Dauch Corp annual report, FY2017

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Business context and reporting period

This is American Axle & Manufacturing Holdings, Inc. (AAM; NYSE: AXL)’s Form 10-K for the fiscal year ended December 31, 2017, not a quarterly filing. The filing does not identify Dauch Corp as the registrant. AAM designs and manufactures driveline, metal-forming, powertrain and casting products. Its acquisition of Metaldyne Performance Group (MPG) closed April 6, 2017; results include MPG only from that date and are therefore not directly comparable with 2016.

Key financial metrics

  • Revenue: $6.266 billion, up 58.7% from $3.948 billion. MPG contributed approximately $2.022 billion. Fourth-quarter sales were $1.734 billion.
  • Profit: Net income attributable to AAM was $337.1 million versus $240.7 million; diluted EPS was $3.21 versus $3.06. Fourth-quarter net income attributable to AAM was $106.3 million and diluted EPS was $0.93.
  • Margins: Gross margin was 17.9% versus 18.4%; operating margin was 8.7% versus 9.6%. The reported margins include acquisition and integration effects.
  • Cash flow and investment: Operating cash flow was $647.0 million versus $407.6 million. Capital expenditures were $477.7 million versus $223.0 million; operating cash flow less capital expenditures was $169.3 million. Investing activities used $1.378 billion, mainly reflecting acquisitions.
  • Debt and liquidity: Debt was $4.051 billion before debt issuance costs; cash was $376.8 million, implying approximately $3.674 billion of debt net of cash. Long-term debt, net, was $3.969 billion. The revolving facility had $866.2 million available at year-end. Interest expense was $195.6 million, up from $93.4 million.
  • Segments: 2017 net external sales and Segment Adjusted EBITDA were Driveline $4.040 billion and $692.3 million; Metal Forming $830.0 million and $232.3 million; Powertrain $806.6 million and $131.1 million; Casting $589.7 million and $47.0 million. The latter two segments entered AAM’s reporting structure with MPG.

Material changes versus the prior comparable period

  • MPG’s acquisition substantially expanded AAM’s scale, product range, assets and debt, and added Powertrain and Casting segments. AAM also acquired USM Mexico in March 2017.
  • Revenue growth chiefly reflects the acquired business; excluding MPG, AAM cited stronger light-truck and SUV volumes and new program launches, partly offset by annual customer price reductions.
  • Net income rose, but diluted EPS increased more modestly as the share count grew by approximately 26 million shares on average following the MPG stock issuance.
  • Gross margin declined 0.5 percentage point and operating margin declined 0.9 percentage point. Restructuring and acquisition-related costs rose to $110.7 million from $26.2 million.
  • Year-end cash decreased by $104.4 million, while debt and capital spending increased substantially, reflecting the acquisition and program-launch investment.

Outlook, management commentary, risks and unusual items

  • Management expected 2018 capital spending of approximately 8% of sales, additional restructuring charges of $10–$20 million, and acquisition integration charges of approximately $40–$55 million. It expected annual interest expense of approximately $225 million.
  • Gross new and incremental business backlog was approximately $1.5 billion for programs launching in 2018–2020. Backlog depends on customer production estimates and timing and may be delayed or cancelled; it is not guaranteed revenue.
  • Management cited anticipated acquisition synergies and diversification, alongside investments in fuel efficiency, emissions reduction, lightweighting, and electric and hybrid driveline technologies. It did not provide a specific revenue or earnings forecast.
  • Customer concentration remains significant: GM accounted for 47% of 2017 sales and FCA for 14%. AAM also said its Guanajuato Manufacturing Complex represented nearly 40% of consolidated sales and a significant share of profitability and operating cash flow.
  • Principal risks include automotive cyclicality and dependence on North American light trucks and SUVs; pricing pressure; successful MPG integration and realization of synergies; launch and supply-chain execution; commodity and foreign-exchange exposure; and debt covenants and servicing. Debt agreements restrict dividends and include leverage and interest-coverage covenants.
  • The 2017 effective tax rate was 0.7% and income tax expense was $2.5 million, affected by tax-law changes, foreign earnings mix and acquisition-related tax accounting. The filing describes the Tax Cuts and Jobs Act tax accounting as provisional. MPG’s reported post-acquisition contribution to AAM net income included a disclosed $227 million tax benefit from deferred-tax remeasurement.
  • Other notable items: $24.9 million of acquisition-related inventory fair-value step-up expense; $75.3 million of intangible amortization; a $0.5 million settlement of an acquired subsidiary’s environmental matter; and an indirect-inventory accounting change applied retrospectively. Auditors gave unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

  1. Reconcile acquisition-related results, tax benefits and one-time charges to assess underlying earnings and the full-year contribution of MPG.
  2. Track debt reduction, interest costs, covenant headroom and continued availability under the revolving facility.
  3. Verify delivery of forecast integration savings while monitoring the remaining $40–$55 million of expected 2018 integration charges.
  4. Assess whether the $1.5 billion backlog converts to production and sales on schedule, and whether new business meaningfully reduces GM, FCA and Guanajuato concentration.
  5. Compare future capital spending and operating cash flow with management’s 2018 outlook, including the effect of program launches and working-capital needs.