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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 27, 2015

OR

 

¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number: 1-36774

 

 

Metaldyne Performance Group Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		47-1420222
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)
One Towne Square, Suite 550, Southfield, MI		48076
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (248) 727-1829

47659 Halyard Dr., Plymouth, MI 48170

(Former Address, if Changed Since Last Report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x		Smaller reporting company		¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

As of October 30, 2015 the registrant had 67,600,953 shares of voting common stock outstanding.

 

 

 

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METALDYNE PERFORMANCE GROUP INC.

FORM 10-Q

QUARTER AND NINE MONTHS ENDED SEPTEMBER 27, 2015

INDEX

 

PART I – FINANCIAL INFORMATION
ITEM 1.		FINANCIAL STATEMENTS
		UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS			2
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS			3
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME			4
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY			5
		UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS			6
		NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			7
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			29
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			46
ITEM 4.		CONTROLS AND PROCEDURES			47
PART II – OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS			48
ITEM 1A.		RISK FACTORS			48
ITEM 6.		EXHIBITS			49

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

METALDYNE PERFORMANCE GROUP INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands except per share data)

 

		September 27, 2015				December 31, 2014
Assets
Current assets:
Cash and cash equivalents		$	124,566				156,498
Receivables, net:
Trade			385,010				312,943
Other			32,648				31,943
Total receivables, net			417,658				344,886
Inventories			189,902				204,789
Deferred income taxes			8,078				12,435
Prepaid expenses			12,758				13,004
Other assets			14,258				14,524
Total current assets			767,220				746,136
Property and equipment, net			759,313				750,181
Goodwill			907,716				907,716
Amortizable intangible assets, net			726,332				778,457
Deferred income taxes, noncurrent			2,384				1,359
Other assets			39,016				40,763
Total assets		$	3,201,981				3,224,612
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	249,196				285,468
Accrued compensation			54,958				50,952
Accrued liabilities			95,735				79,934
Short-term debt			1,650				1,572
Current maturities, long-term debt and capital lease obligations			15,074				16,497
Total current liabilities			416,613				434,423
Long-term debt, less current maturities			1,859,422				1,920,310
Capital lease obligations, less current maturities			22,422				23,425
Deferred income taxes			231,113				260,703
Other long-term liabilities			55,749				60,789
Total liabilities			2,585,319				2,699,650
Stockholders’ equity:
Common stock: par $0.001, 400,000 authorized, and 67,592 and 67,075 issued and outstanding, respectively			68				67
Paid-in capital			846,149				827,307
Accumulated deficit			(177,203	)			(269,663	)
Accumulated other comprehensive loss			(55,136	)			(35,248	)
Total equity attributable to stockholders			613,878				522,463
Noncontrolling interest			2,784				2,499
Total stockholders’ equity			616,662				524,962
Total liabilities and stockholders’ equity		$	3,201,981				3,224,612

See accompanying notes to unaudited condensed consolidated financial statements.

 

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METALDYNE PERFORMANCE GROUP INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share amounts)

 

		Quarter Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
Net sales		$	746,640				772,967				2,312,042				1,954,829
Cost of sales			620,399				655,525				1,915,199				1,649,942
Gross profit			126,241				117,442				396,843				304,887
Selling, general and administrative expenses			64,714				64,694				178,769				134,254
Acquisition costs			—				—				—				13,046
Operating income			61,527				52,748				218,074				157,587
Interest expense, net			26,061				28,412				80,518				70,310
Loss on debt extinguishment			—				—				368				362
Other, net			(1,661	)			(11,571	)			(8,172	)			(7,088	)
Other expense, net			24,400				16,841				72,714				63,584
Income before tax			37,127				35,907				145,360				94,003
Income tax expense			8,808				11,196				40,275				31,136
Net income			28,319				24,711				105,085				62,867
Income attributable to noncontrolling interest			114				110				330				281
Net income attributable to stockholders		$	28,205				24,601				104,755				62,586
Weighted average shares outstanding			67,306				67,075				67,154				67,075
Cash dividends declared per share		$	0.09				—				0.18				—
Net income per share attributable to stockholders:
Basic			0.42				0.37				1.56				0.93
Diluted			0.41				0.36				1.52				0.92

See accompanying notes to unaudited condensed consolidated financial statements.

 

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METALDYNE PERFORMANCE GROUP INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

		Quarter Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
Net income		$	28,319				24,711				105,085				62,867
Other comprehensive loss, net of tax:
Foreign currency translation			(8,307	)			(7,867	)			(20,090	)			(6,107	)
Comprehensive income			20,012				16,844				84,995				56,760
Less comprehensive income attributable to noncontrolling interest			73				89				285				287
Comprehensive income attributable to stockholders		$	19,939				16,755				84,710				56,473

See accompanying notes to unaudited condensed consolidated financial statements.

 

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METALDYNE PERFORMANCE GROUP INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

		Common stock				Paid-in capital				Accumulated deficit				Accumulated other comprehensive loss				Noncontrolling interest				Total stockholders’ equity
Balance, December 31, 2014		$	67				827,307				(269,663	)			(35,248	)			2,499				524,962
Dividends											(12,295	)											(12,295	)
Stock-based compensation expense							15,379																15,379
Cash settlement of equity awards							(684	)															(684	)
Issuance of common stock			1				2,488																2,489
Excess tax benefit on stock-based compensation							1,787																1,787
Other stock activity							(20	)															(20	)
Offering-related costs							(108	)															(108	)
Net income											104,755								330				105,085
Other comprehensive loss															(20,045	)			(45	)			(20,090	)
Reclassifications, net															157								157
Balance, September 27, 2015		$	68				846,149				(177,203	)			(55,136	)			2,784				616,662

See accompanying notes to unaudited condensed consolidated financial statements.

 

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METALDYNE PERFORMANCE GROUP INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Nine Months Ended
		September 27, 2015				September 28, 2014
Cash flows from operating activities:
Net income		$	105,085				62,867
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			172,070				152,446
Debt fee amortization			2,372				5,510
Loss on fixed asset dispositions			1,857				1,446
Deferred income taxes			(25,869	)			(15,578	)
Noncash interest expense			770				706
Stock-based compensation expense			15,379				14,521
Foreign currency adjustment			(3,555	)			(10,129	)
Other			5,388				1,691
Changes in assets and liabilities:
Receivables, net			(78,263	)			(46,713	)
Inventories			9,781				(3,318	)
Accounts payable, accrued liabilities and accrued compensation			11,206				32,524
Other, current			(704	)			(6,885	)
Other, non-current			(3,905	)			1,478
Net cash provided by operating activities			211,612				190,566
Cash flow from investing activities:
Capital expenditures			(168,667	)			(102,216	)
Proceeds from sale of fixed assets			3,828				488
Capitalized patent costs			(315	)			(243	)
Grede Transaction, net of cash acquired			—				(829,656	)
Net cash used for investing activities			(165,154	)			(931,627	)
Cash flows from financing activities:
Dividends			(12,100	)			(111,259	)
Other stock activity			—				(2,444	)
Proceeds from stock issuance			2,489				260,473
Excess tax benefit on stock-based compensation			1,787				—
Cash settlement of equity awards			(684	)			—
Borrowings of revolving lines of credit			14,300				364,128
Payments of revolving lines of credit			(14,568	)			(361,510	)
Proceeds of long-term debt			1,326,625				715,000
Payments on long-term debt			(1,385,154	)			(13,028	)
Payment of debt issue costs			(149	)			(20,231	)
Other debt, net			(1,981	)			(5,487	)
Payment of offering related costs			(108	)			—
Net cash (used) provided by financing activities			(69,543	)			825,642
Effect of exchange rates on cash			(8,847	)			(3,866	)
Net (decrease) increase in cash and cash equivalents		$	(31,932	)			80,715
Cash and cash equivalents:
Cash and cash equivalents, beginning of period		$	156,498				68,224
Net (decrease) increase in cash and cash equivalents			(31,932	)			80,715
Cash and cash equivalents, end of period		$	124,566				148,939
Supplementary cash flow information:
Cash paid for income taxes, net		$	49,224				52,737
Cash paid for interest			66,148				44,095
Noncash transactions:
Capital expenditures in accounts payables			16,544				12,248
Dividends declared on restricted stock awards, not yet vested			195				—

See accompanying notes to unaudited condensed consolidated financial statements.

 

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METALDYNE PERFORMANCE GROUP INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Organization

Metaldyne Performance Group Inc. is a leading provider of components for use in engine, transmission and driveline (“Powertrain”) and chassis, suspension, steering and brake component (“Safety-Critical”) applications for the global light, commercial and industrial vehicle markets. We produce these components using complex metal-forming manufacturing technologies and processes for a global customer base of vehicle original equipment manufacturers (“OEMs”) and tier 1 suppliers. Our components help OEMs meet fuel economy, performance and safety standards. Our metal-forming manufacturing technologies and processes include aluminum casting, cold, warm and hot forging, iron casting, and powder metal-forming, as well as value-added precision machining and assembly. These technologies and processes are used to create a wide range of customized Powertrain and Safety-Critical components that address requirements for power density (increased component strength to weight ratio), power generation, power/torque transfers, strength, noise, vibration and harshness for our global customer base.

