Dauch Corp quarterly report, Q2 FY2017

Business context and reporting period

American Axle & Manufacturing Holdings, Inc. (AAM) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The request metadata names Dauch Corp, but the filing is for AAM; verify the intended issuer. AAM acquired Metaldyne Performance Group (MPG) on April 6, 2017, expanding into metal forming, powertrain and casting and making year-over-year comparisons less comparable. AAM also acquired USM Mexico on March 1.

Financial performance and position

Q2 sales rose about 71% and first-half sales about 41%, substantially reflecting MPG consolidation. MPG contributed approximately $684m of sales and $28m of AAM-attributable net income from acquisition through June 30. Q2 AAM-attributable income declined about 7%, while first-half income increased about 9%; diluted EPS declined in both periods, in part because of shares issued for MPG. Segment Adjusted EBITDA was $325.7m in Q2 and $509.3m for the first half, versus $164.8m and $314.6m, respectively; this non-GAAP measure excludes specified costs.

Operating cash flow was $213.2m for the first six months, versus $183.5m a year earlier. Capital expenditures were $138.6m, versus $105.7m. Investing used $1,035.1m, including acquisitions; financing provided $823.9m. Cash increased $9.4m to $490.6m. At June 30, total debt was $4,261.1m, compared with $1,415.9m at year-end 2016; long-term debt, net of issuance costs, was $4,173.6m. Cash less total debt implies net debt of approximately $3.77bn. Current assets were $2,144.1m and current liabilities $1,227.2m. A $900m revolving facility had $869.8m available, after letters of credit.

Material changes versus prior period

• MPG added significant sales, assets, debt and new reportable segments; reported growth therefore is not a like-for-like measure of underlying performance.
• Q2 gross margin fell to 18.0% from 18.7% and operating margin to 7.6% from 10.9%. The period included $24.9m of MPG inventory fair-value step-up cost and $51.7m of restructuring and acquisition-related costs.
• Interest expense increased to $56.9m in Q2 from $23.4m, reflecting acquisition financing. Debt includes new term loans and $1.2bn of senior notes issued to help fund the transaction.
• First-half reported results include $67.7m of restructuring and acquisition-related costs and $26.4m of intangible amortization, compared with $2.3m of amortization in the prior-year period.
• AAM changed indirect-inventory accounting retrospectively. It recorded a $2.4m after-tax prior-period catch-up in Q2, increasing Q2 EPS by $0.02; management said the current-quarter impact versus the former method was immaterial.

Outlook, commentary and risks

• Management expected 2017 capital spending of approximately 8% of sales and annual interest expense of approximately $235m.
• Management expected an additional $15m–$20m of global restructuring charges and $30m–$40m of additional acquisition and integration charges during 2017; it expected $45m–$60m of cash charges in the second half for restructuring and acquisition/integration.
• Management said operating cash flow, cash and committed borrowing capacity should meet debt service, capital expenditure and working-capital needs. It reported no material changes to previously disclosed risk factors.
• Customer concentration remains significant: GM represented about 53% of first-half 2017 sales; FCA represented about 14%. Results are cyclical and moderately seasonal, and depend on vehicle production, especially light trucks and SUVs.
• Risks include integration and realizing MPG synergies, customer demand and program launches, foreign exchange and interest rates, raw-material costs, labor and supply disruptions, and compliance with debt covenants. A subsidiary acquired with MPG is defending a U.S. DOJ/EPA matter involving alleged Clean Air Act violations and obstruction of justice. AAM said other legal proceedings were not expected to have a material adverse effect.
• Unrecognized tax benefits, including related interest and penalties, were $50.8m at June 30, versus $30.7m at year-end; timing and impact of tax-audit outcomes were uncertain.

Most important facts for investors to verify

• Confirm issuer identity: this filing identifies American Axle & Manufacturing Holdings, Inc., not Dauch Corp.
• Assess underlying growth and profitability apart from MPG consolidation, acquisition costs and purchase-accounting inventory charges; reported comparisons are not directly comparable.
• Review the acquisition financing, leverage, variable-rate exposure, covenant headroom and the sustainability of available revolving credit.
• Track integration costs and expected synergies, along with the final purchase-price allocation, which remained provisional for significant acquired assets and liabilities.
• Monitor GM/FCA concentration, end-market volumes, the acquired subsidiary’s DOJ/EPA case, and uncertain tax positions.