Business context and reporting period
American Axle & Manufacturing Holdings, Inc. (AAM), a Tier I automotive supplier of driveline, drivetrain and chassis products, filed this unaudited Form 10-Q for the quarter ended September 30, 2014. The request identifies “Dauch Corp,” but the filing registrant is American Axle & Manufacturing Holdings, Inc.; verify the intended issuer.
AAM’s business is closely tied to vehicle production and is concentrated in North American light trucks and SUVs. GM represented approximately 68% of sales for the first nine months of 2014 and Chrysler 18%.
Financial performance
Amounts in millions of dollars except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $950.8 | $820.8 | $2,756.5 | $2,376.0 |
| Gross profit / margin | $149.1 / 15.7% | $125.3 / 15.3% | $420.0 / 15.2% | $351.8 / 14.8% |
| Operating income / margin | $85.1 / 9.0% | $67.5 / 8.2% | $237.4 / 8.6% | $173.9 / 7.3% |
| Net income | $48.6 | $31.6 | $134.4 | $64.7 |
| Diluted EPS | $0.63 | $0.41 | $1.74 | $0.84 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $231.6 | $102.3 |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $156.2 | $178.2 |
For the first nine months, operating cash flow less capital expenditures was approximately $75.4 million, compared with negative $75.9 million in 2013. Cash at September 30 was $219.0 million. Total debt was $1,542.6 million, including $17.1 million classified as current; the revolving facility had $505.5 million available. Current assets were $1,176.9 million and current liabilities $738.5 million.
Changes versus the prior comparable period
- Q3 sales rose 15.8%; nine-month sales rose 16.0%. Management cited higher supported North American truck and SUV production, Chrysler Jeep Cherokee sales, and greater content per vehicle.
- Operating income increased to $85.1 million in Q3 and $237.4 million year to date. Higher sales contribution and, for the nine-month period, lower launch preparation costs supported improved margins.
- Nine-month net income more than doubled, while interest expense fell to $75.2 million from $87.9 million. The 2013 comparison included $11.2 million of debt refinancing and redemption costs.
- Nine-month operating cash flow increased, while capital spending declined. Debt fell modestly from $1,559.1 million at year-end 2013.
- Foreign currency translation reduced Q3 comprehensive income: comprehensive income was $23.4 million versus $48.6 million a year earlier, despite higher net income.
Outlook, commentary and risks
- Management expected 2014 capital spending to approximate 6.0% of sales, supporting global program launches. It said cash, operating cash flow and committed revolver capacity should meet liquidity needs.
- AAM expected approximately $17 million of 2014 other postretirement benefit cash payments, net of GM cost sharing; no 2014 pension contributions were required because of prefunding balances.
- A voluntary pension payout offer for eligible terminated vested participants was scheduled for October 2–November 12, 2014, with payments in December. A non-cash fourth-quarter charge was expected; its amount depended on participation, plan asset values and discount rates.
- Two GM agreements generated deferred revenue: a capacity/product-mix agreement and reimbursement for delay-related costs. Recognition was to occur over the relevant program lives; $6.9 million remained receivable from the first agreement and was expected in Q4.
- Key risks include automotive production cyclicality, heavy customer concentration, customer demand and vehicle mix, program launch execution, cost and pricing pressures, labor disruptions, foreign exchange, pension obligations, and customer or supplier financial conditions. Management reported no material change to previously disclosed risk factors. It did not believe pending litigation or environmental matters would materially affect results; environmental spending was not expected to be significant for the rest of 2014.
- Currency forwards had $89.7 million notional value; a 10% adverse currency move was estimated to reduce their fair value by approximately $8.2 million. A one-percentage-point rise in interest rates was estimated to affect annualized pretax earnings and cash flow by approximately $1.9 million.
Important facts for investors to verify
- Confirm the intended issuer: the filing is for American Axle & Manufacturing Holdings, Inc., not an entity named Dauch Corp.
- Assess dependence on GM and Chrysler and the durability of truck/SUV volumes, content-per-vehicle gains and new program launches.
- Review the quality and sustainability of cash generation, including working-capital movements and planned capital expenditures.
- Check debt maturities, covenant compliance and available liquidity; the filing reports $1.5 billion of debt and $505.5 million of revolver availability.
- Monitor the pension payout offer’s participation and the resulting fourth-quarter non-cash charge, as well as GM deferred-revenue recognition and the expected $6.9 million receipt.
- Consider foreign-exchange exposure, tax audit uncertainty in Mexico, warranty estimates and the effect of foreign losses for which tax benefits cannot be recognized.