(2) Accounting Policies

Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Metaldyne Performance Group Inc. (the “Company”, “MPG”, “we”, “our”, or “its”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and as required by Regulation S-X, Rule 10-01. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of September 27, 2015 and December 31, 2014, the results of operations and comprehensive income for the quarters ended September 27, 2015 and September 28, 2014, and the results of operations, comprehensive income, and statement of cash flows for the nine months ended September 27, 2015 and September 28, 2014. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

MPG was formed through the combination of ASP HHI Holdings, Inc. (together with its subsidiaries, “HHI”), ASP MD Holdings, Inc. (together with its subsidiaries, “Metaldyne”) and ASP Grede Intermediate Holdings LLC (together with its subsidiaries, “Grede”) on August 4, 2014 (the “Combination”). The Combination occurred through mergers with three separate wholly owned merger subsidiaries of MPG. In connection with the Combination, 13.4 million shares of MPG common stock were issued in exchange for the outstanding shares of HHI, Metaldyne and Grede. On November 18, 2014, the outstanding shares of MPG Common Stock were split at a 5-to-1 ratio (the “Stock Split”). After the Stock Split, 67.1 million shares were outstanding. The number of shares authorized was increased to 400.0 million.

The Combination was accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests, that is, the bases of accounting of HHI, Metaldyne and Grede were carried over to MPG. These financial statements reflect the retrospective application of the MPG capital structure and Stock Split.

The condensed consolidated balance sheet as of December 31, 2014 was derived from our audited financial statements. The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2014.

 

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Use of significant estimates and judgments are inherent in the accounting for inventory valuation, accrued expenses, acquisitions, stock-based compensation, income taxes and employee benefit plans, as well as in the testing of goodwill and long-lived assets for potential impairment. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

(3) Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance, as agreed to by the FASB, is effective for the interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted on January 1, 2017. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the guidance on the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Topic 835-30). This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for fiscal years and interim periods beginning after December 15, 2015, and requires retrospective application. We expect to adopt this guidance when effective. Upon adoption of this guidance, the debt and total assets presented on our balance sheet will be reduced by net debt issuance costs, which totaled $20.3 million as of September 27, 2015.

 

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(4) Acquisitions

Grede was acquired on June 2, 2014 (the “Grede Transaction”). Grede revenues and earnings included in the unaudited consolidated statements of operations subsequent to the Grede Transaction were as follows:

 

		Quarter Ended September 27, 2015				Quarter Ended September 28, 2014				Nine Months September 27, 2015				Nine Months September 28, 2014
		(In thousands)
Revenues: Net sales		$	220,253				250,424				701,073				331,397
Earnings: Income (loss) before tax			7,918				3,273				38,671				(9,986	)

Supplemental Pro Forma Information

Pro forma net sales, for the nine months ended September 28, 2014, as if the Grede Transaction had occurred on January 1, 2014, were $2,381.8 million and pro forma income before income taxes was $133.1 million.

(5) Receivables Allowances

Receivables were stated net of the following allowances:

 

		September 27, 2015				December 31, 2014
		(In thousands)
Doubtful accounts		$	1,337				1,488
Pricing accruals and anticipated customer deductions			7,436				4,781
Returns			1,298				1,753
		$	10,071				8,022

(6) Inventories

Inventories were as follows:

 

		September 27, 2015				December 31, 2014
		(In thousands)
Raw materials		$	66,166				67,812
Work in process			68,932				69,929
Finished goods			54,804				67,048
Total inventories		$	189,902				204,789

(7) Property and Equipment, Net

Accumulated depreciation as of September 27, 2015, and December 31, 2014, was $389.8 million and $283.5 million, respectively.

 

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In June 2015, the Company announced plans to close its Berlin, Wisconsin facility included within the Grede segment. The closure, which is primarily a result of the industrial market slowdown, is expected to be completed by the end of fiscal 2015. In the quarter ended June 28, 2015, the Company recorded a $4.0 million asset impairment charge within cost of sales in conjunction with this announcement.

(8) Amortizable Intangible Assets

The carrying amounts and accumulated amortization of intangible assets were as follows:

 

		September 27, 2015
		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
		(In thousands)
Customer relationships and applications		$	745,200				(121,845	)			623,355
Other			126,675				(23,698	)			102,977
Total		$	871,875				(145,543	)			726,332

 

		December 31, 2014
		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
		(In thousands)
Customer relationships and platforms		$	745,200				(76,514	)			668,686
Other			126,360				(16,589	)			109,771
Total		$	871,560				(93,103	)			778,457

 

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(9) Debt

The carrying value of debt was as follows:

 

		September 27, 2015				December 31, 2014
		(In thousands)
Short-term debt:
Revolving lines of credit		$	—				—
Other short-term debt			1,650				1,572
Total short-term debt		$	1,650				1,572
Long-term debt:
Term loan facility		$	—				1,340,000
U.S. Dollar term loan			1,027,574				—
Euro term loan			251,798				—
Registered notes			600,000				600,000
Other long-term debt (various interest rates)			410				589
Total			1,879,782				1,940,589
Unamortized discount on term loans			(6,985	)			(6,579	)
Current maturities			(13,375	)			(13,700	)
Total long-term debt		$	1,859,422				1,920,310

Debt Activity

On May 8, 2015, the Company launched an offer to exchange notes registered with the SEC (the “Registered Notes”) for its existing senior notes that were not registered with the SEC. The Registered Notes have substantially identical terms as the senior notes. The exchange offer was made pursuant to a prospectus included in a Registration Statement on Form S-4 that was filed with the SEC on May 1, 2015, and declared effective by the SEC on May 8, 2015. The exchange offer was completed on June 8, 2015, and all outstanding original senior notes were tendered and exchanged for the Registered Notes.

On May 8, 2015, the Company amended its senior credit facilities to reduce the applicable interest rates on the term loan facility and to refinance its former U.S. Dollar denominated term loan with new U.S. Dollar and Euro denominated term loans as follows:

 

		Principal				Interest Rate
		(In thousands)
U.S. Dollar denominated		$	1,072,574			Libor, bearing a 1% floor, plus an applicable margin of 2.75%
Euro denominated (€225,000)			255,328			Euribor, bearing a 1% floor, plus an applicable margin of 2.75%
Total		$	1,327,902

The above terms reduced the stated interest rate on our term loan facility by 0.5 percentage points. The Euro denominated tranche was issued at an original issuance discount of 0.5%, or $1.3 million. The Company also paid fees to third parties totaling $1.8 million, of which $1.6 million was expensed. All other terms on the senior credit facilities remain substantially unchanged.

In March 2015, the Company made a voluntary prepayment of $10.0 million on its Term loan facility.

In June and September, 2015, the Company made voluntary prepayments of $20.0 million and $25.0 million, respectively, on its U.S. Dollar term loan.

Accrued interest of $27.1 million and $15.8 million as of September 27, 2015, and December 31, 2014, was reflected in accrued liabilities.

 

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(10) Equity and Dividends

Dividends

On March 10, 2015, our board of directors declared a dividend of $0.09 per share which was paid on May 26, 2015, to stockholders of record as of May 12, 2015.

On July 29, 2015, our board of directors declared a dividend of $0.09 per share which was paid on August 31, 2015, to stockholders of record as of August 17, 2015.

Changes in Accumulated Other Comprehensive Loss, Net of Tax

 

		Foreign Currency Items				Defined Benefit Items				Total
		(In thousands)
Balance, December 31, 2014		$	(27,721	)			(7,527	)			(35,248	)
Other comprehensive loss			(20,045	)			—				(20,045	)
Reclassifications, net			—				157				157
Balance, September 27, 2015		$	(47,766	)			(7,370	)			(55,136	)

 

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(11) Other, net

Included within other, net were the following (income) and expense items:

 

		Quarter Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
		(In thousands)								(In thousands)
Foreign currency gains		$	(2,825	)			(13,125	)			(11,685	)			(11,484	)
Debt transaction expenses			—				—				1,742				2,836
Other			1,164				1,554				1,771				1,560
Other, net		$	(1,661	)			(11,571	)			(8,172	)			(7,088	)

(12) Stock-based Compensation

In August 2014, our board of directors approved an equity incentive plan (the “MPG Plan”) for officers, key employees and nonemployees. The MPG Plan permits the grant of equity awards to purchase up to 5.9 million shares of MPG common stock. All awards granted on or after August 4, 2014 were issued under the MPG Plan.

Restricted Shares

In September 2015 and March 2015, the Company granted restricted stock awards and restricted stock unit awards to certain employees and nonemployee directors (collectively, the “Restricted Shares”).

The following table summarizes the terms of the Restricted Shares:

 

Vesting Terms		Number of Shares				Weighted Average Grant-date Fair Value
		(In thousands)
1/3rd per year on grant-date anniversary			770			$	19.58

The Restricted Shares are being expensed based on their grant-date fair value on a straight-line basis over the requisite service period for the entire award. The grant-date fair value was determined using the fair value of the Company’s common stock as of the grant date.

Changes in the number of Restricted Shares outstanding for the nine months ended September 27, 2015 were as follows:

 

		Number of Restricted Shares				Weighted Average Grant-date Fair Value
		(In thousands)
Balance, December 31, 2014			847			$	15.00
Granted			770				19.58
Vested			(71	)			15.13
Forfeited			(16	)			16.04
Balance, September 27, 2015			1,530				17.29

 

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Options

In March 2015, the Company granted options to certain employees with the following terms:

 

Vesting Terms

Number of Options

Exercise Price

Contractual Terms

(In thousands)

(In years)

1/3rd per year on grant-date anniversary

438

$

18.90

10

The options are being expensed on their grant-date fair value of $9.03 per option on a straight-line basis over the requisite service period for the entire award. The grant-date fair value for the options was determined using a Black-Scholes valuation model based on the following weighted average assumptions:

 

Exercise price		$	18.90
Expected term			6 years
Risk-free rate			1.8	%
Expected volatility			60.0	%
Expected dividend yield			1.9	%
Per share market value of MPG common stock		$	18.90

The risk-free rate was determined based on U.S. Treasury yield curves of securities matching the expected term of the awards. The expected term was determined using the simplified method as the Company did not have sufficient historical exercise data to provide a reasonable basis upon which to estimate an expected term. Expected volatility was estimated based on the historical volatility of comparable companies within our industry. The expected dividend yield was determined based on the expected annual dividend amount divided by the common stock price as of the grant date.

