Business context and reporting period
This is American Axle & Manufacturing Holdings, Inc. (AAM)’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The filing identifies AAM—not Dauch Corp—as the registrant. AAM is a global automotive supplier of driveline, metal-forming and casting products. It reorganized from four reporting segments to three in early 2019, reallocating its former Powertrain business to Driveline and Metal Forming.
Financial performance
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1,704.3 | $1,900.9 | $3,423.5 | $3,759.3 |
| Gross profit / margin | $248.3 / 14.6% | $331.4 / 17.4% | $470.5 / 13.7% | $647.7 / 17.2% |
| Operating income / margin | $119.9 / 7.0% | $190.3 / 10.0% | $214.3 / 6.3% | $366.1 / 9.7% |
| Net income attributable to AAM | $52.5 | $151.1 | $94.1 | $240.5 |
| Diluted EPS | $0.45 | $1.30 | $0.81 | $2.08 |
| Segment Adjusted EBITDA | $266.0 | $347.9 | $511.0 | $664.9 |
- Q2 sales fell approximately 10.3% year over year; AAM-attributable net income fell approximately 65%. For the first half, sales declined approximately 8.9% and attributable net income approximately 61%.
- First-half operating cash flow was $136.9, down from $289.4. Capital expenditures were $237.5, versus $273.0; operating cash flow less capital expenditures was negative $100.6, compared with positive $16.4 in 2018.
- At June 30, cash and cash equivalents were $248.8, versus $476.4 at year-end 2018. Current assets were $1,976.7 and current liabilities $1,267.1 (current ratio approximately 1.56). Cash, cash equivalents and restricted cash totaled $251.3.
- Total debt was $3,761.3, including $3,674.2 of long-term debt, net of issuance costs. The weighted-average debt interest rate was 6.0%. Net debt using cash and cash equivalents was approximately $3,512.5. Revolver availability was $894.3, net of letters of credit.
- First-half segment sales and Segment Adjusted EBITDA, respectively: Driveline $2,273.8 and $290.1; Metal Forming $765.5 and $173.3; Casting $384.2 and $47.6. Segment figures reflect the revised organization and reclassified 2018 comparatives.
Material changes and drivers
- Management attributed weaker sales chiefly to lower full-size truck volumes after the largest customer brought part of a replacement program in-house, lower crossover-program volumes, and first-quarter customer downtime from program changeovers. Metal-market pass-throughs and foreign-exchange translation also reduced first-half sales by approximately $46 overall.
- Lower production volumes, launch costs, higher material and freight expenses (including tariffs), and higher depreciation weighed on margins and segment EBITDA. New-program launches partly offset sales declines.
- SG&A, including R&D, declined to $91.3 in Q2 and $182.0 for the first half; R&D was $33.2 and $67.5, respectively.
- Prior-year comparisons included a $15.5 gain on sale of the aftermarket business, a $15.6 gain on settlement of a capital lease, and a $23.9 long-lived-asset impairment charge. These items did not recur in 2019. Restructuring and acquisition-related costs were also lower year over year.
- Q2 2018 included a $20.0 discrete tax benefit from finalizing a foreign advance pricing agreement. First-half 2019 included a $9.3 tax benefit from final Transition Tax regulations; reported effective tax rates were 10.2% for Q2 and 3.1% for the first half.
Outlook, commentary and risks
- Management expected 2019 capital spending of approximately 7% of sales, restructuring and acquisition-related cash payments of $50–$60, total restructuring charges of $25–$30, and MPG integration charges of $15–$20. Expected full-year interest expense was $215–$225.
- AAM expected approximately $8 of additional investment in its Liuzhou Wuling joint venture during the second half of 2019. It expected 2019 pension funding of approximately $2.2 and other postretirement-benefit cash payments, net of GM cost sharing, of approximately $17.7.
- On July 29, 2019, after quarter-end, AAM amended its credit agreement: it established $340 of incremental Term Loan A commitments and extended the revolver maturity to July 29, 2024. Proceeds refinanced existing Term Loan A debt and part of Term Loan B, with no additional indebtedness. AAM expected approximately $4 of amendment-related debt issuance costs and approximately $5 of write-offs in Q3.
- Customer concentration is material: GM represented approximately 39% of first-half sales and FCA approximately 14%. Risks cited include customer demand and sourcing decisions, vehicle-production cycles, tariffs and other trade changes, raw-material and freight costs, launch execution, integration, labor disruptions, currency and interest rates, and warranty, legal and environmental exposures.
- Metal Forming’s estimated fair value exceeded carrying value by approximately 11% after the reporting-unit reorganization. Management cautioned that lower future cash flows or changes in valuation assumptions could cause impairment. No goodwill impairment was identified in the first-quarter test. Management said litigation was not expected to have a material adverse effect; environmental expenditures were not significant in Q2.
- Management stated liquidity from operating cash flow, cash and borrowing capacity should be sufficient for debt service, capital expenditures, working capital and strategic initiatives. Results remain cyclical and subject to customer shutdowns and program changeovers. AAM reported effective disclosure controls; risk factors were unchanged from its 2018 Form 10-K.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for American Axle & Manufacturing Holdings, Inc., despite the request metadata naming Dauch Corp.
- Track whether lower truck and crossover volumes, customer insourcing and production changeovers persist, and whether new program launches offset those pressures.
- Assess cash conversion and investment needs: first-half operating cash flow was below capital expenditures, while cash balances declined substantially.
- Review debt service, covenant headroom, and the economics of the July 2019 credit amendment, including subsequent costs.
- Monitor Metal Forming performance and valuation assumptions, given its approximately 11% estimated fair-value cushion over carrying value.
- Check progress against restructuring, integration, capital-spending and interest-expense expectations, and follow tax audits and the recorded $51.3 liability for unrecognized tax benefits and related interest and penalties.