Filing and reporting period
This is American Axle & Manufacturing Holdings, Inc. (AAM), not a filing identified in its text as Dauch Corp. The unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. Results include Metaldyne Performance Group (MPG) from its April 6, 2017 acquisition date; therefore, year-over-year comparisons are not directly comparable. AAM now reports Driveline, Metal Forming, Powertrain and Casting segments.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,724.4 | $1,006.9 | $4,532.1 | $3,001.5 |
| Gross profit / margin | $297.7 / 17.3% | $181.2 / 18.0% | $824.8 / 18.2% | $546.6 / 18.2% |
| Operating income / margin | $148.2 / 8.6% | $101.3 / 10.1% | $394.4 / 8.7% | $311.2 / 10.4% |
| Net income attributable to AAM | $86.2 | $61.7 | $230.8 | $193.8 |
| Diluted EPS | $0.75 | $0.78 | $2.27 | $2.47 |
| Operating cash flow | Not stated separately | Not stated separately | $420.7 | $291.0 |
| Capital expenditures | Not stated separately | Not stated separately | $278.7 | $158.7 |
- Q3 sales rose 71% year over year, including about $667 million from MPG. Nine-month sales increased 51%, including about $1.351 billion from MPG. Excluding the acquisition, management cited new program launches, metal pass-throughs and, for the nine-month period, higher supported light-truck and SUV volumes; productivity-related price reductions partly offset growth.
- Q3 net income increased, but diluted EPS declined as shares issued for the MPG acquisition increased the Q3 weighted-average share count by about 35 million. Nine-month diluted EPS also declined despite higher net income, with the share count about 23 million higher.
- Q3 gross and operating margins fell year over year; nine-month gross margin was flat while operating margin declined. Acquisition-related costs, higher amortization and interest expense contributed to the pressure.
- Nine-month operating cash flow less capital expenditures was approximately $142 million. Cash and equivalents were $549.6 million at September 30, versus $481.2 million at year-end 2016.
- Total debt was $4.255 billion, compared with $1.416 billion at year-end; cash-adjusted debt was approximately $3.706 billion. Long-term debt, net, was $4.169 billion. The company reported $869.1 million available on its $900 million revolving facility, after letters of credit.
- Current assets were $2.213 billion and current liabilities $1.285 billion, for working capital of approximately $928 million and a current ratio of about 1.72. The weighted-average interest rate on debt was 5.7% at quarter-end.
Material changes and unusual items
- AAM acquired MPG for approximately $1.53 billion in cash and shares and assumed about $1.7 billion of net debt; MPG’s existing debt was repaid at closing. The transaction added substantial goodwill and intangible assets and expanded AAM into powertrain, casting, commercial and industrial markets. AAM also acquired USM Mexico in March for an adjusted purchase price of $144.1 million, net of cash acquired.
- Debt increased to fund the MPG transaction. AAM issued $700 million of 6.25% notes due 2025 and $500 million of 6.50% notes due 2027, and established term loans and a revolving facility. Interest expense increased to $57.5 million in Q3 from $23.2 million and to $139.9 million for nine months from $70.2 million.
- Nine-month restructuring and acquisition-related costs were $90.5 million, including acquisition advisory costs, accelerated MPG stock compensation and integration expenses. The filing also reports a $24.9 million acquisition-related inventory fair-value adjustment and $2.7 million of debt redemption costs.
- Effective April 1, AAM changed its accounting for indirect inventory to expense it when purchased, applied the change retrospectively and recorded a $2.4 million after-tax cumulative adjustment in Q2 2017, increasing nine-month EPS by $0.02.
- The effective tax rate was 6.2% in Q3 and 6.3% for nine months, versus 22.4% and 21.7%, respectively, in 2016. Management attributed the lower rates principally to a greater share of income in lower-tax jurisdictions and a valuation-allowance reassessment following the MPG acquisition, partly offset by nondeductible transaction costs.
Outlook, risks and contingencies
- Management said operating cash flow, cash balances and committed borrowing capacity should be sufficient for debt service, capital spending and working capital. It expected 2017 capital spending, including MPG, of approximately 8% of sales and annual interest expense of about $235 million.
- Management expected up to $5 million of additional global restructuring charges in 2017, approximately $20–$25 million of additional integration charges, and $25–$30 million of cash restructuring and acquisition/integration charges for the remainder of 2017.
- Key disclosed risks include dependence on GM and FCA and vehicle production cycles; GM represented approximately 49% and FCA 14% of nine-month 2017 sales. The filing also highlights acquisition integration and synergy execution, customer program launches, raw-material costs, foreign exchange, interest rates, labor and supply disruptions, and compliance with debt covenants.
- The credit agreement includes leverage and interest-coverage covenants, restrictions on certain transactions and events of default that may accelerate debt and permit remedies against collateral. AAM reported no revolver borrowings at quarter-end.
- AAM disclosed a DOJ/EPA matter involving an acquired MPG subsidiary and alleged Clean Air Act violations and obstruction of justice at a closed Wisconsin facility. The company is defending the matter. AAM said other legal proceedings were not expected to have a material adverse effect; it also reported $54.4 million of unrecognized tax benefits and related interest and penalties.
- Management reported effective disclosure controls as of September 30, 2017, while noting that integration of MPG policies, processes and operations was ongoing. The filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported sales and earnings growth reflects MPG versus organic performance, and whether integration benefits and synergies are being realized.
- Debt repayment capacity, covenant headroom, variable-rate exposure and the sustainability of liquidity after acquisition spending and capital expenditures.
- Whether margins can recover as integration, restructuring and acquisition-related charges subside, while amortization and interest costs remain elevated.
- The final purchase-price allocations for MPG and USM Mexico, including goodwill, intangible valuations and contingent liabilities.
- Potential outcomes and financial exposure from the Grede Wisconsin proceedings and tax audits, as well as sensitivity to customer concentration and automotive production cycles.