Business context and reporting period
This Form 10-Q covers the three months ended March 31, 2017. The filing is by American Axle & Manufacturing Holdings, Inc. (AAM), not Dauch Corp. AAM supplies driveline, drivetrain and related automotive components. Its April 6, 2017 acquisition of Metaldyne Performance Group (MPG) occurred after quarter-end, so MPG is not included in the reported results.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,049.9 million | $969.2 million |
| Gross profit / margin | $210.7 million / 20.1% | $174.0 million / 18.0% |
| Operating income / margin | $111.9 million / 10.7% | $98.4 million / 10.2% |
| Net income | $78.4 million | $61.1 million |
| Diluted EPS | $0.99 | $0.78 |
| Operating cash flow | $62.3 million | $26.2 million |
| Capital expenditures | $34.9 million | $50.6 million |
Q1 2017 gross margin improved 2.1 percentage points and operating margin improved 0.5 percentage points. The effective tax rate was 8.7%, versus 20.0%, primarily reflecting favorable foreign tax rates and a U.S. tax benefit related to forecast interest expense.
Liquidity, debt and cash flow
At March 31, cash and cash equivalents were $1,543.4 million, current assets were $2,573.5 million and current liabilities were $772.7 million. Total debt was $2,616.3 million, including $2,581.5 million of long-term debt, net of issuance costs. AAM reported $507.3 million available on its then-existing revolving facility and $91.2 million available under foreign credit facilities. Operating cash flow was partly offset by $174.6 million of investing cash outflows, including the $144.1 million net cash cost of acquiring USM Mexico.
In March, AAM issued $1.2 billion of senior notes to help fund the MPG transaction. At the April 6 closing, it also borrowed $100 million under a five-year term loan and $1.55 billion under a seven-year term loan, and established a $900 million revolving facility. These post-quarter transactions substantially changed the company’s financing and leverage profile; the filing does not provide a clear pro forma debt balance after all closing repayments and funding.
Material changes and management outlook
- Sales increased about 8% year over year, reflecting approximately 12% higher production volumes on supported North American light-truck and SUV programs. Content per vehicle rose to $1,630 from $1,611; 4WD/AWD penetration was 70%, compared with 71%.
- Management attributed higher gross profit chiefly to stronger contribution from increased production volumes. Lower net manufacturing costs and productivity initiatives partly offset higher volumes and metal pass-through costs.
- Q1 included $16.0 million in restructuring and acquisition-related costs. Management expected another $15–$20 million of global restructuring charges and $65–$75 million of acquisition and integration charges in 2017.
- Management expected 2017 capital spending, including MPG, of approximately 8% of sales, and annual interest expense of approximately $235 million after the notes and new credit facilities.
- Combined pro forma sales with MPG were $1.8 billion for Q1 2017 and $1.7 billion for Q1 2016. Pro forma earnings were not provided because the necessary information was not readily available.
Risks, contingencies and other notable items
- Customer concentration remains significant: GM represented approximately 67% of Q1 sales and FCA approximately 19%. AAM highlighted exposure to customer production, particularly light trucks and SUVs, as well as competition, pricing, supply, labor, foreign-exchange and integration risks.
- The new credit agreement includes leverage and interest-coverage financial covenants, restrictions on certain transactions and mandatory prepayment provisions. Borrowings are secured, subject to stated exceptions, and carry variable-rate pricing.
- A subsidiary of MPG is facing a U.S. Department of Justice and Environmental Protection Agency investigation and indictment concerning alleged Clean Air Act violations and alleged obstruction of justice at a now-closed Wisconsin facility; AAM stated it is defending the matter.
- AAM reported $38.5 million of unrecognized tax benefits and related interest and penalties at March 31, 2017. It stated that it could not estimate the timing or impact of potential changes arising from ongoing tax audits.
- Management concluded disclosure controls were effective as of March 31, 2017. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the post-acquisition debt, cash, leverage, covenant headroom and interest burden after MPG financing and repayment transactions.
- Track MPG integration, expected synergies and the actual restructuring and acquisition-related charges against management’s 2017 estimates.
- Monitor customer concentration and North American truck/SUV production, including changes in GM and FCA volumes and AAM content per vehicle.
- Review the final purchase accounting for USM Mexico and MPG, and the Wisconsin subsidiary legal matter as additional disclosures become available.
- Assess whether cash generation supports planned capital expenditures, debt service and other liquidity needs; Q1 cash balances predate the MPG closing.