. operations absorbed retiree healthcare costs of more than $100. Our pool of retirees in the U.S. has grown disproportionately as a result of our acquisitions and divestitures, magnifying the impact that inflation in the costs of healthcare has had on us.

 

 

In 2003, our raw material costs began to increase significantly. Given the cost pressures facing our major U.S. customers in the light vehicle market, we have absorbed most of these higher costs, and the relief we have received has been mostly outside the U.S.

 

We have taken significant restructuring actions in an effort to improve our U.S. profitability. In 2001 and 2002, we undertook the largest restructuring program in our history, taking after-tax restructuring charges of $445, closing 39 facilities and reducing the workforce by 20%. Additional restructuring initiatives have been taken in subsequent years. A substantial portion of these actions were directed specifically at our U.S. operations. While these actions were undertaken to improve our profitability, they have been insufficient to offset the downward profit pressures, in large part due to the factors cited above.

 

The current financial performance of the Debtor operations is reported in Note 2 to our consolidated financial statements in Item 8. During 2006, the Debtors experienced before tax losses of $443, which included realignment and impairment charges of $56 and net reorganization costs of $117. After adjusting for the reorganization items, the losses are indicative of our current and ongoing U.S. losses at current sales levels, underscoring the urgency of successfully pursuing the initiatives discussed in “Business Strategy” above.

 

Results of Operations — Summary

 

 

 

 

Results of Operations (2006 versus 2005)

 

Geographic Sales, Operating Segment Sales and Gross Margin Analysis (2006 versus 2005)

 

Geographic Sales Analysis

 

 

Sales decreased $107, or 1.2%, from 2005 to 2006. Currency movements increased 2006 sales by $94 due to an overall weaker U.S. dollar compared to a number of the major currencies in other global markets where we conduct business. Sales in 2006 also benefited from net acquisitions, primarily the purchase of the axle and driveshaft businesses previously owned by Spicer S.A., our equity affiliate in Mexico. Excluding currency and acquisition effects, we experienced an organic sales decline of $216, or 2.5%, in 2006 compared to 2005. Organic change is the period-on-period measure of sales volume that excludes the effects of currency movements, acquisitions and divestitures.

 

Regionally, North American sales were down $239 in 2006, or 4.4%. A stronger Canadian dollar increased sales as did the acquisition of the axle and driveshaft businesses of our previous equity affiliate in Mexico. Excluding the effect of these increases, organic sales were down $323, or 6.0%, principally due to lower production levels in the North American light vehicle market. In our primary market — light trucks — production levels in 2006 were down about 9%. Within this market, production levels on vehicles with significant Dana content — primarily pickups and SUVs — were down about 12%. Partially offsetting the effects of lower light truck production levels was net new business of approximately $240 which came on stream during 2006 and a stronger commercial vehicle market, where Class 8 heavy duty production was up 10% and Class 5-7 medium duty production was up 9%.

 

Sales in Europe increased $260, mostly due to increases from net new business. Production levels in two of our key markets — the European light vehicle market and the off-highway market — were somewhat stronger in 2006 than in 2005. In South America, comparable year-over-year production levels in our major vehicular markets led to relatively comparable year-over-year sales. In Asia Pacific, sales declined significantly from 2005, by $147, due primarily to expiration of an axle program in Australia with Holden Ltd., a subsidiary of GM.

 

Operating Segment Sales Analysis

 

 

By operating segment, the organic sales declines occurred in the segments of ASG. The North American light truck market, where production levels were down about 9% in 2006, is a major market for each of the ASG operating segments. The sales decrease in the Axle segment also reflects the expiration of the Holden Ltd. axle program in Australia. Increased sales from new axle programs in 2006 helped mitigate the reduced sales from lower North America production levels and the loss of the Australian business. Our Driveshaft segment serves both light vehicle and commercial vehicle original equipment customers. As such, the stronger commercial vehicle market in 2006 in North America helped to offset the reduced sales from lower production on the light truck side of the business. Our Sealing segment, like Driveshaft, supplies product to the commercial vehicle and off-highway markets as well as the consumer-based light vehicle markets, thereby offsetting the impact of lower 2006 North American light vehicle production. In the Thermal segment, we are more heavily concentrated on the North American market. Consequently, our sales decline here is largely driven by the lower production of North American light vehicles. Similarly, in Structures, a number of our key programs involve light truck platforms for the North American market, driving the lower sales in this segment.

 

In the HVTSG, our Commercial Vehicle segment is primarily focused on North America — where Class 8 heavy duty production was up 10% in 2006 and Class 5-7 medium duty production was up 9%. Our Off-Highway segment, on the other hand, has significant business in Europe, as well as in North America. Each of these markets remained relatively strong in 2006, with the production requirements of our major customers up slightly or relatively comparable year-over-year. Sales in this segment also benefited from net new business in 2006.

