UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2004
Commission File Number 1-1063

Dana Corporation

     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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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DANA CORPORATION
INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DANA CORPORATION

The accompanying notes are an integral part of
the condensed consolidated financial statements.

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DANA CORPORATION

The accompanying notes are an integral part of
the condensed consolidated financial statements.

As explained in Note 2, the results of operations for the six months ended
June 30, 2004 have been restated to reflect the adoption of FSP FAS106-2.

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DANA CORPORATION

The accompanying notes are an integral part of
the condensed consolidated financial statements.

As explained in Note 2, the results of operations for the six months ended
June 30, 2004 have been restated to reflect the adoption of FSP FAS106-2.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in millions)

Note 1. Basis of Presentation

     In our opinion, the accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of financial condition, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of full-year results. We have reclassified certain amounts in 2003 to conform to the 2004 presentation, primarily in connection with the reporting of discontinued operations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2003.

Note 2. New Accounting Pronouncements

     In December 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 132R, “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires additional disclosures about defined benefit pension plans and other postretirement benefit plans. The standard requires, among other things, additional disclosures about the components of pension expense for interim periods beginning after December 15, 2003. We adopted this pronouncement as of December 31, 2003 for all our U.S. plans and included the revised annual disclosures in our 2003 Form 10-K. See Note 5 to our condensed consolidated financial statements in this report for the required interim disclosures.

     In May 2003, the FASB Emerging Issues Task Force (EITF) issued EITF 03-4, “Accounting for Cash Balance Pension Plans.” EITF 03-4 addresses whether a cash balance retirement plan should be considered a defined contribution plan or a defined benefit plan for purposes of applying SFAS No. 87, “Employers’ Accounting for Pensions,” and, if considered a defined benefit plan, the appropriate expense attribution method. The EITF reached a consensus that cash balance plans are defined benefit plans for purposes of applying SFAS No. 87 and that such plans should apply the unit credit method for determining expense associated with the plans. A substantial majority of our domestic pension plans are cash balance pension plans that have been considered to be defined benefit plans for purposes of applying SFAS No. 87. Prior to 2004, our pension expense for cash balance plans had been determined using the projected unit credit method, which is similar to the unit credit method. Beginning in 2004, our pension expense for cash balance plans is being determined using the unit credit method. The adjustments resulting from application of this method are being treated as actuarial gains or losses pursuant to SFAS No. 87. The adoption of EITF 03-4 did not have a material effect on our results of operations or financial condition in the quarter or year-to-date period ended September 30, 2004.

     In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was enacted in the U.S. The Act expanded Medicare healthcare benefits to include an outpatient

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prescription drug benefit to Medicare eligible residents of the U.S. (Medicare Part D) beginning in 2006. Prescription drug coverage will be available to eligible individuals who voluntarily enroll under the Part D plan. As an alternative, employers may provide drug coverage at least “actuarially equivalent to standard coverage” and receive a tax-free federal subsidy equal to 28% of a portion of a Medicare beneficiary’s drug costs for covered retirees who do not enroll in a Part D plan.

     In May 2004, the FASB issued Staff Position FAS No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” to provide guidance on accounting for the effects of the Act. The Staff Position requires treating the initial effect of the employer subsidy on the accumulated postretirement benefit obligation (APBO) as an actuarial gain. The subsidy also affects the estimate of service cost in measuring the cost of benefits attributable to current service. The effects of plan amendments adopted subsequent to the Act to qualify plans as actuarially equivalent are to be treated as actuarial gains if the net effect of the amendments reduces the APBO. The net effect on the APBO of any plan amendments that (a) reduce benefits under the plan and thus disqualify the benefits as actuarially equivalent and (b) eliminate the subsidy are to be accounted for as prior service cost.

     During the three months ended September 30, 2004, we adopted the Staff Position retroactively to the beginning of 2004. The initial effect of the subsidy was a $68 reduction in our APBO at January 1, 2004 and a corresponding actuarial gain, which we deferred in accordance with our accounting policy related to postretirement benefit plans. Amortization of the actuarial gain, along with a reduction in service and interest costs, increased net income for the three months ended September 30, 2004 by $2. Because of the retroactive application of the Staff Position, net income and earnings per share for each of the first two quarters of 2004 have been restated as follows:

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Note 3. Common Shares

     The following table reconciles our average shares outstanding for purposes of calculating basic and diluted net income per share.

Note 4. Equity-Based Compensation

     In accordance with our accounting policy for stock-based compensation, we have not recognized any expense relating to our stock options. If we had used the fair value method of accounting, the alternative policy set out in SFAS No. 123, “Accounting for Stock-Based Compensation,” the after-tax expense relating to the stock options would have been $3 in the third quarter of both 2004 and 2003.

