American Axle & Manufacturing Holdings, Inc. (AAM) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing is for American Axle & Manufacturing Holdings, Inc.; the request metadata names Dauch Corp.
Business context
AAM is a global automotive, commercial and industrial supplier with Driveline, Metal Forming, Powertrain and Casting segments. It employed more than 25,000 people across nearly 90 facilities in 17 countries. General Motors represented approximately 41% of nine-month sales; FCA represented 13%. The 2017 MPG acquisition materially affects year-over-year comparisons, particularly for the nine-month period.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,817.0m | $1,724.4m | $5,576.3m | $4,532.1m |
| Gross profit / margin | $267.4m / 14.7% | $297.7m / 17.3% | $915.1m / 16.4% | $824.8m / 18.2% |
| Operating income / margin | $134.6m / 7.4% | $148.2m / 8.6% | $500.7m / 9.0% | $394.4m / 8.7% |
| Net income attributable to AAM | $63.8m | $86.2m | $304.3m | $230.8m |
| Diluted EPS | $0.55 | $0.75 | $2.63 | $2.27 |
| Total Segment Adjusted EBITDA | $275.0m | $297.8m | $939.9m | $807.2m |
Q3 sales rose about 5%, while gross profit, operating income and AAM-attributable net income fell year over year. Nine-month sales increased about 23% and attributable net income about 32%; the comparison includes nine months of MPG in 2018 versus six months in 2017. Nine-month diluted EPS also reflects approximately 12 million more shares following the MPG acquisition.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $513.2m, versus $420.7m. Capital expenditures were $391.8m, versus $278.7m; operating cash flow less capital expenditures was $121.4m.
- Cash and cash equivalents were $439.4m at September 30, 2018, up from $376.8m at year-end 2017. Total assets were $8.25bn and stockholders’ equity was $1.84bn.
- Total debt was $3.96bn, down from $4.05bn at year-end; long-term debt, net of issuance costs, was $3.87bn. The weighted-average debt interest rate was 5.9% at quarter-end. The company reported $895.7m available on its revolving facility and a further $95.1m available under foreign facilities.
- Current assets of $2.30bn compared with current liabilities of $1.41bn. Receivables and inventories rose to $1.27bn and $443.6m, respectively, from $1.04bn and $392.0m at year-end.
Material changes and unusual items
- Q3 gross margin contracted to 14.7% from 17.3%. Management cited higher material and freight costs and increased global launch activity, alongside metal pass-throughs and foreign exchange effects. Q3 Segment Adjusted EBITDA declined to $275.0m from $297.8m.
- For nine months, operating income included a $15.5m pretax gain on the sale of the Powertrain aftermarket business. The sale generated approximately $47m net proceeds.
- Restructuring and acquisition-related costs were $66.8m for nine months, including $26.6m of noncash asset impairment charges following actions to exit facilities in Driveline, Metal Forming and Powertrain. AAM revised expected 2018 restructuring charges upward to as much as $45m.
- Nine-month results also included a $15.6m gain on settlement of a capital lease and $14.6m in debt refinancing and redemption costs. AAM issued $400m of 6.25% notes due 2026 and retired its 6.25% notes due 2021; it also redeemed $100m of 6.625% notes due 2022.
- In October 2018, AAM gave notice to redeem $100m of 7.75% notes due 2019, with an expected $4.5m early-redemption premium.
Outlook, risks and contingencies
- Management expected 2018 capital spending of 7.5%–8% of sales, full-year interest expense of $210m–$220m, and cash restructuring and acquisition/integration charges of approximately $60m–$75m. It expected approximately $10m of additional acquisition and integration charges during the remainder of 2018. The filing does not provide clear full-year revenue or EPS guidance.
- Management said operating cash flow, cash balances and committed borrowing capacity should cover debt service, capital spending and working-capital needs. It expected approximately $2m of 2018 regulatory pension funding and $17m of postretirement benefit payments, net of GM cost sharing.
- Key risks include dependence on GM and FCA, cyclical vehicle production and program changeovers, customer demand, launch execution, rising input and freight costs, tariffs and trade changes, foreign exchange, facility disruption, supplier constraints, and successful MPG integration. The filing also highlights warranty, product liability, environmental, cybersecurity, pension and financing risks.
- AAM reported no material changes to previously disclosed risk factors. It said existing litigation was not expected to have a material adverse effect; environmental compliance spending was not significant in Q3. Disclosure controls were reported effective, with no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether margin pressure and lower Q3 segment EBITDA persist as launch costs, freight and materials affect profitability.
- How much reported nine-month growth reflects MPG consolidation versus underlying organic sales and earnings trends.
- Progress and costs of restructuring, facility exits, MPG integration, and realization of expected synergies.
- Working-capital requirements, capital spending, and the ability to sustain positive cash generation after investment.
- Debt refinancing and repayment plans, interest costs, and the effect of customer concentration and automotive production cycles on liquidity.