 

Margin Analysis

 

 

 

 

Automotive Systems

 

In ASG, gross margin less SG&A declined 1.5%, from 2.4% in 2005 to 0.9% in 2006. Lower sales of $374 contributed to the margin decline, as we were unable to proportionately reduce fixed costs.

 

In the Axle segment, the net margin decline was 2.0%. The margin decline resulted in part from lower sales relative to fixed costs. Additionally, the acquired Mexican axle operations of our previous equity affiliate contributed losses of $3. Higher premium freight costs to prevent disruption to customer schedules — mostly during the first half of the year when we were managing the business disruption in the aftermath of our bankruptcy filing — and manufacturing inefficiencies in our Venezuelan foundry operations resulted in higher cost of $12. Partially offsetting these reductions to Axle margins in 2006 were lower warranty expenses of $15, primarily due to two programs which required higher provisions in 2005, and lower overall material costs in 2006 — mostly due to reduced steel cost.

 

The Driveshaft segment experienced a margin decline of 1.5% despite a year-over-year sales increase. The acquired Mexican driveshaft operations from our previous equity affiliate contributed losses of $6. Launch costs and competitive pricing on a new light truck program in 2006 resulted in losses of approximately $7.

 

Margins in the Sealing segment were down 0.9%, primarily due to higher material costs of $4 — mostly due to the higher costs of stainless steel, a major material component for this business. Also contributing to the margin decline were facility closure and asset impairment costs of $3.

 

Our Thermal segment experienced a significant sales decline in 2006, resulting in lower sales relative to fixed costs. Additionally, higher material costs — mostly due to the high content of aluminum in this business — reduced margins by $6.

 

In our Structures segment, the margin decline was largely attributed to an 8.8% reduction in sales, with the margin reduction on the lost sales not offset by proportionate fixed cost reductions. Program start-up costs were also higher in 2006. Partially offsetting these margin reductions was lower overall material costs, principally due to savings from more steel purchases under customer re-sale programs.

 

Heavy Vehicle Technology and Systems

 

Unlike the ASG business, Heavy Vehicle gross margins less SG&A benefited in 2006 from stronger sales levels, increasing 2.0% from 2.5% in 2005 to 4.5% in 2006. Commercial Vehicle segment margins improved 2.6%. In addition to the contribution from higher sales, Commercial Vehicle margins benefited from price increases of $18, largely to help defray the higher costs absorbed in previous years due to increased material costs. Margins also increased in 2006 as realignments of the operations and other improvements addressed the manufacturing inefficiencies which negatively impacted this business in 2005. Lower overall material cost, due in part to more effective use of steel grades and resourcing to lower cost steel suppliers, also benefited margins slightly in this business. In the Off-Highway segment, margins improved 1.1%. Higher sales relative to fixed costs contributed to some of the margin improvement, with most of the remaining improvement coming from reductions in material cost.

 

Consolidated

 

Consolidated gross margin less SG&A includes corporate expenses and other costs not allocated to the business units of $262, or 3.1% of sales, in 2006 as compared to $303, or 3.5% of sales, in 2005. This improvement in consolidated margins of .4% largely reflects our overall efforts to reduce overhead through headcount reduction, limited wage increases, suspension of benefits and cutbacks in discretionary spending.

 

Impairment of goodwill and other assets

 

As discussed in Note 4 to our consolidated financial statements in Item 8, an impairment charge of $165 was recorded in the third quarter of 2006 to reduce lease and other assets in DCC to their fair value less cost to sell. Additional impairment charges in 2006 of $11 were recorded based on the planned sales of specific DCC investments. DCC reviews its investments for impairment on a quarterly basis. An impairment charge of $58 was recorded in the fourth quarter to adjust our equity investment in GETRAG to fair value based on an other-than-temporary decline in value related to the March 2007 sale of this investment.

 

As discussed in Notes 4 and 7 to our consolidated financial statements in Item 8, a $46 charge was taken in 2006 to write off the goodwill in our Axle business. In 2005, we wrote off the remaining goodwill of our Structures and Commercial Vehicles businesses.

 

Realignment charges

 

Realignment charges are discussed in Note 4 to our consolidated financial statements in Item 8. These charges relate primarily to employee separation and exit costs associated with facility closures.

 

Other income (expense)

 

Other income for 2006 was up $52 compared to 2005. The increase was due primarily to $28 in losses from divestitures and joint venture dissolutions in 2005, and the inclusion of gains of $10 from such activities in 2006. Additionally, DCC income, net of gains and losses on asset sales, was $14 higher in 2006 than 2005.

 

Interest expense

 

As a result of our Chapter 11 reorganization process, a substantial portion of our debt obligations is now subject to compromise. Since the Filing Date, we have not accrued interest on these obligations. The post-petition interest expense not recognized in 2006 on these obligations amounted to $89.

