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American Axle Tops but Profits Fall

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American Axle and Manufacturing Inc. (AXL - Free Report) posted a profit of $41.2 million or 55 cents per share (excluding special charges and restructuring costs of $36.5 million or 49 cents) in the second quarter of 2012, a 16% decline (in absolute terms) from $49.2 million or 65 cents per share in the same quarter of 2011. However, the company’s profits exceeded the Zacks Consensus Estimate by 4 cents per share.

Sales in the quarter grew 8% to $739.8 million, overriding the Zacks Consensus Estimate of $713 million. The company’s content-per-vehicle (dollar value of its product sales supporting its customers’ North American light truck and SUV programs) was $1,439 versus $1,504 in the second quarter of 2011.

The fall in content-per-vehicle was driven by a reduction in deferred revenue recognition related to an agreement between American Axle and General Motors Company (GM - Free Report) in 2008 and lower penetration of four-wheel drive in North American light truck and SUV programs.

Cost of goods sold rose 18% to $654.0 million from $555.7 million a year ago. As a result, gross profit went down 34% to $85.8 million (12% of sales) from $130.5 million (19%) in the second quarter of 2011.

Selling, general and administrative spending was almost flat at $55.5 million or 7.5% of sales compared with $58.8 million or 9% of sales in the second quarter of 2011. Research and development spending rose 5% to $28.8 million from $27.3 million in the comparable quarter of 2011.

Operating income fell 58% to $30.3 million from $71.7 million in the second quarter of 2011 due to higher costs. This translated into a lower operating margin of 4.1% versus 10.4% in the prior year.

The company progressed well in diversifying its customer base during the quarter. The company has a high exposure to customers, including GM and Chrysler. This is reflected in its non-GM sales that increased 8.5% to $198.2 million (27% of sales) in the quarter from $182.7 million (27%) in the second quarter of 2011.

Adjusted earnings before interest expense, income taxes and depreciation and amortization fell 4% to $103.3 million (14% of sales) compared with $107.5 million (15.7%) a year ago.

Financial Position

American Axle had cash and cash equivalents of $85.2 million as of June 30, 2012, down from $169.2 million as of December 31, 2011. Long-term debt was flat at $1.17 billion as of June 30, 2012 compared with $1.18 billion as of December 31, 2011.
In the first half of 2012, American Axle’s operating net cash flow deteriorated to $24.6 million from $116.5 million in the same period of 2011 due to a fall in net income. Meanwhile, capital expenditures (net) increased to $91.7 million from $63.8 million in the first half of 2011. This led to a free cash flow use of $67.1 million in the first half of the year compared with an inflow of $52.7 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’s continued leadership in the development of advanced driveline technology has helped it to grow new business backlog to $1.2 billion in future annual sales for programs launching from 2012 through 2014.

However, due to higher customer concentration, the company retains a Zacks #3 Rank on its shares, which translates to a “Hold” rating for the short-term (1-3 months) and we have reiterated our recommendation of “Neutral” for the long-term (more than 6 months).

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