Changes in the number of options outstanding for the nine months ended September 27, 2015, were as follows:

 

		Number of Options				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
		(In thousands)								(In years)				(In millions)
Balance, December 31, 2014			6,442			$	10.54				8.5
Granted			438				18.90				10.0
Forfeited			(32	)			8.58				7.8
Exercised			(488	)			5.29				7.4
Balance, September 27, 2015			6,360				11.53				7.8			$	53.5
Options exercisable, September 27, 2015			2,566				12.03				7.7				20.5

Stock-based Compensation Expense

 

		Quarter ended								Nine months ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
		(In thousands)								(In thousands)
Restricted shares		$	2,718				—				6,022				—
Options			5,129				9,908				9,357				14,521
Total		$	7,847				9,908				15,379				14,521

 

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Compensation expense associated with the outstanding stock-based awards was recognized within selling, general and administrative expense. In July and August 2015, the Company accelerated vesting for certain awards as part of employee retirement agreements, resulting in additional expense related to restricted shares and options of approximately $0.8 million and $3.1 million, respectively, for the three months ended September 27, 2015. Total unrecognized compensation cost related to non-vested awards as of September 27, 2015 was approximately $41.0 million, and is expected to be recognized ratably over the remaining vesting terms.

(13) Income Taxes

The Company is required to adjust its effective tax rate each quarter based upon its estimated annual effective tax rate. The Company must also record the tax impact of certain discrete, unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate.

Income tax expense for the quarter ended September 27, 2015 and September 28, 2014 was $8.8 million and $11.2 million, respectively. Income tax expense for the nine months ended September 27, 2015 and September 28, 2014 was $40.3 million and $31.1 million, respectively. The effective income tax rate for the quarter ended September 27, 2015 and September 28, 2014 was 23.7% and 31.2%, respectively. The effective income tax rate for the nine months ended September 27, 2015 and September 28, 2014 was 27.7% and 33.1%, respectively.

The effective income tax rate for the quarter ended September 27, 2015 decreased compared to prior year primarily due to the inclusion of $5.2 million of non-deductible transaction costs and other non-recurring permanent differences in the prior year, in addition to a net change of $0.6 million in discrete items. In addition to the items impacting the quarter, income tax expense for the nine month period ended September 27, 2015 includes a tax benefit of $3.1 million relating to the enactment of Senate Bill 441 in the state of Indiana, eliminating the throwback rule for calculating state income tax expense. Income tax expense for the nine month period ended September 29, 2014 includes a tax expense of $1.3 million for establishing a valuation allowance against loss carryforwards of the Company’s Brazilian subsidiary, of which $0.9 million represents a discrete tax expense. Due to the history of losses at the entity, the Company concluded it was no longer more likely than not that the net deferred tax asset would be realized.

The effective tax rate for the periods ended September 27, 2015 and September 29, 2014 varies from statutory rates primarily due to income taxes on foreign earnings which are taxed at rates different from the U.S. statutory rate and other permanent items. Further, the Company’s current and future provision for income taxes may be impacted by the recognition of valuation allowances in certain countries.

(14) Retirement Plans

The net expense recognized for the Company’s defined benefit pension plans was $0.3 million for the quarter ended September 28, 2014 and $0.8 million and $1.0 million for the nine months ended September 27, 2015 and September 28, 2014, respectively. There was no net expense recognized for the Company’s defined benefit pension plans for the quarter ended September 27, 2015.

(15) Commitments and Contingencies

Various claims, lawsuits and administrative proceedings are pending or threatened against the Company or its subsidiaries, covering a wide range of matters that arise in the ordinary course of the Company’s business activities, primarily with respect to commercial, environmental and occupational and employment matters. Commercial disputes vary in nature and have historically been resolved by negotiations between the parties. Although the outcome of any of these matters cannot be predicted with certainty, the Company does not believe that any of these proceedings or matters in which the Company is currently involved will have a material adverse effect on the Company’s results of operations, financial position or cash flows.

In addition, the Company is conducting remediation actions at certain of its facilities. An accrual estimate for each environmental matter is established using standard engineering cost estimating techniques on an

 

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undiscounted basis. In determining such costs, consideration is given to the professional judgment of Company environmental engineers. The Company believes any liability that may result from the resolution of environmental matters for which sufficient information is available to support these cost estimates will not have a material adverse effect on the Company’s results of operations, financial position or cash flows. The Company cannot predict the effect of compliance with environmental laws and regulations with respect to unknown environmental matters on the Company’s results of operations, financial position or cash flows or the possible effect of compliance with environmental requirements imposed in the future.

(16) Fair Value

 

		September 27, 2015								December 31, 2014
		Carrying Value				Fair Value				Carrying Value				Fair Value
		(In thousands)
Registered notes		$	600,000				630,000				600,000				615,000
Term loan facility			—				—				1,333,421				1,343,350
U.S. Dollar term loan			1,021,777				1,026,290				—				—
Euro term loan			250,609				252,113				—				—

The fair values of the Registered Notes and term loans were estimated using quoted market prices. As the markets for this debt are not active, the debt is categorized as Level 2 within the fair value hierarchy.

The fair value of the Company’s other financial instruments, cash and cash equivalents, revolving lines of credit and other long-term debt, are estimated to equal their carrying values due to their nature.

(17) Net Income per Share Attributable to Stockholders (“EPS”)

The Company’s basic and diluted EPS were calculated as follows:

 

		Quarter Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
		(In thousands except per share amounts)								(In thousands except per share amounts)
Weighted-average shares outstanding
Basic shares			67,306				67,075				67,154				67,075
Equivalent shares for outstanding stock-based compensation awards			1,708				1,640				1,823				835
Diluted shares			69,014				68,715				68,977				67,910
Income attributable to stockholders
Basic EPS attributable to stockholders		$	0.42				0.37				1.56				0.93
Diluted EPS attributable to stockholders			0.41				0.36				1.52				0.92

 

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(18) Related Party Transactions

HHI, Metaldyne and Grede were parties to management services agreements with American Securities. These agreements were terminated upon completion of the initial public offering of the Company’s common stock on December 12, 2014. Management fees and expenses totaling $1.0 million and $11.7 million for the quarter and nine months ended September 28, 2014, respectively, were paid to American Securities under the agreements. There were no amounts due to American Securities as of September 27, 2015 and December 31, 2014.

As of September 27, 2015, affiliates of American Securities held 76.0% of the outstanding common stock of the Company.

 

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(19) Segment Information

The Company is organized and operated as three operating segments: the HHI segment, the Metaldyne segment and the Grede segment.

Segment information was as follows:

 

		Quarter ended September 27, 2015
		External Sales				Intersegment Sales				Adjusted EBITDA				Capital Spending				Depreciation/ Amortization
		(In thousands)
HHI		$	243,971				2,154				51,250				15,799				20,271
Metaldyne			282,416				319				48,513				21,018				19,140
Grede			220,253				50				29,066				15,688				17,459
Elimination and other			—				(2,523	)			—				1,205				—
Total		$	746,640				—				128,829				53,710				56,870

 

		Quarter ended September 28, 2014
		External Sales				Intersegment Sales				Adjusted EBITDA				Capital Spending				Depreciation/ Amortization
		(In thousands)
HHI		$	236,309				2,546				45,354				13,442				19,632
Metaldyne			286,234				403				49,917				19,815				22,890
Grede			250,424				—				35,031				10,886				19,391
Elimination and other			—				(2,949	)			—				—				—
Total		$	772,967				—				130,302				44,143				61,913

 

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		Nine months ended September 27, 2015
		External Sales				Intersegment Sales				Adjusted EBITDA				Capital Spending				Depreciation/ Amortization
		(In thousands)
HHI		$	750,136				6,596				157,358				52,384				58,697
Metaldyne			860,833				943				151,995				59,225				58,662
Grede			701,073				179				105,663				55,762				54,711
Elimination and other			—				(7,718	)			—				1,296				—
Total		$	2,312,042				—				415,016				168,667				172,070

 

		Nine months ended September 28, 2014
		External Sales				Intersegment Sales				Adjusted EBITDA				Capital Spending				Depreciation/ Amortization
		(In thousands)
HHI		$	729,464				7,137				146,390				39,952				58,100
Metaldyne			893,968				802				159,466				48,994				70,073
Grede			331,397				—				47,104				13,270				24,273
Elimination and other			—				(7,939	)			—				—				—
Total		$	1,954,829				—				352,960				102,216				152,446

Elimination and other above reflects the elimination of intercompany sales.

