Business context and reporting period
This is American Axle & Manufacturing Holdings, Inc. (AAM), not a filing identified as Dauch Corp, for the quarter ended June 30, 2016. AAM is a Tier I automotive supplier of driveline, drivetrain and chassis products. Results below compare Q2 and the first six months of 2016 with the corresponding 2015 periods.
Customer concentration is significant: GM represented approximately 67% of first-half 2016 sales and FCA approximately 20%. AAM describes itself as a principal supplier to GM on key full-size truck and SUV programs and a sole-source supplier on certain programs.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1,025.4m | $1,004.0m | $1,994.6m | $1,973.1m |
| Gross profit / margin | $191.4m / 18.7% | $164.5m / 16.4% | $365.4m / 18.3% | $317.3m / 16.1% |
| Operating income / margin | $111.5m / 10.9% | $93.9m / 9.4% | $209.9m / 10.5% | $178.2m / 9.0% |
| Net income | $71.0m | $58.6m | $132.1m | $111.8m |
| Diluted EPS | $0.90 | $0.75 | $1.68 | $1.43 |
| Operating cash flow | Not separately provided in the filing text for Q2 | $183.5m | $154.3m |
First-half capital expenditures were $105.7m versus $91.4m; operating cash flow less capital expenditures was $77.8m versus $62.9m. SG&A, including R&D, rose to $155.5m from $139.1m for the half, largely due to higher R&D and incentive compensation.
Balance sheet and liquidity
At June 30, 2016, cash and cash equivalents were $388.4m, total current assets $1,334.4m and current liabilities $751.9m. The resulting current ratio was approximately 1.8x. Total debt was $1,419.9m, including $3.4m current; long-term debt net of issuance costs was reported as $1,403.3m. Cash exceeded year-end 2015 by $105.9m, while total debt increased from $1,393.6m at year-end. AAM reported $513.1m available on its revolving facility and a further $62.9m available under foreign credit facilities.
Management said operating cash flow, available cash and committed borrowing capacity should be sufficient for capital expenditures, debt service, working capital and discretionary share repurchases. The filing reports a $6.6m increase in long-term debt net of issuance costs compared with year-end; MD&A separately reports total debt net of issuance costs increased $27.7m to $1,406.7m.
Material changes versus prior periods
- Q2 sales increased 2.1%; first-half sales increased 1.1%. Higher North American light-truck/SUV and passenger-car/crossover production volumes were partly offset by Brazil volume declines, lower metal pass-throughs, foreign exchange and reduced commercial-vehicle sales from an expiring program.
- First-half gross profit increased $48.1m and operating income increased $31.7m. Management attributed improved profitability to higher contribution from supported North American truck/SUV volume, better operating efficiency and lower net manufacturing costs.
- First-half diluted EPS rose to $1.68 from $1.43. Effective tax rate increased to 21.4% from 16.5%, mainly reflecting a greater share of income in higher-tax jurisdictions.
- Cash from operations increased, but capital spending also rose. Foreign-facility borrowings increased primarily to fund capital expenditure and working capital ahead of China program launches.
Outlook, risks and unusual items
- AAM expected 2016 capital spending of approximately 6% of sales, including support for global program launches. The filing provides no clear full-year sales or earnings guidance.
- The board authorized up to $100m of share repurchases through December 31, 2018. AAM repurchased 100,000 shares for $1.5m under the program in Q2; $98.5m remained authorized at quarter-end. Additional shares were purchased or withheld for employee tax obligations.
- AAM expected $30m–$40m of 2016 payments related to Mexican transfer-pricing matters; $26.1m had been paid in the first half. Unrecognized tax benefits and related interest and penalties were $29.6m at June 30, down from $48.5m at year-end.
- No 2016 cash contributions to pension trusts were required; expected other postretirement cash payments, net of GM cost sharing, were approximately $16m.
- Principal disclosed risks include dependence on GM and FCA and automotive production cycles; customer demand and vehicle mix; program launches and backlog realization; pricing and cost competitiveness; supply, labor and foreign-exchange risks; pensions; product warranty, liability and recalls; environmental and tax matters; and financing and covenant compliance. AAM reported no material change in risk factors from its 2015 Form 10-K.
- Currency forward contracts had $196.8m notional value. A 10% adverse exchange-rate move was estimated to reduce their fair value by approximately $17.9m. No interest-rate swaps were in place; a one-percentage-point rate increase was estimated to affect annualized pretax earnings and cash flow by approximately $0.6m.
- Management reported disclosure controls effective at June 30, 2016, with no material quarter changes in internal control over financial reporting. It did not believe pending legal matters or environmental spending would have a material adverse effect.
Important facts for investors to verify
- Whether production mix, metal pass-through reductions and productivity price-downs continue to affect content per vehicle and margins.
- Exposure to GM and FCA, including program terms, customer production levels and the realization of new program backlog, especially China launches.
- Cash generation relative to planned capital expenditure, foreign borrowing, and the $100m share-repurchase authorization.
- Progress and final cash cost of Mexican transfer-pricing settlements and other tax audits.
- Debt disclosures and liquidity availability, including the differing debt measures reported in the balance sheet and MD&A.