American Axle & Manufacturing Holdings, Inc. (AAM) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The interim financial statements are unaudited. The request identifies “Dauch Corp,” but the filing registrant is American Axle & Manufacturing Holdings, Inc.; confirm the intended company.
Business context
AAM is a global Tier I automotive supplier of driveline, drivetrain and related components. General Motors represented approximately 73% of first-half 2011 sales; Chrysler represented approximately 9%. AAM reported higher production volumes for the North American light-truck and SUV programs it supports.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $686.2 million | $559.6 million | $1,331.8 million | $1,081.5 million |
| Gross profit / margin | $130.5 million / 19.0% | $98.9 million / 17.7% | $245.9 million / 18.5% | $186.2 million / 17.2% |
| Operating income / margin | $71.7 million / 10.4% | $50.4 million / 9.0% | $130.4 million / 9.8% | $92.4 million / 8.5% |
| Net income attributable to AAM | $49.2 million | $25.4 million | $86.9 million | $41.7 million |
| Diluted EPS | $0.65 | $0.34 | $1.15 | $0.56 |
- Q2 sales rose about 23% year over year; first-half sales rose about 23%. First-half supported-program production volumes increased approximately 13.8%.
- First-half operating cash flow was $116.5 million, down from $164.9 million. Capital expenditures were $71.6 million versus $36.9 million, leaving operating cash flow less capital expenditures of $44.9 million, compared with $128.0 million in the prior-year period.
- At June 30, cash was $250.3 million, current assets $678.6 million, and current liabilities $628.5 million. Long-term debt was $964.6 million, down from $1,010.0 million at year-end 2010. Stockholders’ deficit was $357.9 million.
- AAM reported $345.0 million of availability under its amended revolving credit facility, after accounting for $30.0 million of standby letters of credit. Foreign facilities had $29.5 million outstanding and no additional availability. Weighted-average interest rate on long-term debt was 8.1% at June 30.
Material changes and unusual items
- Profitability improved year over year, reflecting higher sales and, for the first half, productivity gains. Gross profit also included a $6.1 million gain on sale of previously impaired equipment. GM-related expanded warranty cost sharing and product price-downs partly offset the improvement.
- R&D spending increased to $27.3 million in Q2 and $53.6 million for the first half, partly due to e-AAM, a joint venture developing electric all-wheel-drive hybrid driveline systems.
- Q2 and first-half results included $3.1 million of debt refinancing and redemption costs. AAM redeemed $42.5 million principal amount of its 9.25% Notes at 103% of principal and amended its revolving facility, extending $235 million of commitments through June 30, 2016.
- First-half tax expense was $1.9 million, including $2.8 million of net tax benefits from audit resolutions and Michigan tax legislation. AAM settled its 2004–2007 U.S. federal tax audits; gross unrecognized tax benefits fell by $28.7 million.
- GM warrants were exercised in Q1 2011; AAM issued 3.3 million net common shares under the cashless exercise provision.
Outlook, risks and contingencies
- Management expected 2011 capital spending to be 6.0%–6.5% of sales, supporting global program launches, and stated available cash, operating cash flow and committed borrowing capacity were expected to meet liquidity needs.
- Ending GM’s expedited payment terms on June 30 was expected to reduce Q3 2011 operating cash flow by approximately $175 million–$200 million as payment terms shifted to approximately 50 days. The related Second Lien Term Loan was also terminated.
- The GM Access and Security Agreement was due to expire September 28, 2011, unless specified events occurred. GM’s access rights could allow it to use facility assets and certain intellectual property or resource production elsewhere; AAM warned that invocation could materially adversely affect its business, results and financial condition.
- AAM announced plans to close its Detroit Manufacturing Complex on or after February 26, 2012, with estimated asset redeployment and related costs of $15 million–$20 million over the following 12 months. UAW negotiations covering 65 associates at Cheektowaga could result in $25 million–$35 million of redeployment and related costs, including approximately $10 million of non-cash impairment charges.
- Management estimated 2011 pension funding requirements of approximately $25 million and other postretirement cash outlays, net of GM cost sharing, of approximately $15 million. Remaining restructuring payments were expected to be about $6 million in the rest of 2011 and $5 million in 2012.
- Key risks include dependence on GM and vehicle production cycles, customer and supplier disruptions, labor negotiations, commodity and currency movements, product launches, warranty exposure, and compliance with credit-facility covenants. A 10% adverse currency move was estimated to reduce the fair value of currency contracts by about $5.3 million; a one-percentage-point interest-rate increase was estimated to affect annualized pretax earnings and cash flow by about $0.2 million.
- AAM said ordinary-course litigation and environmental matters were not expected to have a material adverse effect; environmental expenditures were not expected to be significant for the remainder of 2011. Disclosure controls were judged effective, with no material control change reported during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for American Axle & Manufacturing Holdings, Inc., not an entity identified in the request as Dauch Corp.
- Track the realized Q3 cash-flow effect of the GM payment-term change and the status/expiration of the GM Access and Security Agreement.
- Review the amended revolver’s covenant compliance, maturity schedule, and available borrowing capacity, including the short-dated commitment portions.
- Assess whether planned Detroit closure and Cheektowaga labor outcomes remain within estimated cost ranges and how costs affect cash and operating results.
- Evaluate the sustainability of earnings and cash conversion, considering the $6.1 million equipment-sale gain, higher capital spending, working-capital movements, and increased R&D.
- Monitor customer concentration and exposure to GM’s light-truck and SUV production, as well as pension and postretirement funding requirements.