Business Context and Reporting Period
American Axle & Manufacturing Holdings, Inc. (AAM) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. AAM manufactures drivetrain, driveline and related automotive components. The filing identifies American Axle & Manufacturing Holdings, Inc. as the registrant; it does not identify Dauch Corp as the registrant.
GM accounted for approximately 66% of Q1 2014 sales, down from 75% a year earlier; Chrysler accounted for 19%, up from 7%. AAM attributed much of its sales growth to Chrysler’s 2014 AWD Jeep Cherokee and heavy-duty Ram programs.
Key Financial Results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $858.8 million | $755.6 million |
| Gross profit / margin | $121.9 million / 14.2% | $104.3 million / 13.8% |
| Operating income / margin | $64.8 million / 7.5% | $44.7 million / 5.9% |
| Net income | $33.6 million | $7.3 million |
| Diluted EPS | $0.44 | $0.10 |
| Net cash used in operating activities | $55.5 million | $26.8 million |
| Capital expenditures | $47.9 million | $47.9 million |
At March 31, 2014, cash was $79.6 million, total current assets were $1,108.1 million, and total current liabilities were $697.8 million. Long-term debt was $1,578.4 million, compared with $1,559.1 million at year-end 2013. AAM had $501.7 million available under its revolving credit facility, net of letters of credit. The weighted-average interest rate on long-term debt was 6.3%.
Changes Versus the Prior Comparable Period
- Sales rose 14%; sales to customers other than GM increased 53%, to $287.8 million.
- Gross and operating margins improved, reflecting higher contribution from increased sales and lower project expense. A $4.1 million gain on sale of the Detroit Manufacturing Complex also benefited gross profit; launch timing was a partial offset.
- SG&A, including R&D, declined to $57.1 million from $59.6 million. Net R&D expense was $25.8 million versus $28.5 million.
- Interest expense fell to $25.0 million from $29.1 million, reflecting 2013 refinancing actions. Q1 2013 results included $11.3 million of debt refinancing and redemption costs; Q1 2014 did not.
- Operating cash use increased year over year, primarily amid a $194.2 million cash outflow from accounts receivable. Cash declined $74.4 million from year-end, to $79.6 million.
Outlook, Commentary, Risks and Unusual Items
- Management expected 2014 capital spending to approximate 6.5% of sales, supporting global program launches. It stated that cash, operating cash flow and committed borrowing capacity should be sufficient for capital expenditures, debt service and working capital needs.
- AAM expected approximately $17 million of 2014 cash outlay for other postretirement benefits, net of GM cost sharing; it expected no pension cash contributions in 2014 due to prefunding balances.
- Two Q1 agreements with GM generated $34.4 million and $9.3 million of deferred revenue, respectively. These amounts are to be recognized over the related programs’ lives; the first agreement’s recognition is over approximately five years, and the second’s over approximately eight years. The first agreement related to increased capacity and product mix; the second recovered costs related to a delayed program.
- AAM sold its Detroit Manufacturing Complex, receiving $9.2 million net proceeds; $7.2 million was classified as investing cash flow. The transaction also produced the $4.1 million gain noted above.
- Principal risks include dependence on GM and automotive production cycles, customer demand—particularly for light trucks and SUVs—program launches, pricing and cost pressures, labor and supply disruptions, foreign exchange, financing and covenant compliance, pensions, warranty claims, environmental requirements, and legal proceedings. Management reported no material change to previously disclosed risk factors and said it did not believe current legal matters would materially adversely affect the company.
- AAM had $59.7 million of currency forwards outstanding; a modeled 10% adverse currency move would reduce their fair value by approximately $5.4 million. A one-percentage-point interest-rate increase was estimated to affect annualized pretax earnings and cash flow by approximately $2.2 million.
Important Facts for Investors to Verify
- Confirm the issuer identity: this filing is for American Axle & Manufacturing Holdings, Inc., notwithstanding the request metadata’s “Dauch Corp” label.
- Monitor customer concentration and program volumes, especially GM exposure, as well as the ramp and profitability of Chrysler programs.
- Assess whether receivables convert to cash as expected and whether operating cash flow improves after the Q1 working-capital outflow.
- Track realization and revenue recognition of the GM deferred-revenue agreements, including expected collection of receivables and the delayed program launch.
- Review debt levels, foreign-facility borrowings, available revolving capacity, and cash requirements for capital spending and postretirement benefits.