 

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The reconciliation from the Company’s net income to Adjusted EBITDA was as follows:

 

		Quarter Ended								Nine Months Ended
		September 27, 2015				September 28, 2014				September 27, 2015				September 28, 2014
		(In thousands)								(In thousands)
Net income		$	28,319				24,711				105,085				62,867
Income tax expense			8,808				11,196				40,275				31,136
Interest expense, net			26,061				28,412				80,518				70,310
Depreciation and amortization			56,870				61,913				172,070				152,446
(Gain) loss on foreign currency			(2,825	)			(13,125	)			(11,685	)			(11,484	)
Loss on fixed assets			1,509				261				1,857				1,446
Loss on debt extinguishment			—				—				368				362
Debt transaction expenses			—				—				1,742				2,836
Stock-based compensation			7,847				9,908				15,379				14,521
Sponsor management fees			—				1,500				—				3,653
Non-recurring acquisition and purchase accounting items			1,329				4,619				1,366				22,757
Non-recurring operational items			911				907				8,041				2,110
Adjusted EBITDA		$	128,829				130,302				415,016				352,960

 

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(20) Guarantor

Our Registered Notes and outstanding balances under our senior credit facilities are guaranteed by all of the Company’s existing and future domestic subsidiaries (“Guarantor Subsidiaries”). All of the Guarantor Subsidiaries are 100% owned by Metaldyne Performance Group Inc. (“Parent”) and MPG Holdco I Inc., the Company’s wholly owned subsidiary (“Issuer”). The guarantee is full, unconditional, joint and several. The Company’s non-domestic subsidiaries (“Non-Guarantor Subsidiaries”) have not guaranteed the Registered Notes or the senior credit facilities.

The accompanying supplemental condensed, consolidating financial information is presented using the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the Company’s share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions.

 

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Unaudited Condensed Consolidating Balance Sheet

September 27, 2015

(In thousands)

 

		Parent				Issuer				Guarantor				Non- Guarantor				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	2,232				5,990				5,088				111,256				—				124,566
Receivables, net:
Trade			—				—				312,320				73,349				(659	)			385,010
Other			—				—				66,986				23,893				(58,231	)			32,648
Total receivables, net			—				—				379,306				97,242				(58,890	)			417,658
Inventories			—				—				144,947				44,955				—				189,902
Deferred income taxes			—				—				4,595				3,483				—				8,078
Prepaid expenses			616				1,676				6,681				3,785				—				12,758
Other assets			102				—				7,278				6,878				—				14,258
Total current assets			2,950				7,666				547,895				267,599				(58,890	)			767,220
Property and equipment, net			—				1,583				530,917				226,813				—				759,313
Goodwill			—				—				673,209				234,507				—				907,716
Amortizable intangible assets, net			—				—				575,382				150,950				—				726,332
Deferred income taxes, noncurrent			—				—				108				2,276				—				2,384
Other assets			—				23,210				37,261				13,197				(34,652	)			39,016
Intercompany receivables			55,060				1,776,054				1,316				—				(1,832,430	)			—
Investment in subsidiaries			600,677				664,885				672,142				—				(1,937,704	)			—
Total assets		$	658,687				2,473,398				3,038,230				895,342				(3,863,676	)			3,201,981
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	1				802				177,986				95,823				(25,416	)			249,196
Accrued compensation			—				3,240				34,864				16,854				—				54,958
Accrued liabilities			385				28,995				47,689				52,152				(33,486	)			95,735
Short-term debt			—				—				—				1,650				—				1,650
Current maturities, long-term debt and capital lease obligations			—				13,244				1,681				149				—				15,074
Total current liabilities			386				46,281				262,220				166,628				(58,902	)			416,613
Long-term debt, less current maturities			—				1,859,143				12,827				22,092				(34,640	)			1,859,422
Capital lease obligations			—				—				22,402				20				—				22,422
Deferred income taxes			—				—				224,117				6,996				—				231,113
Other long-term liabilities			—				432				29,768				25,549				—				55,749
Intercompany payables			44,423				(33,135	)			1,822,011				(869	)			(1,832,430	)			—
Total liabilities			44,809				1,872,721				2,373,345				220,416				(1,925,972	)			2,585,319
Stockholders’ equity:
Total equity attributable to stockholders			613,878				600,677				664,885				672,142				(1,937,704	)			613,878
Noncontrolling interest			—				—				—				2,784				—				2,784
Total stockholders’ equity			613,878				600,677				664,885				674,926				(1,937,704	)			616,662
Total liabilities and stockholders’ equity		$	658,687				2,473,398				3,038,230				895,342				(3,863,676	)			3,201,981

 

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Unaudited Condensed Consolidating Balance Sheet

December 31, 2014

(In thousands)

 

		Parent				Issuer				Guarantor				Non- Guarantor				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	1				52,253				3,182				101,062				—				156,498
Receivables, net:
Trade			—				—				253,648				61,805				(2,510	)			312,943
Other			—				266				55,750				19,511				(43,584	)			31,943
Total receivables, net			—				266				309,398				81,316				(46,094	)			344,866
Inventories			—				—				157,379				47,410				—				204,789
Deferred income taxes			—				—				8,560				3,875				—				12,435
Prepaid expenses			600				2,770				6,986				2,648				—				13,004
Other assets			—				—				6,425				8,099				—				14,524
Total current assets			601				55,289				491,930				244,410				(46,094	)			746,136
Property and equipment, net			—				—				517,700				232,481				—				750,181
Goodwill			—				—				673,209				234,507				—				907,716
Amortizable intangible assets, net			—				—				616,313				162,144				—				778,457
Deferred income taxes, noncurrent			—				—				—				1,359				—				1,359
Other assets			—				24,581				15,694				13,439				(12,951	)			40,763
Intercompany receivables			11,982				1,858,569				—				—				(1,870,551	)			—
Investment in subsidiaries			516,381				529,838				656,504				—				(1,702,723	)			—
Total assets		$	528,964				2,468,277				2,971,350				888,340				(3,632,319	)			3,224,612
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	—				538				197,088				103,662				(15,820	)			285,468
Accrued compensation			—				—				36,357				14,595				—				50,952
Accrued liabilities			918				17,937				38,353				53,124				(30,398	)			79,934
Short-term debt			—				—				268				1,304				—				1,572
Current maturities, long-term debt and capital lease obligations			—				13,500				(19,034	)			22,031				—				16,497
Total current liabilities			918				31,975				253,032				194,716				(46,218	)			434,423
Long-term debt, less current maturities			—				1,919,921				12,826				390				(12,827	)			1,920,310
Capital lease obligations			—				—				23,384				41				—				23,425
Deferred income taxes			—				—				254,433				6,270				—				260,703
Other long-term liabilities			—				—				32,869				27,920				—				60,789
Intercompany payables			5,583				—				1,864,968				—				(1,870,551	)			—
Total liabilities			6,501				1,951,896				2,441,512				229,337				(1,929,596	)			2,699,650
Stockholders’ equity:
Total equity attributable to stockholders			522,463				516,381				529,838				656,504				(1,702,723	)			522,463
Noncontrolling interest			—				—				—				2,499				—				2,499
Total stockholders’ equity			522,463				516,381				529,838				659,003				(1,702,723	)			524,962
Total liabilities and stockholders’ equity		$	528,964				2,468,277				2,971,350				888,340				(3,632,319	)			3,224,612

 

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Unaudited Condensed Consolidating Statements of Operations

Quarter Ended September 27, 2015 and September 28, 2014

(In thousands)

 

For the quarter ended September 27, 2015		Parent				Issuer				Guarantor				Non-Guarantor				Eliminations				Consolidated
Net sales		$	—				—				605,590				180,925				(39,875	)			746,640
Cost of sales			—				—				507,654				152,620				(39,875	)			620,399
Gross profit			—				—				97,936				28,305				—				126,241
Selling, general and administrative expenses			—				—				53,835				10,879				—				64,714
Operating profit			—				—				44,101				17,426				—				61,527
Interest expense, net			1				24,801				(1,134	)			2,393				—				26,061
Other, net			3				613				(2,254	)			(23	)			—				(1,661	)
Other expense, net			4				25,414				(3,388	)			2,370				—				24,400
Income (loss) before tax			(4	)			(25,414	)			47,489				15,056				—				37,127
Income tax expense (benefit)			—				(8,306	)			12,856				4,258				—				8,808
Income (loss) before from equity in subsidiaries			(4	)			(17,108	)			34,633				10,798				—				28,319
Earnings from equity in subsidiaries			28,209				45,317				10,684				—				(84,210	)			—
Net income			28,205				28,209				45,317				10,798				(84,210	)			28,319
Income attributable to noncontrolling interest			—				—				—				114				—				114
Net income attributable to stockholders		$	28,205				28,209				45,317				10,684				(84,210	)			28,205
For the quarter ended September 28, 2014
Net sales		$	—				—				616,529				187,905				(31,467	)			772,967
Cost of sales			—				—				524,991				162,001				(31,467	)			655,525
Gross profit			—				—				91,538				25,904				—				117,442
Selling, general and administrative expenses			(750	)			—				53,621				11,823				—				64,694
Operating profit			750				—				37,917				14,081				—				52,748
Interest expense, net			—				—				25,677				2,735				—				28,412
Other, net			—				—				(8,813	)			(2,758	)			—				(11,571	)
Other expense, net			—				—				16,864				(23	)			—				16,841
Income before tax			750				—				21,053				14,104				—				35,907
Income tax expense			263				—				10,309				624				—				11,196
Income before from equity in subsidiaries			487				—				10,744				13,480				—				24,711
Earnings from equity in subsidiaries			24,114				24,114				13,370				—				(61,598	)			—
Net income			24,601				24,114				24,114				13,480				(61,598	)			24,711
Income attributable to noncontrolling interest			—				—				—				110				—				110
Net income attributable to stockholders		$	24,601				24,114				24,114				13,370				(61,598	)			24,601

 

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Unaudited Condensed Consolidating Statements of Operations

Nine Months Ended September 27, 2015 and September 28, 2014

(In thousands)

 