 

Reorganization items

 

Reorganization items are primarily expenses directly attributed to our Chapter 11 reorganization process. See Note 2 to our consolidated financial statements in Item 8 for a summary of these costs. Reorganization items reported in 2006 included professional advisory fees, lease rejection costs, debt valuation adjustments on pre-petition liabilities and underwriting fees related to the DIP Credit Agreement. The debt valuation adjustments and DIP Credit Agreement underwriting fees were one-time charges associated with the initial phase of the reorganization.

 

Income tax benefit (expense)

 

The primary factor resulting in income tax expense of $66 during 2006, as compared to a tax benefit of $200 that would be expected based on the 35% U.S. statutory income tax rate, was the discontinued recognition of tax benefits on U.S. losses. Also impacting this rate differential was $46 of goodwill impairment charges which are not deductible for income tax purposes.

 

The 2005 results included a charge of $817 for placing a valuation allowance against our net U.S. deferred tax assets. Additional valuation allowances of $13 were also provided in 2005 against net deferred tax assets in the U.K. These provisions were the principal reason for tax expense of $924 recognized in 2005 differing from a tax benefit of $100 that would be expected at a 35% federal U.S. tax rate.

 

Discontinued operations

 

Losses from discontinued operations were $121 and $434 in 2006 and 2005. Discontinued operations in both years included the engine hard parts, fluid routing and pump products businesses held for sale at the end of 2006 and 2005. The net losses included pre-tax impairment charges of $137 in 2006 and $411 in 2005 that were required to reduce the net book value of these businesses to expected fair value less cost to sell. See Note 4 to our consolidated financial statements in Item 8 for additional information relating to the discontinued operations.

 

Results of Operations (2005 versus 2004)

 

Business Unit and Geographic Sales and Gross Margin Analysis

 

Geographic Sales Analysis

 

 

Organic sales in 2005 increased $653, or 8.4%, primarily as a result of net new business that came on stream in 2005 and a stronger heavy vehicle market. Net new business increased 2005 sales by approximately $320 in ASG and $180 in HVTSG. The remaining increase in 2005 was driven primarily by increased production levels in the heavy vehicle market. In commercial vehicles, most of our sales are to the North American market. Production levels of Class 8 commercial trucks increased 27% in 2005, while medium duty Class 5-7 truck production was up about 12%.

 

Regionally, North American sales increased $192, or 3.7%. A stronger Canadian dollar accounted for $63 of the increase, with divestitures reducing 2005 sales by $19. Net of currency and divestitures, the organic sales increased $148, or 2.8%. Higher production levels in the North American commercial vehicle market and contributions from net new business were the primary factors generating the higher sales in North America. Sales in our largest market, the North American light truck market, were lower as production levels declined about 2% year-over-year, with sales of the vehicles having larger Dana content being down even more.

 

Sales in our European region benefited from contributions from net new business and a stronger off-highway market. Production levels in the European light vehicle market were relatively flat compared to 2004. In South America, organic sales were higher as a result of net new business as well as higher light vehicle production levels. A stronger Brazilian real also contributed to the higher sales in South America. In our Asia Pacific region, sales increased primarily because of a weaker dollar against currencies in this region and the 2004 acquisition of a majority interest in a joint venture, which resulted in the sales of the joint venture being consolidated.

 

Operating Segment Sales Analysis

 

 

ASG sales increased $557, or 10.3%, over 2004. A weaker U.S. dollar against a number of currencies in the major international markets where we do business accounted for higher sales of $152, or 2.8%. Excluding currency and net acquisition effects, organic sales in ASG increased $363, or 6.7%. In our Axle segment, sales increased $162. Net new business added $220 of sales. This was partially offset by reduced sales due to lower production levels in the North American light truck market. Our Driveshaft segment experienced higher sales of $88. This unit also sells to original equipment commercial vehicle customers. As such, the higher production levels in the North American commercial vehicle market added to sales in this segment. This, along with some added sales from net new business and higher light truck production levels outside the U.S., more than offset the lower sales due to production declines in the North American light truck market. Sales in our Sealing segment increased largely due to the acquisition of a majority interest in a Japanese gasket joint venture. This segment also sells to the commercial vehicle market which was much stronger in 2005. Our Thermal segment experienced increased sales due to currency — primarily the Canadian dollar, as this segment is heavily focused on the North American market. As such, the organic sales decline is due primarily to the lower production levels in the North American light truck market. Structures sales increased primarily due to net new business which came on stream in 2005 and to higher production levels of certain key platforms with structures content.

 

In the Heavy Vehicle group, sales increased due to stronger markets and contributions from net new business. Our Commercial Vehicle segment is focused primarily on North America. As such, the sales in this segment increased principally due to the increased North American production levels of Class 5-8 vehicles. Our Off-Highway segment serves the European as well as the North American markets. Sales in this segment benefited from higher global production in our primary markets of about 4%, as well as from the addition of new customer programs in 2005.

 

Margin Analysis