American Axle chief touts cash-flow, predicts further deleveraging

By Paul Deckelman

New York, Jan. 17 – American Axle & Manufacturing Holdings, Inc. “did lever up” last year when it acquired sector peer Metaldyne Performance Group, its chairman and chief executive officer said Wednesday.

But David C. Dauch is confident that the Detroit-based manufacturer of drivetrain components and other automotive propulsion systems will generate sufficient free cash flow that it will be able to meet, or even exceed, its previously announced targets for deleveraging following that big acquisition, which saw AAM go from being a company generating about $4 billion of annual sales to a $7 billion company.

“I think what’s been under-appreciated and is now starting to be recognized is the amount of cash that we can generate from our business and what we are doing with that cash as it relates to capital allocation of that cash going forward,” Dauch told participants at the 2018 Deutsche Bank Global Automotive Conference in Detroit.

He noted the increase in leverage resulting from the Metaldyne deal – but said that “clearly the biggest thing for us ... is the focus on deleveraging and strengthening our balance sheet, while still supporting organic growth.”

Strong cash flow generation

Dauch said that free cash flow for the just completed 2017 calendar year will come in around $330 million to $340 million, which should rise to around $350 million this year. By the end of the 2020 calendar year, he said, the company will have generated a total of more than $1.5 billion of free cash flow.

During the question-and-answer portion of the proceedings following Dauch’s formal presentation, it was asked how much of the $1.5 billion might actually be available for debt paydown.

AAM vice president and chief financial officer Christopher J. May, on hand along with Dauch, replied that outside of relatively small amounts that will be dedicated to cash restricting costs arising from the Metaldyne deal – about $20 million to $30 million for 2017, between $50 million and $75 million this year, and then trailing off to “minimal amounts” after that – “the bulk of that $1.5 billion is available for debt paydown.”

Dauch said that “when the MPG acquisition closed in April of 2017, the company projected a leverage ratio of net debt as a multiple of trailing 12-month adjusted EBITDA of around 3.5 times. The acquisition financing included $1.2 billion of new junk bonds sold in a two-part deal in March – $700 million of 6¼% senior notes due 2025 and $500 million of 6½% senior notes due 2027.

There was also a $2.45 billion senior secured credit facility, consisting of $1.55 billion of seven-year term loan debt, an $800 million five-year revolving credit facility and $100 million of five-year term loan A debt.

Leverage ratio to come down

Dauch said that the actual leverage pro forma for the transaction was a little less – around 3.3 times.

As of the end of the 2017 third quarter on Sept. 30, total debt stood at around $4.18 billion, nearly all of that considered long term. The company had just under $550 million of cash and equivalents on its books, for net debt of about $3.63 billion. With proforma adjusted EBITDA of around $1.22 billion, its leverage ratio at that time was 2.98 times.

“We said we would be at 3 [times] by the end of 2017 – we actually accomplished that in the third quarter of ’17, and we’re now around 2.9 [times] for the full year of ’17,” the CEO declared.

He continued that “we said we would be around 2 [times] by the end of 2019 – and we’re clearly on a glide path to deliver on what we committed to the investors with respect to our balance sheet and the strength of the balance sheet.”

From a liquidity standpoint, he said, AAM had set a target of having at least $1 billion of liquidity, and at the year’s end, it had $1.3 billion, allowing it to prepay $200 million of notes due in 2019 during the 2017 fourth quarter.

He said that the company has another $200 million of 7¾% non-callable “bullet” notes due in 2019, “so we’re not looking to pull that forward.”

He said that there were “other opportunities” for paying down debt in the 2020 through 2022 period, although he did not elaborate on them, other than to say that “Chris [May] and his team from a financial standpoint have given us the financial runway that we need. At the same time, they have given us optionality based on the use of our cash flow going forward as well, and again – we’ll look to continue to strengthen this as we move forward.”

© 2015 Prospect News.
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