For the nine months ended September 27, 2015		Parent				Issuer				Guarantor				Non-Guarantor				Eliminations				Consolidated
Net sales		$	—				—				1,856,874				555,667				(100,499	)			2,312,042
Cost of sales			—				—				1,549,472				466,226				(100,499	)			1,915,199
Gross profit			—				—				307,402				89,441				—				396,843
Selling, general and administrative expenses			—				—				146,040				32,729				—				178,769
Operating profit			—				—				161,362				56,712				—				218,074
Interest expense, net			1				76,502				(3,242	)			7,257				—				80,518
Loss on debt extinguishment			—				368				—				—				—				368
Other, net			3				(1,806	)			(6,990	)			621				—				(8,172	)
Other expense, net			4				75,064				(10,232	)			7,878				—				72,714
Income (loss) before tax			(4	)			(75,064	)			171,594				48,834				—				145,360
Income tax expense (benefit)			—				(24,313	)			50,026				14,562				—				40,275
Income (loss) before from equity in subsidiaries			(4	)			(50,751	)			121,568				34,272				—				105,085
Earnings from equity in subsidiaries			104,759				155,510				33,942				—				(294,211	)			—
Net income			104,755				104,759				155,510				34,272				(294,211	)			105,085
Income attributable to noncontrolling interest			—				—				—				330				—				330
Net income attributable to stockholders		$	104,755				104,759				155,510				33,942				(294,211	)			104,755

 

For the nine months ended September 28, 2014		Parent				Issuer				Guarantor				Non-Guarantor				Eliminations				Consolidated
Net sales		$	—				—				1,508,123				534,459				(87,753	)			1,954,829
Cost of sales			—				—				1,280,310				457,385				(87,753	)			1,649,942
Gross profit			—				—				227,813				77,074				—				304,887
Selling, general and administrative expenses			—				—				106,169				28,085				—				134,254
Acquisition costs			—				—				13,046				—				—				13,046
Operating profit			—				—				108,598				48,989				—				157,587
Interest expense, net			—				—				62,743				7,567				—				70,310
Loss on debt extinguishment			—				—				362				—				—				362
Other, net			—				—				(15,160	)			8,072				—				(7,088	)
Other expense, net			—				—				47,945				15,639				—				63,584
Income before tax			—				—				60,653				33,350				—				94,003
Income tax expense			—				—				24,345				6,791				—				31,136
Income before from equity in subsidiaries			—				—				36,308				26,559				—				62,867
Earnings from equity in subsidiaries			62,586				62,586				26,278				—				(151,450	)			—
Net income			62,586				62,586				62,586				26,559				(151,450	)			62,867
Income attributable to noncontrolling interest			—				—				—				281				—				281
Net income attributable to stockholders		$	62,586				62,586				62,586				26,278				(151,450	)			62,586

 

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Unaudited Condensed Consolidating Statements of Comprehensive Income

Quarter and Nine Months Ended September 27, 2015 and September 28, 2014

(In thousands)

 

For the quarter ended September 27, 2015		Parent				Issuer				Guarantor				Non-Guarantor				Eliminations				Consolidated
Net income		$	28,205				28,209				45,317				10,798				(84,210	)			28,319
Other comprehensive loss, net of tax:
Foreign currency translation			(8,307	)			(8,622	)			(8,622	)			(8,701	)			25,945				(8,307	)
Comprehensive income			19,898				19,587				36,695				2,097				(58,265	)			20,012
Less comprehensive income attributable to noncontrolling interest			—				—				—				73				—				73
Comprehensive income attributable to stockholders		$	19,898				19,587				36,695				2,024				(58,265	)			19,939
For the quarter ended September 28, 2014
Net income		$	24,601				24,114				24,114				13,480				(61,598	)			24,711
Other comprehensive loss, net of tax:
Foreign currency translation			(7,867	)			(7,867	)			(7,867	)			(11,255	)			26,989				(7,867	)
Comprehensive income			16,734				16,247				16,247				2,225				(34,609	)			16,844
Less comprehensive income attributable to noncontrolling interest			—				—				—				89				—				89
Comprehensive income attributable to stockholders		$	16,734				16,247				16,247				2,136				(34,609	)			16,755
For the nine months ended September 27, 2015
Net income		$	104,755				104,759				155,510				34,272				(294,211	)			105,085
Other comprehensive loss, net of tax:
Foreign currency translation			(20,090	)			(20,665	)			(20,665	)			(18,347	)			59,677				(20,090	)
Comprehensive income			84,665				84,094				134,845				15,925				(234,534	)			84,995
Less comprehensive income attributable to noncontrolling interest			—				—				—				285				—				285
Comprehensive income attributable to stockholders		$	84,665				84,094				134,845				15,640				(234,534	)			84,710
For the nine months ended September 28, 2014
Net income		$	62,586				62,586				62,586				26,559				(151,450	)			62,867
Other comprehensive loss, net of tax:
Foreign currency translation			(6,107	)			(6,107	)			(6,107	)			(9,388	)			21,602				(6,107	)
Comprehensive income			56,479				56,479				56,479				17,171				(129,848	)			56,760
Less comprehensive income attributable to noncontrolling interest			—				—				—				287				—				287
Comprehensive income attributable to stockholders		$	56,479				56,479				56,479				16,884				(129,848	)			56,473

 

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Unaudited Condensed Consolidating Statements of Cash Flows

Nine Months Ended September 27, 2015 and September 28, 2014

(In thousands)

 

For the nine months ended September 27, 2015		Parent				Issuer				Guarantor				Non-Guarantor				Eliminations				Consolidated
Cash flows from operating activities:
Net cash provided by (used for) operating activities		$	15,085				(35,824	)			176,143				56,208				—				211,612
Cash flows from investing activities:
Capital expenditures			—				(1,296	)			(130,657	)			(36,714	)			—				(168,667	)
Proceeds from sale of fixed assets			—				—				3,655				173				—				3,828
Capitalized patent costs			—				—				(315	)			—				—				(315	)
Intercompany activity			(4,238	)			49,381				—				—				(45,143	)			—
Net cash provided by (used for) investing activities			(4,238	)			48,085				(127,317	)			(36,541	)			(45,143	)			(165,154	)
Cash flows from financing activities:
Dividends			(12,100	)			—				—				—				—				(12,100	)
Stock-based compensation activity, net			3,592				—				—				—				—				3,592
Borrowings of revolving lines of credit			—				14,300				—				—				—				14,300
Repayments of revolving lines of credit			—				(14,300	)			(268	)			—				—				(14,568	)
Proceeds from long-term debt			—				1,326,625				—				—				—				1,326,625
Payments on long-term debt			—				(1,385,000	)			(154	)			—				—				(1,385,154	)
Other debt, net			—				—				(2,224	)			243				—				(1,981	)
Payment of debt issue costs			—				(149	)			—				—				—				(149	)
Payment of offering related costs			(108	)			—				—				—				—				(108	)
Intercompany activity			—				—				(44,774	)			(869	)			45,143				—
Net cash used for financing activities			(8,616	)			(58,524	)			(47,420	)			(626	)			45,143				(69,543	)
Effect of exchange rates on cash			—				—				—				(8,847	)			—				(8,847	)
Net increase (decrease) in cash and cash equivalents		$	2,231				(46,263	)			1,906				10,194				—				(31,932	)
Cash and cash equivalents:
Cash and cash equivalents, beginning of period			1				52,253				3,182				101,062				—				156,498
Net increase (decrease) in cash and cash equivalents			2,231				(46,263	)			1,906				10,194				—				(31,932	)
Cash and cash equivalents, end of period		$	2,232				5,990				5,088				111,256				—				124,566
For the nine months ended September 28, 2014
Cash flows from operating activities:
Net cash provided by operating activities		$	4,072				782				121,479				64,233				—				190,566
Cash flows from investing activities:
Capital expenditures			—				—				(75,236	)			(26,980	)			—				(102,216	)
Proceeds from sale of fixed assets			—				—				475				13				—				488
Capitalized patent costs			—				—				(243	)			—				—				(243	)
Grede Transaction, net of cash acquired			—				—				(812,578	)			(17,078	)			—				(829,656	)
Intercompany activity			(3,982	)			(782	)			—				—				4,764				—
Net cash used for investing activities			(3,982	)			(782	)			(887,582	)			(44,045	)			4,764				(931,627	)
Cash flows from financing activities:
Dividends			—				—				(111,259	)			—				—				(111,259	)
Other stock activity			—				—				(2,444	)			—				—				(2,444	)
Proceeds from stock issuance			1				—				244,805				15,667				—				260,473
Borrowings of revolving lines of credit			—				—				364,128				—				—				364,128
Repayments of revolving lines of credit			—				—				(359,210	)			(2,300	)			—				(361,510	)
Proceeds from long-term debt			—				—				715,000				—				—				715,000
Payments on long-term debt			—				—				(13,028	)			—				—				(13,028	)
Other debt, net			—				—				(5,461	)			(26	)			—				(5,487	)
Payment of debt issue costs			—				—				(20,231	)			—				—				(20,231	)
Intercompany activity			—				—				6,476				(1,712	)			(4,764	)			—
Net cash provided by financing activities			1				—				818,776				11,629				(4,764	)			825,642
Effect of exchange rates on cash			—				—				—				(3,866	)			—				(3,866	)
Net increase in cash and cash equivalents		$	91				—				52,673				27,951				—				80,715
Cash and cash equivalents:
Cash and cash equivalents, beginning of period			—				—				720				67,504				—				68,224
Net increase in cash and cash equivalents			91				—				52,673				27,951				—				80,715
Cash and cash equivalents, end of period		$	91				—				53,393				95,455				—				148,939

 

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(21) Subsequent events

On October 28, 2015, our board of directors declared a dividend of $0.09 per share, payable on December 3, 2015, to stockholders of record as of November 20, 2015.

