Dauch Corp quarterly report, Q1 FY2015

Business context and reporting period

Issuer in the filing: American Axle & Manufacturing Holdings, Inc. (AAM), a Tier I automotive supplier of driveline, drivetrain and related components. This does not match the request metadata naming Dauch Corp; verify the intended issuer. The filing covers the quarter ended March 31, 2015, compared with the quarter ended March 31, 2014. Figures are unaudited and in U.S. dollars.

AAM is highly exposed to major automakers: GM represented approximately 66% of sales in both quarters, and Chrysler represented 20% in Q1 2015 versus 19% in Q1 2014.

Financial performance and position

Gross profit and operating income increased as higher sales generated greater contribution margin. The prior-year gross profit comparison included a $4.1 million gain from the Detroit Manufacturing Complex sale, which partly offset launch-timing impacts. SG&A rose to $68.5 million from $57.1 million, reflecting higher salaried staffing, incentive compensation and IT costs, including ERP upgrades. The effective tax rate declined to 14.8% from 17.3%; Q1 2015 included a $1.0 million tax benefit from settlement of IRS audits.

Operating cash flow improved year over year but remained modest relative to earnings and capital spending. The quarter’s cash use reflected, among other items, a $140.6 million increase in accounts receivable; management attributed receivables growth to higher sales and timing of weekly GM payments. Cash declined by $43.5 million during the quarter. The company reported $505.5 million available on its revolving credit facility and $46.2 million available under foreign credit facilities. Total debt less cash was approximately $1.33 billion.

Material changes and management commentary

• North American light-truck and SUV production volumes for programs supported by AAM and GM/Chrysler rose approximately 10.5%. AAM’s content per vehicle increased to $1,676 from $1,655, while 4WD/AWD penetration rose to 71.4% from 67.5%.
• Sales to customers other than GM increased 14% to $328.9 million. GM remained the dominant customer, making customer concentration a significant exposure.
• Management expected 2015 capital spending to approximate 5% of sales, supporting global program launches in 2015 and 2016. It expected approximately $16 million of 2015 postretirement-benefit cash payments, net of GM cost sharing; no 2015 pension contributions were required due to prefunding balances.
• Management said operating cash flow, cash balances and committed borrowing capacity should be sufficient for capital expenditures, debt service and working capital needs.
• Foreign currency translation reduced Q1 2015 other comprehensive income by $31.5 million; comprehensive income was $25.1 million versus $47.4 million a year earlier.

Risks, contingencies and unusual items

• Key risks include automotive cyclicality, dependence on GM and Chrysler, customer production and program changes, pricing and competition, product launches, labor disruptions, supply and raw-material constraints, foreign exchange, and execution of ERP upgrades. Management noted seasonality around customer shutdowns.
• AAM had $60.8 million of liabilities for unrecognized tax benefits and related interest and penalties at March 31, 2015. It expected Mexican tax audits for 2007–2009 to conclude before year-end 2015 and result in a cash payment; management did not expect settlement to be materially different from the recorded liability.
• Product warranty liability was $17.9 million, including $1.4 million of net adjustments to prior-period accruals during the quarter.
• Currency forwards had a $108.2 million notional amount. A 10% adverse exchange-rate move was estimated to reduce their fair value by approximately $9.9 million. A one-percentage-point increase in interest rates was estimated to affect annualized pretax earnings and cash flow by approximately $1.8 million.
• The company said pending legal matters were not expected to have a material adverse effect; environmental expenditures were not significant and were not expected to be significant for the remainder of 2015. It reported no material risk-factor changes from its 2014 Form 10-K.
• Management stated that the previously reported material weakness concerning oversight of certain accrued accounts payable changes had been remediated. Disclosure controls were considered effective as of March 31, 2015; ERP implementation was continuing through 2015 and early 2016.

Important facts for investors to verify

1. Confirm that American Axle & Manufacturing Holdings, Inc., rather than Dauch Corp, is the intended filing issuer.
2. Assess the persistence of sales and margin growth, including the extent attributable to production volumes, vehicle mix and program launches.
3. Monitor customer concentration, especially GM’s approximately 66% share of sales, and the terms and duration of key customer programs.
4. Track receivables, working-capital needs and cash conversion, given positive but low Q1 operating cash flow and substantial capital spending.
5. Review debt maturities, revolving-credit availability, tax-audit cash payments and the progress and control implications of ERP upgrades.
6. Evaluate warranty exposure, foreign-exchange sensitivity, and the timing and outcome of tax and other contingencies.