     The following table presents pro forma stock compensation expense, net of tax, net income and earnings per share as if we had included expense related to the fair value of stock options. The stock compensation expense included in our reported earnings, which was $1 in the third quarter of both 2004 and 2003, was incurred in connection with our restricted stock plans and stock awards under our stock incentive plan.

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Note 5. Pension and Other Postretirement Benefits

     The components of net periodic benefit costs for the three months and nine months ended September 30, 2004 and 2003 are shown in the following table.

     We disclosed in our 2003 Form 10-K the amounts we expected to contribute to our U.S. pension plans in 2004 if proposed legislation modifying the discount rate used to determine funding requirements were enacted. Enactment of that legislation occurred early in the second quarter of 2004. We made $28 in pension contributions during the nine months ended September 30, 2004 and now expect to contribute $5 during the last three months of the year. This amount does not include any incremental contribution we may elect to make from the proceeds of the sale of our automotive aftermarket business.

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Note 6. Comprehensive Income

     Comprehensive income includes net income and components of other comprehensive income, such as foreign currency translation and minimum pension liability adjustments that are charged or credited directly to shareholders’ equity. The deferred translation gain reported for the three months ended September 30, 2004 was $64. The effects related to the euro ($22), the Canadian dollar ($15) and the Brazilian real ($15) were the largest components of the quarterly change. For the nine months ended September 30, 2004, the $10 deferred gain was primarily the result of a strengthening Canadian dollar ($9) and British pound ($4), partially offset by the effect of a weakening euro ($6) relative to the U.S. dollar. Changes in the relative value of the euro ($65), the Canadian dollar ($55), the Brazilian real ($33) and the British pound ($8) accounted for the largest components of the $214 gain reported for the nine months ended September 30, 2003.

     Our total comprehensive income is as follows:

Note 7. Income Taxes

     The effective tax rates for the three-month and nine-month periods ended September 30, 2004 and 2003 were affected primarily by adjustments to the valuation allowances provided against deferred tax assets related to capital loss carryforwards, by adjustments associated with the finalization of prior-year returns and by the impact of adjustments to the annualized tax rate.

     The $81 of income tax benefit recognized on a pre-tax loss of $33 for the three months ended September 30, 2004 differs significantly from an expected benefit of $12 at a U.S. federal statutory tax rate of 35%. The primary reasons for this difference were a $57 reduction in our valuation allowance against deferred tax assets, a $9 benefit related to the finalization of prior-year returns and a $7 benefit recorded to adjust our estimated annual effective tax rate. The adjustment to the valuation allowance was based primarily on utilization of our capital loss carryforward in connection with DCC asset sales and the settlement of certain outstanding tax issues. For the nine months ended September 30, 2004, an $87 reduction in the valuation allowance related to the capital loss carryforward was the primary reason that we recorded a tax benefit of $78 versus an expected expense provision of $29 derived by applying the 35% statutory rate.

     The $13 income tax benefit for the three months ended September 30, 2003 recognized on pre-tax income of $20 differed from an expected expense provision of $7 at a statutory tax rate of 35%. The primary reason for this difference was a $17

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reduction in the valuation allowance against deferred tax assets related to our capital loss carryforward. For the nine months ended September 30, 2003, a $42 reduction in the valuation allowance related to the capital loss carryforward accounted for most of the difference between the $34 reported tax benefit and an $18 expected tax expense derived by applying the 35% statutory rate.

     To the extent that asset sales or other transactional activities result in capital gains, the tax liability on the capital gains is offset by the release of a portion of the valuation allowance recorded against the deferred tax asset related to our existing capital loss carryforward. The release of the valuation allowance is recognized when sales of assets or other capital gain transactions are determined to be more likely than not to occur. Any tax benefit recognized on this basis is limited to the lower of the expected overall net gain on the transaction or the expected amount of capital loss carryforward valuation allowance to be released in connection with the transaction. Our income from discontinued operations for the three months ended September 30, 2004 included a $20 tax charge related to the impending divestiture of substantially all of our automotive aftermarket business, effectively reversing the benefit recorded during the prior quarter. As of June 30, 2004, we had determined that it was more likely than not that the transaction would result in the utilization of a portion of our capital loss carryforward. During our assessment of deferred tax assets as of September 30, 2004, we determined that the projected utilization of our capital loss carryforward no longer supported the reduction of the related valuation allowance.

     Deferred tax assets at September 30, 2004, net of valuation allowances, totaled $742. We evaluate the carrying value of deferred tax assets quarterly. Excluding the capital loss carryover, the most significant portion of our deferred tax assets relates to the tax benefits recorded for U.S.-based other post-employment employee benefits (OPEB) and net operating loss (NOL) carryforwards in the U.S. Although full realization of our deferred tax assets is not assured, based on our current evaluation, we believe that it is more likely than not that we will generate sufficient U.S.-based taxable income to realize these deferred tax assets during the NOL carryforward period and the periods in which the OPEB payments will be deducted on tax returns. This assessment is based on our current forecast of future operating profitability in the U.S. and our ability to employ acceptable strategies to increase revenues and/or reduce costs in the U.S. This forecast could change as a result of changes in the competitive, operating, economic or regulatory environment and we may be required to provide a full or partial valuation allowance against these deferred tax assets in future periods.