 

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ITEM  2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion in conjunction with Management’s Discussion and Analysis of Financial Conditions and Results of Operations included in our Annual Report for the year ended December 31, 2014 as filed on March 16, 2015 with the Securities and Exchange Commission (“SEC”) and the notes to our Condensed Consolidated Financial Statements included elsewhere in this report.

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Form 10-Q”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the SEC, including the documents incorporated herein by reference, in materials delivered to stockholders, and in press releases. In addition, our officers and representatives may from time to time make oral forward-looking statements.

All statements other than statements of historical fact or relating to present facts or current conditions included in this Form 10-Q are forward-looking statements. Forward-looking statements give our current beliefs, expectations and assumptions relating to our financial condition, results of operations, plans, projections, objectives, strategies, anticipated events and trends, future performance and business, the economy and other future conditions. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “will,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “could,” “can have,” “likely,” “goal,” “seek,” “strategy,” “future,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

The forward-looking statements contained in this Form 10-Q are based on assumptions that we have made. As you read and consider this Form 10-Q, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions and you should not rely on any of these forward-looking statements. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors are difficult to predict and could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements, including many factors that are outside of our control. We believe these factors include, but are not limited to, those described under or incorporated in “Item 1A. Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements.

Any forward-looking statement made by us in this Form 10-Q is based only on information currently available to us and speaks only as of the date on which we make it. Factors or events that could cause our actual operating and financial performance to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

Overview

We are a leading provider of highly-engineered components for use in powertrain and safety-critical applications for the global light, commercial and industrial vehicle markets. We produce these components using complex metal-forming manufacturing technologies and processes for a global customer base of vehicle original equipment manufacturers and tier 1 suppliers. We are headquartered in Southfield, Michigan, and our manufacturing is conducted in 56 production facilities located throughout North and South America, Europe and Asia.

 

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Our Segments

We are organized in, operate and report our results of operations for three segments:

 

•

HHI segment, which is comprised of the HHI business;

 

•

Metaldyne segment, which is comprised of the Metaldyne business; and

 

•

Grede segment, which is comprised of the Grede business.

We allocate the corporate costs of MPG equally among the three segments due to their similar size and nature of the costs, unless a cost is specific to a certain segment.

Results of Operations

Quarter Ended September 27, 2015 compared to Quarter Ended September 28, 2014

The following table sets forth our statement of operations for the periods presented.

 

		Quarter Ended
		September 27, 2015				September 28, 2014
		(In millions)
Net sales		$	746.6				773.0
Cost of sales			620.4				655.5
Gross profit			126.2				117.5
Selling, general and administrative expenses			64.8				64.7
Operating income			61.4				52.8
Interest expense, net			26.0				28.4
Other, net			(1.7	)			(11.5	)
Income before taxes			37.1				35.9
Income tax provision			8.8				11.2
Net income			28.3				24.7
Income attributable to noncontrolling interests			0.1				0.1
Net income attributable to stockholders		$	28.2				24.6

Net Sales

Net sales were $746.6 million for the quarter ended September 27, 2015 as compared to $773.0 million for the quarter ended September 28, 2014, a decrease of $26.4 million. This decrease was primarily driven by the impact of lower material surcharge pass through of approximately $27.0 million, unfavorable foreign currency movements of approximately $17.0 million, net price decreases of approximately $7.0 million, and lower industrial market volumes. These decreases were partially offset by increased volumes due to higher light vehicle production.

 

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The following table sets forth our net sales by segment for the quarters ended September 27, 2015 and September 28, 2014:

 

		Quarter Ended								Increase (Decrease)				Percent Change
		September 27, 2015				September 28, 2014
		(In millions)
HHI segment		$	243.9				236.3				7.6				3.2	%
Metaldyne segment			282.4				286.3				(3.9	)			(1.4	%)
Grede segment			220.3				250.4				(30.1	)			(12.0	%)
Total		$	746.6				773.0				(26.4	)

 

 

The increase in HHI net sales was primarily attributable to increased volumes mainly from higher North American light vehicle production levels partially offset by lower raw material surcharge pass-through and price decreases.

The slight decrease in Metaldyne net sales was primarily attributable to foreign currency movements, net price decreases and lower raw material pass-through partially offset by increased volumes due to higher North American and European light vehicle production levels.

The decrease in Grede net sales was primarily attributable to the decrease in industrial volume, heavy truck volume and lower raw material surcharge pass-through, offset slightly by an increase in light vehicle volume.

 

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Cost of Sales

Cost of sales was $620.4 million for the quarter ended September 27, 2015 as compared to $655.5 million for the quarter ended September 28, 2014, a decrease of $35.1 million. The decrease was primarily driven by favorable foreign currency movements of approximately $16.0 million, lower raw material surcharge costs of approximately $28.0 million, net manufacturing cost reductions and lower depreciation. These decreases were partially offset by a net increase in volume. The volume change was due to higher light vehicle production, partially offset by lower industrial production.

The following table sets forth our cost of sales by segment for the quarters ended September 27, 2015 and September 28, 2014:

 

		Quarter Ended								Increase (Decrease)				Percent Change
		September 27, 2015				September 28, 2014
		(In millions)
HHI segment		$	199.7				197.7				2.0				1.1	%
Metaldyne segment			237.5				243.9				(6.4	)			(2.6	%)
Grede segment			183.2				213.9				(30.7	)			(14.3	%)
Total		$	620.4				655.5				(35.1	)

 

 

The slight increase in HHI cost of sales was primarily due to increased volumes, offset by lower scrap sales price, lower raw material surcharge costs and net manufacturing cost savings.

The decrease in Metaldyne cost of sales was primarily attributable to foreign currency movements, lower depreciation and lower raw material surcharge costs partially offset by increased volumes and higher wages, benefits and utilities.

The decrease in Grede cost of sales was primarily attributable to the lower volumes in the industrial and heavy truck markets, as well as lower raw material surcharge costs and lower depreciation.

 

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Gross Profit

Gross profit was $126.2 million for the quarter ended September 27, 2015 as compared to $117.5 million for the quarter ended September 28, 2014, an increase of $8.7 million. This increase was driven largely by the impact of lower depreciation and net manufacturing cost reductions, in addition to the factors discussed above.

The following table sets forth our gross profit by segment for the quarters ended September 27, 2015 and September 28, 2014:

 

		Quarter Ended								Increase				Percent Change
		September 27, 2015				September 28, 2014
		(In millions)
HHI segment		$	44.2				38.6				5.6				14.5	%
Metaldyne segment			44.9				42.3				2.6				6.1	%
Grede segment			37.1				36.6				0.5				1.4	%
Total		$	126.2				117.5				8.7

 

 

The increase in HHI gross profit was primarily attributable to increased sales volume and net manufacturing cost savings. These increases were partially offset by lower scrap sales and higher wages.

The increase in Metaldyne gross profit was primarily attributable to increased sales volumes and lower depreciation, partially offset by foreign currency movements, net price decreases and higher wages, benefits and utilities.

The slight increase in Grede gross profit was primarily attributable to lower depreciation and amortization.

 

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Operating Income

Operating income was $61.4 million for the quarter ended September 27, 2015 as compared to $52.8 million for the quarter ended September 28, 2014, an increase of $8.6 million. The increase was primarily driven by higher gross profit, slightly offset by higher selling, general, and administrative expenses.

The following table sets forth our operating income by segment for the quarters ended September 27, 2015 and September 28, 2014:

 

		Quarter Ended								Increase (Decrease)				Percent Change
		September 27, 2015				September 28, 2014
		(In millions)
HHI segment		$	24.9				17.2				7.7				44.8	%
Metaldyne segment			26.6				23.9				2.7				11.3	%
Grede segment			9.9				11.7				(1.8	)			(15.4	%)
Total		$	61.4				52.8				8.6

 

 

The increase in HHI operating income was primarily attributable to the increase in gross profit and decrease in SG&A costs.

The increase in Metaldyne operating income was primarily attributable to the increase in gross profit.

The decrease in Grede operating income was primarily attributable to an increase in selling, general, and administrative costs, mainly wage and benefit costs, including healthcare, slightly offset by an increase in gross profit.

Interest Expense, Net

Interest expense, net was $26.0 million for the quarter ended September 27, 2015 compared to $28.4 million for the quarter ended September 28, 2014, a decrease of $2.4 million. The decrease in interest expense was largely due to a reduction in debt fee amortization due to the refinancing of debt in the fourth quarter of 2014 and the pay down of long-term debt in 2015.

Other, Net

Other, net was $1.7 million of income for the quarter ended September 27, 2015 as compared to income of $11.5 million for the quarter ended September 28, 2014, an unfavorable change of $9.8 million. The change in other, net was primarily due to a decrease in gains associated with foreign currency transactions.

Income Taxes

The income tax provision for the quarter ended September 27, 2015 and September 28, 2014 was $8.8 million and $11.2 million, respectively. The $2.4 million decrease was primarily attributable to a lower effective tax rate, partially offset by higher income before taxes due to the factors discussed above. The effective income tax rate for the quarter ended September 27, 2015 decreased compared to prior year primarily due to the impact of $5.2 million of non-deductible transaction costs and other non-recurring permanent differences in the prior year, in addition to a net change of $0.6 million in discrete items. Our effective tax rate for the three months ended September 27, 2015 and September 28, 2014 was 23.7% and 31.2%, respectively.

 

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Net Income Attributable to Stockholders

Net income attributable to stockholders was $28.2 million, or 3.8% of net sales for the quarter ended September 27, 2015, as compared to $24.6 million, or 3.2% of net sales for the quarter ended September 28, 2014, an increase of $3.6 million. The increase was primarily attributable to the factors discussed above.

