Business context and reporting period
American Axle & Manufacturing Holdings, Inc. (AAM; NYSE: AXL) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. AAM is a global automotive supplier of driveline, metal-forming and casting products. In Q1 2019 it reorganized its four segments into three—Driveline, Metal Forming and Casting—by redistributing the former Powertrain business. This summary reflects the named filing registrant; the request metadata’s “Dauch Corp” does not match the registrant named in the filing.
Key financial metrics
Amounts in millions of dollars except per-share data. Comparisons are with Q1 2018 unless otherwise noted.
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net sales | $1,719.2 | $1,858.4 |
| Gross profit / margin | $222.2 / 12.9% | $316.3 / 17.0% |
| Operating income / margin | $94.4 / 5.5% | $175.8 / 9.5% |
| Net income attributable to AAM | $41.6 | $89.4 |
| Diluted EPS | $0.36 | $0.78 |
| Segment Adjusted EBITDA (non-GAAP) | $245.0 | $317.0 |
| Net cash from (used in) operations | $(80.2) | $66.9 |
| Capital expenditures | $124.2 | $130.8 |
| Cash and cash equivalents | $252.1 | $476.4 at Dec. 31, 2018 |
| Total debt | $3,861.7 | $3,875.5 at Dec. 31, 2018 |
| Stockholders’ equity | $1,523.8 | $1,486.3 at Dec. 31, 2018 |
Current assets were $2,038.9 and current liabilities $1,391.5 at quarter-end. AAM reported $893.8 of availability under its revolving credit facility, after letters of credit, plus $85.5 available under foreign credit facilities. The weighted-average interest rate on long-term debt was 5.9%.
Material changes versus the prior comparable period
- Sales fell approximately 7.5%; management attributed the decline mainly to lower full-size truck sales after a major customer insourced part of a replacement program, and to customer downtime for program changeovers. Metal-market pass-throughs and foreign-exchange translation also reduced sales by approximately $12 million overall.
- Gross margin declined 4.1 percentage points and operating margin declined 4.0 points. Lower volumes and product mix, launch-related costs, and approximately $10 million of higher material and freight costs weighed on results; depreciation also increased about $13 million.
- Net income attributable to AAM decreased to $41.6 million from $89.4 million. Q1 2019 included a $9.3 million discrete tax benefit from final transition-tax regulations; Q1 2018 included $10.3 million of debt refinancing and redemption costs.
- Operating cash flow swung to an $80.2 million use from $66.9 million provided, reflecting lower earnings and cash absorbed by receivables, including payment timing from customers. Capital spending remained substantial.
- Segment Adjusted EBITDA fell to $245.0 million from $317.0 million. Driveline declined to $137.2 million from $189.7 million; Metal Forming to $85.3 million from $105.7 million; Casting increased to $22.5 million from $21.6 million.
Outlook, management commentary, risks and unusual items
- Management said cash, operating cash flow and borrowing capacity should be sufficient for debt service, capital expenditures, working capital and strategic initiatives. It expects 2019 capital spending of approximately 7% of sales and full-year interest expense of $215–$225 million.
- AAM expects $25–$35 million of restructuring charges and $15–$25 million of integration charges in 2019. Expected restructuring and acquisition-related cash payments are $50–$60 million.
- In April 2019, AAM gave irrevocable notice to redeem its $100 million of 7.75% notes due 2019 in Q2. The redemption was expected to include $0.3 million accrued interest, a $2.2 million premium and a $0.1 million write-off of unamortized issuance costs.
- A goodwill test following the segment reorganization identified no impairment. However, Metal Forming’s estimated fair value exceeded carrying value by approximately 11%; lower future cash flows or adverse valuation assumptions could eliminate that cushion and lead to impairment.
- Customer concentration is material: GM represented approximately 39% of Q1 sales and FCA approximately 12%. AAM highlighted exposure to automotive production cycles, customer demand and program transitions, input and freight costs, foreign exchange, interest rates, tariffs and trade-policy changes, supply or production disruptions, labor issues, cybersecurity, warranty and legal matters, and its ability to complete MPG integration and realize cost savings.
- AAM reported that it did not believe existing litigation would have a material adverse effect. It said there were no material changes to the risk factors in its 2018 Form 10-K. Disclosure controls were assessed as effective; ERP implementations at acquired MPG locations and new lease-accounting controls were ongoing.
Important facts for investors to verify
- Whether customer volumes, insourcing and program-changeover effects persist, particularly given GM’s 39% share of sales.
- Whether operating cash flow recovers from the Q1 outflow and receivables build, and how capital spending near 7% of sales affects liquidity.
- Progress against the $25–$35 million restructuring and $15–$25 million integration cost expectations, including expected cash payments.
- Debt service and refinancing plans, including completion and funding of the announced $100 million note redemption and ongoing compliance with credit-facility terms.
- Metal Forming’s performance and goodwill valuation headroom, stated at approximately 11% above carrying value.
- The effect of the $9.3 million discrete tax benefit on comparisons; the filing does not present this item as recurring guidance.