Note 8. Business Segments

     In the first quarter of 2004, we combined the Automotive Systems Group (ASG) and the Engine and Fluid Management Group (EFMG) into a single business unit which retained the ASG name. The combined operations produce components primarily for the light vehicle original equipment (OE) manufacturer market. The combination enables their global operations serving these markets to focus resources on their common customers. The consolidation of sales, marketing and similar functions makes it impractical to continue evaluating these units as separate operations. Accordingly, our segments for the three months and nine months ended September 30, 2004 consist of our Strategic Business Units (SBUs) – the expanded ASG and the Heavy Vehicle Technologies and Systems Group (HVTSG) – and DCC. The segment data for the three months and nine months ended September 30, 2003 has been revised to reflect the combination of the former ASG and EFMG.

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     In accordance with plans announced in October 2001, we have been divesting DCC’s businesses and assets; these sales continued during the third quarter of 2004. As a result of sales and the continuing collection of payments, DCC’s total portfolio assets were reduced by $345 during the quarter, leaving assets of approximately $865 at September 30, 2004. While we are continuing to pursue the sale of many of the remaining DCC assets, we expect to retain certain assets for varying periods of time because tax attributes and/or market conditions make disposal uneconomical at this time. As of September 30, 2004, our expectation was that we would retain approximately $425 of the $865 of DCC assets held at that date; however, changes in market conditions may result in a change in our expectation. DCC’s retained liabilities include certain asset-specific financing and general obligations that are uneconomical to pay off in advance of their scheduled maturities. We expect that the cash flow generated from DCC assets, including proceeds from asset sales, will be sufficient to service DCC’s debt.

     Management evaluates the operating segments and geographic regions as if DCC were accounted for on the equity method of accounting rather than on the fully consolidated basis used for external reporting. This is done because DCC is not homogeneous with our manufacturing operations, its financing activities do not support the sales of our other operating segments and its financial and performance measures are inconsistent with those of our other operating segments. Moreover, the financial covenants contained in Dana’s long-term bank facility are measured with DCC accounted for on an equity basis.

     Information used to evaluate the segments and geographic regions is as follows:

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     Operating profit after tax (PAT) is the key internal measure of performance used by management, including our chief operating decision maker, as a measure of segment profitability. With the exception of DCC, Operating PAT represents earnings before interest and taxes (EBIT), tax-effected at 39% (our estimated long-term effective rate), plus equity in earnings of affiliates. Net Profit (Loss), which is Operating PAT less allocated corporate expenses and net interest expense, provides a secondary measure of profitability for our segments that is more comparable to that of a free-standing entity.

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The allocation is based on segment sales because it is readily calculable, easily understood and, we believe, provides a reasonable distribution of the various components of our corporate expenses among our business units.

     The Other category includes businesses unrelated to the segments, trailing liabilities for closed plants and corporate administrative functions. For purposes of presenting Operating PAT, Other also includes interest expense net of interest income, elimination of inter-segment income and adjustments to reflect the actual effective tax rate. In the Net Profit (Loss) column, Other includes the net profit or loss of businesses not assigned to the segments and closed plants (but not discontinued operations), minority interest in earnings and the tax differential.

     The following table reconciles the EBIT amount reported for our segments, excluding DCC, to our consolidated income (loss) before income taxes as presented in the condensed consolidated statement of income.

     The gains and losses recorded by DCC are not presented as Unusual items excluded from performance measures in the preceding EBIT reconciliation table since we do not include DCC’s results in EBIT for segment reporting. However, the pre-tax portion of such amounts is included within DCC’s pre-tax loss in the table.

     Our presentation of segment information includes separate reporting of Unusual items excluded from performance measures. These items include, among other things, gains and losses on divestitures and related expenses and restructuring expenses such as severance, lease continuation and asset impairment charges. The following table describes the Unusual items excluded from performance measures for the three months and nine months ended September 30, 2004.

     Certain expenses incurred in connection with our restructuring activities that are not included in the table above are included in the respective SBUs’ operating results, as are charges and credits to earnings resulting from the periodic adjustments of our

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restructuring accruals to reflect changes in our estimates of the total cost remaining on uncompleted restructuring projects and gains and losses realized on the sale of assets related to restructuring. These expenses and credits for the three months and nine months ended September 30, 2004 and 2003 are summarized by SBU in the following table. They are included in Operating PAT and Net Profit (Loss) after applying a 39% tax effect.