Dauch Corp quarterly report, Q2 FY2022

Business context and reporting period

American Axle & Manufacturing Holdings, Inc. (NYSE: AXL) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company is a global automotive supplier of Driveline and Metal Forming products. The supplied filing identifies AAM—not Dauch Corp—as the registrant.

Key financial metrics

For the six months, operating cash flow was $215.2 million, versus $346.2 million a year earlier; capital expenditures were $71.2 million. Cash and equivalents were $501.4 million at June 30, down from $530.2 million at year-end 2021. Total assets were $5.77 billion and stockholders’ equity was $469.2 million.

Gross debt was $3.08 billion at June 30 (including $14.1 million current); cash-adjusted gross debt was approximately $2.58 billion. The weighted-average debt interest rate was 5.4%. Liquidity was approximately $1.5 billion: $501 million cash, $893.5 million available on the revolving facility, and $62.7 million available under foreign facilities. Management reported no significant debt maturities before 2024.

Material changes versus comparable periods

• Q2 sales rose 12.1%, but gross profit fell 8.7% and operating income fell 13.1%; first-half sales grew 6.1%, while gross profit declined 13.6% and operating income declined 20.9%. Higher metal, commodity, utility, freight and labor costs more than offset sales growth.
• Sales benefited from improved production volumes as semiconductor-related constraints eased, metal pass-throughs and foreign exchange, and $29 million of Tekfor sales following its June 1 acquisition. AAM estimated supply-chain constraints reduced Q2 sales by $99 million in 2022 versus $162 million in 2021; the comparable first-half estimates were $193 million and $225 million.
• Q2 net income increased year over year, but included an $11.6 million non-taxable bargain-purchase gain from Tekfor. First-half net income and EPS declined substantially, with a $21.7 million unrealized loss on REE Automotive equity securities among the unusual items.
• Operating cash flow declined by $131.0 million year over year. The filing cites lower earnings and working-capital timing, including a $139 million adverse year-over-year comparison from receivables. Investing cash use increased to $150.2 million, including the Tekfor acquisition; financing cash use was $86.7 million.
• Debt was restructured in March: the Term Loan A was increased to $520 million and the revolving facility and Term Loan A maturity extended to March 2027. AAM also redeemed $220 million of 6.25% notes due 2026 and prepaid $50 million of Term Loan B during the first half.

Outlook, commentary, risks and unusual items

• Management expected supply-chain disruptions, semiconductor shortages, inflationary input costs, labor shortages, volatile production schedules and higher utilities and transportation costs to continue through 2022; their ultimate impact was described as uncertain.
• 2022 outlook in the filing: capital spending of 3.5%–4% of sales; interest expense of approximately $170–$180 million; total restructuring charges of approximately $20–$30 million; restructuring and acquisition-related operating cash payments of $30–$40 million; and approximately $5 million of integration costs. Pension funding was expected below $1 million, with postretirement cash payments of about $16.5 million net of GM cost sharing.
• Tekfor was acquired for $94.4 million, funded with cash. Preliminary purchase accounting produced an $11.6 million bargain-purchase gain; AAM noted that key valuation allocations remained provisional. Tekfor contributed approximately $29 million sales and $7 million net income in June, with the latter including the bargain gain and a $5 million inventory fair-value step-up expense.
• AAM recorded $5.4 million net pre-tax income in first-half 2022 related to the Malvern facility fire and insurance recoveries. It had estimated insurance recoveries of $88.3 million and received $81.9 million cumulatively; settlement was expected to continue through 2022, and final costs and recoveries could differ.
• AAM is contesting an IRS position concerning its 2015 U.S. tax return. It believes its position is supportable and has not recorded the proposed adjustment; if unsuccessful, estimated additional tax expense and interest for 2015–2021 could be $275–$325 million. The company cited a pending Supreme Court petition in a related taxpayer’s case.
• Customer concentration is material: GM represented about 41% of first-half 2022 sales, Stellantis 18%, and Ford 11%. Other risks include currency and interest-rate exposure, automotive cyclicality, warranty claims, environmental matters and execution of acquisition integration. Management reported disclosure controls were effective; no material risk-factor changes from the 2021 Form 10-K were reported.

Important facts for investors to verify

1. Whether cost inflation, production interruptions and labor constraints persist, and whether pricing/pass-throughs adequately offset them.
2. Underlying operating profitability excluding Tekfor’s bargain-purchase gain, the REE investment loss, fire recoveries and other identified unusual items.
3. Working-capital conversion and cash-flow recovery, including receivables and inventory trends, alongside planned capital spending and acquisition/integration cash needs.
4. Debt reduction, interest costs, covenant headroom and liquidity after the refinancing and Tekfor acquisition.
5. Developments in the IRS dispute and the potential $275–$325 million exposure, as well as final Tekfor purchase accounting and Malvern insurance settlement.