Adjusted EBITDA

Management’s assessment of performance includes an evaluation of Adjusted EBITDA. The following table sets forth Adjusted EBITDA by segment.

 

		Quarter Ended
		September 27, 2015				September 28, 2014
		(In millions)
Adjusted EBITDA
HHI segment		$	51.2				45.4
Metaldyne segment			48.5				49.9
Grede segment			29.1				35.0
Total		$	128.8				130.3

 

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EBITDA is calculated as net income before interest expense, income tax expense (benefit) and depreciation and amortization. Adjusted EBITDA is calculated as EBITDA adjusted for:

 

•

(gain) loss on foreign currency;

 

•

(gain) loss on fixed assets;

 

•

debt transaction expenses;

 

•

stock-based compensation;

 

•

sponsor management fees;

 

•

non-recurring acquisition and purchase accounting related items; and

 

•

non-recurring operational items.

Adjusted EBITDA eliminates the effects of items that we do not consider indicative of our core operating performance. Adjusted EBITDA is a supplemental measure of operating performance that does not represent and should not be considered as alternatives to net income, as determined under GAAP, and our calculation of Adjusted EBITDA may not be comparable to those reported by other companies.

Management believes the inclusion of the adjustments to Adjusted EBITDA are appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future. By providing this non-GAAP financial measure, together with a reconciliation to GAAP results, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives. We believe Adjusted EBITDA is used by investors as supplemental measures to evaluate the overall operating performance of companies in our industry.

Management uses Adjusted EBITDA or comparable metrics:

 

•

as a measurement used in comparing our operating performance on a consistent basis;

 

•

to calculate incentive compensation for our employees;

 

•

for planning purposes, including the preparation of our internal annual operating budget;

 

•

to evaluate the performance and effectiveness of our operational strategies; and

 

•

to assess compliance with various metrics associated with our agreements governing our indebtedness.

 

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Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

 

•

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

•

Adjusted EBITDA does not reflect all GAAP non-cash and non-recurring adjustments;

 

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect the cash requirements for such replacements;

 

•

Adjusted EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; and

 

•

Adjusted EBITDA does not reflect the non-cash component of employee compensation.

To address these limitations, we reconcile Adjusted EBITDA to the most directly comparable GAAP measure, net income. Further, we also review GAAP measures and evaluate individual measures that are not included in Adjusted EBITDA.

 

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The following table sets forth the reconciliation between Adjusted EBITDA and net income, the most directly comparable GAAP measure:

 

		Quarter Ended
		September 27, 2015				September 28, 2014
		(In millions)
Net income		$	28.3				24.7
Income tax expense			8.8				11.2
Interest expense, net			26.0				28.4
Depreciation and amortization			56.9				62.0
Gain on foreign currency			(2.8	)			(13.2	)
Loss on fixed assets			1.5				0.2
Stock-based compensation			7.9				9.9
Sponsor management fees			—				1.5
Non-recurring acquisition and purchase accounting related items			1.3				4.7
Non-recurring operational items			0.9				0.9
Adjusted EBITDA		$	128.8				130.3

 

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Nine Months Ended September 27, 2015 compared to Nine Months Ended September 28, 2014

The following table sets forth our statement of operations for the periods presented.

 

		Nine Months Ended
		September 27, 2015				September 28, 2014
		(In millions)
Net sales		$	2,312.0				1,954.8
Cost of sales			1,915.2				1,649.9
Gross profit			396.8				304.9
Selling, general and administrative expenses			178.8				134.3
Acquisition costs			—				13.0
Operating income			218.0				157.6
Interest expense, net			80.5				70.4
Loss on debt extinguishment			0.4				0.3
Other, net			(8.2	)			(7.1	)
Income before taxes			145.3				94.0
Income tax provision			40.3				31.1
Net income			105.0				62.9
Income attributable to noncontrolling interests			0.3				0.3
Net income attributable to stockholders		$	104.7				62.6

Net Sales

Net sales were $2,312.0 million for the nine months ended September 27, 2015 as compared to $1,954.8 million for the nine months ended September 28, 2014, an increase of $357.2 million. This increase was primarily driven by the impact of the Grede acquisition of approximately $409.0 million and increased volumes, mainly due to higher light vehicle production volume, partially offset by unfavorable foreign currency movements of approximately $57.0 million, lower raw material surcharge pass-through of approximately $46.0 million and net price decreases of approximately $10.0 million.

The following table sets forth our net sales by segment for the nine months ended September 27, 2015 and September 28, 2014:

 

		Nine Months Ended								Increase (Decrease)				Percent Change
		September 27, 2015				September 28, 2014
		(In millions)
HHI segment		$	750.1				729.4				20.7				2.8	%
Metaldyne segment			860.8				894.0				(33.2	)			(3.7	%)
Grede segment			701.1				331.4				369.7
Total		$	2,312.0				1,954.8				357.2

 

The increase in HHI net sales was primarily attributable to increased volumes due to higher North American light vehicle production levels partially offset by lower raw material surcharge pass-through and price decreases.

The decrease in Metaldyne net sales was primarily attributable to foreign currency movements, net price decreases and lower raw material pass-through partially offset by increased volumes due to higher North American and European light vehicle production levels.

 

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The increase in Grede net sales was primarily attributable to the additional five months of results included in the nine month ended September 27, 2015, offset by lower raw material pass-through surcharges and lower volumes in the industrial market.

Cost of Sales

Cost of sales was $1,915.2 million for the nine months ended September 27, 2015 as compared to $1,649.9 million for the nine months ended September 28, 2014, an increase of $265.3 million. This increase was primarily driven by the impact of the Grede acquisition of approximately $338.0 million, lower scrap sales, and higher wages, benefits and utilities. These increases were partially offset by favorable foreign currency movements of approximately $51.0 million, lower raw material surcharge costs of approximately $45.0 million, net manufacturing cost reductions, and lower depreciation.

The following table sets forth our cost of sales by segment for the nine months ended September 27, 2015 and September 28, 2014:

 

		Nine Months Ended								Increase (Decrease)				Percent Change
		September 27, 2015				September 28, 2014
		(In millions)
HHI segment		$	609.9				605.1				4.8				0.8	%
Metaldyne segment			720.9				759.7				(38.8	)			(5.1	%)
Grede segment			584.4				285.1				299.3
Total		$	1,915.2				1,649.9				265.3

 

The increase in HHI cost of sales was primarily due to increased volumes, lower scrap sales and higher wages, benefits and utilities partially offset by lower raw material surcharge costs and net manufacturing cost savings.

The decrease in Metaldyne cost of sales was primarily attributable to foreign currency movements, lower depreciation and raw material surcharge costs partially offset by increased volumes and higher wages, benefits and utilities.

The increase in Grede cost of sales was primarily attributable to the additional five months of results included in the nine months ended September 27, 2015, partially offset by lower raw material surcharge costs.

Gross Profit

Gross profit was $396.8 million for the nine months ended September 27, 2015 as compared to $304.9 million for the nine months ended September 28, 2014, an increase of $91.9 million. This increase was primarily driven by the impact of the Grede acquisition of approximately $71.0 million, increased volumes, net manufacturing cost reductions, and lower depreciation. These increases were partially offset by lower scrap sales of approximately $9.0 million driven by the decline in the scrap metal market, in addition to the factors discussed above.

 

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The following table sets forth our gross profit by segment for the nine months ended September 27, 2015 and September 28, 2014:

 

		Nine Months Ended								Increase (Decrease)				Percent Change
		September 27, 2015				September 28, 2014
		(In millions)
HHI segment		$	140.2				124.3				15.9				12.8	%
Metaldyne segment			139.9				134.2				5.7				4.2	%
Grede segment			116.7				46.4				70.3
Total		$	396.8				304.9				91.9

 

The increase in HHI gross profit was primarily attributable to increase in light vehicle sales volume and net manufacturing cost savings partially offset by lower scrap sales and increased wages and benefits.

The increase in Metaldyne gross profit was primarily attributable to lower depreciation and increased sales volumes partially offset by net price decreases and foreign currency movements.

The increase in Grede gross profit was primarily attributable to the additional five months of results included in the nine months ended September 27, 2015.

Operating Income

Operating income was $218.0 million for the nine months ended September 27, 2015 as compared to $157.6 million for the nine months ended September 28, 2014, an increase of $60.4 million. This increase was primarily driven by the impact of the additional five months of Grede segment results of $30.6 million, $13.0 million of acquisition related costs incurred in June 2014 resulting from the Grede acquisition, and the increase in gross profit due to the factors discussed above. These increases were partially offset by higher stock-based compensation and additional costs associated with being a public company, including higher professional fees.

The following table sets forth our operating income by segment for the nine months ended September 27, 2015 and September 28, 2014:

 

		Nine Months Ended								Increase (Decrease)				Percent Change
		September 27, 2015				September 28, 2014
		(In millions)
HHI segment		$	89.4				73.8				15.6				21.1	%
Metaldyne segment			87.4				82.9				4.5				5.4	%
Grede segment			41.2				0.9				40.3
Total		$	218.0				157.6				60.4

 

 

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The increase in HHI operating income was primarily attributable to the increase in gross profit partially offset by higher professional fees.

The decrease in Metaldyne operating income was primarily attributable to the increase in gross profit partially offset by increased stock-based compensation and higher professional fees.

The increase in Grede operating income was primarily attributable to the additional five months of results included in the nine months ended September 27, 2015.

