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American Axle and Manufacturing Inc. (AXL - Analyst Report) reported a profit of $5.2 million or 7 cents per share in the third quarter of 2012, down significantly by 86% from $38.3 million or 50 cents in the year-ago quarter. The third-quarter 2012 results excluded impacts of debt refinancing and redemption costs of $10.1 million or 14 cents and restructuring costs of $3.2 million or 4 cents while 2011 results excluded asset impairments and other non-recurring operating costs of $11.9 million or 15 cents and special charges of $1.6 million or 2 cents.

The company’s profit also considerably lagged the Zacks Consensus Estimate by 27 cents. Meanwhile, on a reported basis, the company incurred a loss of $8.1 million or 11 cents per share compared with a profit of $24.8 million or 33 cents in the third quarter of 2011.

However, the company’s revenues increased 8.5% year over year to $702.9 million during the quarter and surpassed the Zacks Consensus Estimate of $692.0 million. The company’s content-per-vehicle (calculated by dollar value of the product sales supporting the company’s customers’ North American light truck and SUV programs) was flat at $1,466 on a year-over-year basis.

Management believes that growth in sales volume and improved business diversification based on global launch activity had favorable impacts on the company’s results. However, complexity of the new products, process and facility launches, and lower capacity utilization due to a decrease in customers in certain existing programs had negative impact on the result.

Cost of goods sold rose 12.5% to $612.2 million from $544.1 million a year ago. As a result, gross profit went down 12.4% to $90.7 million from $103.5 million in the third quarter of 2011. Gross margin was 12.9% compared to 16% in the year-ago quarter.

Selling, general and administrative expenses increased 2.7% to $60.6 million or 8.6% of sales from $59.0 million or 9.1% of sales in the 2011 quarter. Research and development spending decreased marginally to $31.4 million from $31.8 million in the comparable quarter of 2011. Operating income plunged 32.3% to $30.1 million from $44.5 million, while operating margin was 4.3% versus 6.9% in the prior year.

The company progressed well in diversifying its customer base during the quarter. The company has a high exposure to customers like General Motors Company (GM - Analyst Report) and Chrysler. Non-GM sales increased 14% to $198.8 million (28.3% of sales) in the quarter from $173.9 million (27%) in the third quarter of 2011.

Adjusted earnings before interest expense, income taxes and depreciation and amortization fell 24.8% to $70.1 million (10% of sales) from $93.2 million (14.4%) a year ago.

Financial Position

American Axle had cash and cash equivalents of $209.0 million as of September 30, 2012, down from $169.2 million as of December 31, 2011. Long-term debt increased to $1.6 billion as of September 30, 2012 from $1.2 billion as of December 31, 2011.
 
In the first nine months of 2012, American Axle’s cash flow used in operating activities increased to $196.6 million from $65.4 million in the same period of 2011. Capital expenditures (net) increased to $141.5 million from $103.1 million in the first nine months of 2011. This led to a free operating cash flow use of $338.1 million in the first nine months of the year compared with $168.5 million in the same period of 2011.

Our Take

American Axle is a leading supplier of driveline systems, modules and components for the light vehicle market. The company makes axles, driveshafts and chassis components for light trucks, sport utility vehicles and passenger cars.

The company expects to benefit from its expansion in Asia, Brazil, China, India, Mexico, Poland and Thailand. Growing demand in these markets is likely to boost the production volumes of the company. However, the company faces challenges owing to its high customer concentration.

American Axle retains a Zacks #4 Rank on its shares, which translates into a short-term (1-3 months) Sell rating. We also have a long-term (more than 6 months) Neutral recommendation on the stock.
 

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