Business context and reporting period
This is American Axle & Manufacturing Holdings, Inc. (AAM), not a filing under the name Dauch Corp. The unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. AAM supplies driveline, metal-forming, powertrain and casting products to automotive, commercial and industrial markets; its 2017 acquisition of Metaldyne Performance Group (MPG) materially affects year-over-year comparisons.
Key financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2017 period.
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,900.9 | $1,757.8 | $3,759.3 | $2,807.7 |
| Gross profit / margin | $331.4 / 17.4% | $316.4 / 18.0% | $647.7 / 17.2% | $527.1 / 18.8% |
| Operating income / margin | $190.3 / 10.0% | $134.3 / 7.6% | $366.1 / 9.7% | $246.2 / 8.8% |
| Net income attributable to AAM | $151.1 | $66.2 | $240.5 | $144.6 |
| Diluted EPS | $1.30 | $0.59 | $2.08 | $1.51 |
| Interest expense | $54.4 | $56.9 | $107.6 | $82.4 |
First-half operating cash flow was $289.4, versus $213.2. Capital spending was $273.0, versus $138.6; operating cash flow less capital spending was therefore about $16 million. Cash and equivalents were $353.2 at June 30, down from $376.8 at year-end 2017. Total debt was $3,979.5, including $3,873.0 of long-term debt net of issuance costs; $896.5 remained available under the revolving facility.
Material changes versus the prior period
- Q2 sales increased about 8%; first-half sales increased about 34%. The first-half increase primarily reflects six months of MPG results in 2018 versus only about three months in 2017, along with metal-price pass-throughs, foreign exchange and production changes. Management attributed about $738 million of the first-half sales increase to the additional MPG period.
- Operating income rose in both periods, but gross margin declined. Management cited program-changeover preparation costs and product mix; metal-price pass-throughs increased both sales and costs.
- First-half Segment Adjusted EBITDA was $664.9 versus $509.4. This non-GAAP measure excludes specified restructuring, acquisition-related and other items; it is not a substitute for GAAP results.
- First-half interest expense increased, principally reflecting debt issued or assumed in connection with the MPG acquisition. Weighted-average debt interest rate was 5.9% at June 30.
- Accounts receivable and inventories increased from year-end to $1,253.6 and $426.4, respectively; management linked working-capital use partly to sales, customer-payment timing, program changeovers and upcoming launches.
Outlook, commentary, risks and unusual items
- Management expected full-year 2018 capital spending of approximately 8% of sales and interest expense of $210–$220. It expected up to $45 of 2018 restructuring charges and an additional $20–$30 of acquisition and integration charges during the remainder of 2018. Cash restructuring and acquisition/integration charges for the full year were estimated at $50–$75. No full-year revenue or EPS guidance is stated in the supplied filing text.
- Q2 included a $15.5 pretax gain on the sale of the Powertrain aftermarket business (approximately $50 sale price; $47 net proceeds), a $15.6 gain on settlement of an MPG-related capital lease, and $23.9 of noncash impairment charges tied to planned facility exits. The filing also reports a $20 discrete tax benefit from reducing unrecognized tax-benefit liabilities.
- AAM issued $400 of 6.25% notes due 2026, retired its 6.25% notes due 2021, and redeemed $100 of 6.625% notes due 2022. These transactions generated debt-refinancing and redemption costs. The company expected to pay $11.4 related to the settled capital lease in the second half of 2018.
- Customer concentration is significant: GM represented about 42% of first-half sales and FCA about 13%. Management cited North American light-truck and SUV program changeovers, automotive cyclicality, customer demand, foreign exchange, interest rates, tariffs and trade-policy uncertainty, supply disruptions, and successful MPG integration among relevant risks.
- Management said it believed cash, operating cash flow and committed borrowing capacity would meet liquidity needs. It reported no material change in previously disclosed risk factors, no expected material adverse effect from current litigation, and effective disclosure controls as of June 30.
Important facts for investors to verify
- How much of sales and earnings growth reflects MPG consolidation versus organic volume, pricing, mix and foreign exchange.
- Whether gross-margin pressure and program-changeover costs persist, and whether planned launches deliver expected returns on elevated capital spending.
- Cash conversion and working-capital trends, including receivable collections and inventory levels.
- Debt-service capacity, refinancing needs, covenant compliance and the effect of variable interest rates despite hedging.
- Execution and cash cost of facility exits, restructuring and MPG integration; also monitor warranty liabilities, tax settlements and customer concentration.