American Axle & Manufacturing Holdings, Inc. — Q3 2013 Form 10-Q
Entity note: The request identifies Dauch Corp, but the supplied filing is for American Axle & Manufacturing Holdings, Inc. (AAM). The filing covers the three and nine months ended September 30, 2013; interim financial statements are unaudited.
Business context
AAM is a Tier I automotive supplier of driveline, drivetrain and chassis products. It is highly exposed to North American truck and SUV production: GM accounted for approximately 73% of sales in the first nine months of 2013 and Chrysler approximately 9%. AAM reported higher production and launch activity, increased content on new full-size truck programs, and growth in sales to customers other than GM.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $820.8 million | $702.9 million | $2,376.0 million | $2,194.2 million |
| Gross profit / margin | $125.3 million / 15.3% | $90.7 million / 12.9% | $351.8 million / 14.8% | $315.7 million / 14.4% |
| Operating income / margin | $67.5 million / 8.2% | $30.1 million / 4.3% | $173.9 million / 7.3% | $137.8 million / 6.3% |
| Net income attributable to AAM | $31.6 million | Loss of $8.1 million | $64.7 million | $47.8 million |
| Diluted EPS | $0.41 | Loss of $0.11 | $0.84 | $0.63 |
- Q3 sales rose 17%; nine-month sales rose 8%. Management attributed growth primarily to higher volumes on major North American truck programs, new-program launches and higher non-GM sales.
- Operating performance improved with higher sales and favorable mix, lower warranty accruals, and lower material and freight costs as launch activity stabilized. Nine-month SG&A was unchanged at $177.9 million, while R&D declined to $79.4 million from $90.3 million.
- Interest expense increased to $30.0 million in Q3 and $87.9 million year to date, mainly reflecting higher average borrowings. Nine-month refinancing and redemption costs were $11.2 million.
- Operating cash flow was $102.3 million for the first nine months, versus cash use of $196.6 million in 2012. The comparison was significantly affected by $225.0 million of pension contributions in 2012; AAM said it expected no regulatory pension contributions in 2013.
- Capital expenditures were $178.2 million year to date, compared with $143.7 million. Cash ended at $118.6 million, up from $62.4 million at year-end 2012. Investing cash use was $148.9 million; financing provided $103.3 million.
Balance sheet, debt and liquidity
- At September 30, 2013, total assets were $3.12 billion, current assets $1.09 billion and current liabilities $704.1 million. Stockholders’ deficit was $46.8 million.
- Long-term debt was $1.57 billion, up from $1.45 billion at December 31, 2012. The weighted-average debt interest rate was 7.5% for the first nine months, compared with 7.9% in 2012.
- The amended revolving facility provided $523.5 million of commitments through September 2018; $23.3 million of letters of credit were issued against it. No term-facility borrowing was outstanding at quarter-end. Foreign credit facilities had $79.3 million outstanding against $111.4 million of capacity.
- Management said operating cash flow, cash balances and committed borrowing availability should cover capital spending, debt service and working-capital needs. It expected 2013 capital spending, net of equipment-sale proceeds, to be approximately 7% of sales.
Material changes, outlook and risks
- In October 2013, after quarter-end, AAM borrowed $150 million under its term facility and used the proceeds to redeem $150 million of 9.25% notes. The redemption included an $8.6 million premium and $3.5 million accrued interest; AAM expected to expense a further $3.0 million of unamortized costs. This is a subsequent event, not reflected in September 30 debt balances.
- AAM issued $400 million of 6.25% notes due 2021 and used proceeds in part to retire all $300 million of 7.875% notes. The revolving facility was also extended and expanded, and certain covenants were made more flexible.
- Management cited a customer delay affecting the EcoTrac disconnecting AWD launch. The first-quarter GM labor strike at its Thailand plant reduced nine-month sales by an estimated $12.5 million. A proposed Mexican tax change could increase upfront VAT and working-capital needs; the company could not yet estimate the 2014 liquidity impact.
- Q3 SG&A included a net $5.3 million charge related to the death of AAM’s co-founder and executive chairman, partly offset by key-man life-insurance proceeds. A separate SERP remeasurement reduced long-term benefit liabilities. Warranty liability was reduced by $6.9 million in Q3 through adjustments to prior-period accruals.
- Other risks include dependence on GM and the cyclical automotive industry, vehicle demand and production changes, program launches, pricing and cost pressures, labor disruptions, foreign exchange, pension obligations, and environmental or product-warranty claims. AAM reported no material change to previously disclosed risk factors and did not expect pending litigation or environmental matters to have a material adverse effect.
Key facts for investors to verify
- Whether sales and margin improvements persist as new truck programs ramp and launch-related costs evolve.
- GM and Chrysler concentration, and the durability of growth in non-GM sales and content per vehicle.
- Cash conversion and working-capital needs, including the effect of the proposed Mexican VAT change and planned capital spending.
- Debt reduction progress, refinancing costs, covenant headroom and the terms and use of revolving and term-facility capacity.
- The ultimate cost and timing of the EcoTrac launch delay, warranty adjustments and executive-benefit-related charges.