Interest Expense, Net

Interest expense, net was $80.5 million for the nine months ended September 27, 2015 as compared to $70.4 million for the nine months ended September 28, 2014, an increase of $10.1 million. The increase in interest expense, net reflected higher average outstanding borrowings including the additional debt associated with the Grede Transaction in June 2014 and higher overall interest rates due to the issuance of our Registered Notes in October of 2014, partially offset by lower debt fee amortization and pay down of long-term debt in 2015.

Other, Net

Other, net was $8.2 million of income for the nine months ended September 27, 2015 as compared to income of $7.1 million for the nine months ended September 28, 2014, a favorable change of $1.1 million. The change in other, net was primarily due to an increase in gains associated with foreign currency transactions.

Income Taxes

The income tax provision for the nine months ended September 27, 2015 and September 28, 2014 was $40.3 million and $31.1 million, respectively. The $9.2 million increase was primarily attributable to higher income before taxes due to the factors discussed above, partially offset by a lower effective tax rate. Our effective tax rate for the nine months ended September 27, 2015 and September 28, 2014 was 27.7% and 33.1%, respectively.

The effective income tax rate for the nine months ended September 27, 2015 decreased compared to prior year primarily due to the impact of $5.2 million of non-deductible transaction costs and other non-recurring permanent differences in the prior year and a tax benefit of $3.1 million in the current year relating to the enactment of Senate Bill 441 in the state of Indiana, eliminating the throwback rule for calculating state income tax expense. In addition, income tax expense for the nine month period ended September 29, 2014 includes a tax expense of $1.3 million for establishing a valuation allowance against loss carryforwards of the Company’s Brazilian subsidiary, of which $0.9 million represents a discrete tax expense.

Net Income Attributable to Stockholders

Net income attributable to stockholders was $104.7 million, or 4.5% of net sales for the nine months ended September 27, 2015, as compared to $62.6 million, or 3.2% of net sales for the nine months ended September 28, 2014, an increase of $42.1 million. The increase was primarily attributable to the factors discussed above.

 

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Adjusted EBITDA

Management’s assessment of performance includes an evaluation of Adjusted EBITDA. The following table sets forth Adjusted EBITDA by segment.

 

		Nine Months Ended
		September 27, 2015				September 28, 2014
		(In millions)
Adjusted EBITDA
HHI segment		$	157.3				146.4
Metaldyne segment			152.0				159.5
Grede segment			105.7				47.1
Total		$	415.0				353.0

 

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The following table sets forth the reconciliation between Adjusted EBITDA and net income, the most directly comparable GAAP measure:

 

		Nine Months Ended
		September 27, 2015				September 28, 2014
		(In millions)
Net income		$	105.0				62.9
Income tax expense			40.3				31.1
Interest expense, net			80.5				70.4
Depreciation and amortization			172.1				152.5
Gain on foreign currency			(11.7	)			(11.5	)
Loss on fixed assets			1.9				1.4
Loss on debt extinguishment			0.4				0.3
Debt transaction expenses			1.7				2.8
Stock-based compensation			15.4				14.5
Sponsor management fees			—				3.7
Non-recurring acquisition and purchase accounting related items			1.4				22.8
Non-recurring operational items			8.0				2.1
Adjusted EBITDA		$	415.0				353.0

Liquidity and Capital Resources

As of September 27, 2015, we had cash and cash equivalents of $124.6 million and total indebtedness, inclusive of capitalized lease obligations, of $1,898.6 million. We also have access to additional liquidity pursuant to the terms of our revolving credit facility. As of September 27, 2015, $236.5 million was available on our revolving credit facility after giving effect to letters of credit of $13.5 million.

As of September 27, 2015, $98.9 million of cash and cash equivalents were held by certain foreign subsidiaries whose earnings are reinvested indefinitely. We make this assertion based on the operational and investing needs of the foreign locations and our ability to fund our U.S. operations and obligations from domestic cash flow and capital resources. Based on this assertion, no provision has been made for U.S. income taxes, which would be assessed upon repatriation of the foreign earnings.

The Company has been assigned the following credit ratings and outlook by Moody’s Investors Service (“Moody’s”) and Standard & Poor’s Rating Services (“S&P”):

 

		Moody’s		S&P
Corporate		B1		BB-
Revolving credit facility		Ba3		BB+
U.S. Dollar term loan		Ba3		BB+
Euro term loan		Ba3		BB+
Registered Notes		B3		B+
Outlook		Stable		Stable

On May 8, 2015, the Company amended and restated its senior credit facilities to reduce the applicable interest rates on our term loan facility and to convert a portion of the liability from U.S. Dollar denominated debt to Euro denominated debt.

 

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The revised terms were as follows:

 

		Principal				Interest Rate
		(In thousands)
U.S. Dollar denominated		$	1,072,574			Libor, bearing a 1% floor, plus an applicable margin of 2.75%
Euro denominated (€225,000)			255,328			Euribor, bearing a 1% floor, plus an applicable margin of 2.75%
Total		$	1,327,902

The above terms reduced the stated interest rate on our term loan facility by 0.5 percentage points. The Euro denominated tranche was issued at an original issuance discount of 0.5%, or $1.3 million. The Company also paid fees to third parties totaling $1.8 million. All other terms on the senior credit facilities remain substantially unchanged.

In March 2015, our board of directors authorized and the Company made a voluntary prepayment of $10.0 million on our term loan facility.

In June 2015, the board of directors authorized and the Company made a voluntary prepayment of $20.0 million on our U.S. Dollar denominated term loan.

In September 2015, the board of directors authorized and the Company made a voluntary prepayment of $25.0 million on our U.S. Dollar denominated term loan.

Included in our total indebtedness are senior notes with an aggregate principal amount of $600.0 million (the “Senior Notes”). In June 2015, the Company completed an offer to exchange notes registered with the SEC (the “Registered Notes”) for its original senior notes that were not registered with the SEC. The Registered Notes have substantially identical terms as the senior notes. The exchange offer was made pursuant to a prospectus included in a Registration Statement on Form S-4 that was filed with the SEC on May 1, 2015 and declared effective by the SEC on May 8, 2015. As of the exchange offer expiration on June 8, 2015, all of the outstanding original senior notes were tendered and exchanged for Registered Notes.

On March 10, 2015, our board of directors declared a dividend of $0.09 per share. The dividend was paid on May 26, 2015 to stockholders of record as of May 12, 2015.

On July 29, 2015 our board of directors declared a dividend of $0.09 per share. The dividend was paid on August 31, 2015 to stockholders of record as of August 17, 2015.

On October 28, 2015, our board of directors declared a dividend of $0.09 per share, payable on December 3, 2015, to stockholders of record as of November 20, 2015.

Cash Flows

The following tables provide a summary of cash flows from operating, investing and financing activities for the periods presented:

 

		Nine Months Ended
		September 27, 2015				September 28, 2014
		(In millions)
Cash flows from operating activities		$	211.6				190.6
Cash flows from investing activities			(165.2	)			(931.6	)
Cash flows from financing activities			(69.5	)			825.6
Effect of exchange rates on cash			(8.8	)			(3.9	)
Net increase (decrease) in cash and cash equivalents		$	(31.9	)			80.7

For the nine months ended September 27, 2015, cash flows from operating activities reflected results of operations exclusive of non-cash income and expenses, primarily depreciation and amortization, and stock-based compensation expense, and a net increase in working capital due to seasonality. For the nine months ended September 28, 2014, cash flows from operating activities reflected results of operations exclusive of non-cash income and expenses, primarily depreciation and amortization less the change in deferred income taxes, partially offset by an increase in working capital due to seasonality.

 

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For the nine months ended September 27, 2015, cash flows from investing activities primarily reflected capital expenditures of $168.7 million, offset by cash proceeds from the sale of fixed assets. For the nine months ended September 28, 2014, cash flows from investing activities primarily reflected the consideration paid for the Grede Transaction, $829.7 million, and capital expenditures of $102.2 million.

For the nine months ended September 27, 2015, cash flows from financing activities primarily reflected the re-pricing of our term loan in May 2015, which resulted in a full repayment of our previous term loan and the borrowing of a new U.S. Dollar term loan and a new Euro term loan. Also reflected in cash flows from financing activities were $45.0 million of prepayments made on our new U.S. Dollar term loan, a $10.0 million prepayment made on our previous term loan, and $12.1 million of dividends paid to common stockholders. For the nine months ended September 28, 2014 the cash flows from financing activities primarily reflected the issuance of a $600.0 million term loan and capital contributions of $260.5 million primarily to fund the Grede Transaction and debt issuance costs paid. Additionally, HHI borrowed $115.0 million to fund a dividend to the HHI stockholders of $111.3 million.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 7A—Quantitative and Qualitative Analysis of Market Risk,” in our 2014 Annual Report on Form 10-K filed on March 16, 2015.

On May 8, 2015, the Company amended and restated its senior credit facilities agreement to reduce the applicable interest rate on our term loan facility and to convert $255.3 million of the liability from U.S. Dollar denominated debt to €225.0 million of Euro denominated debt. The variable interest rate on U.S. Dollar denominated debt is subject to a LIBOR floor; the Euro denominated debt is subject to a Euribor floor. Due to these floors, an assumed 25 basis point change in Libor or Euribor would have no impact on our annual interest expense from these loans.

The Euro denominated debt is subject to transaction gains and losses each period. The following table sets forth a sensitivity analysis of the effect a hypothetical change in the Euro to U.S. dollar exchange rate would have on the carrying value of our Euro denominated debt as of September 27, 2015:

 

Change in exchange rate:		10% increase in Euro to U.S. dollar exchange rate				10% decrease in Euro to U.S. dollar exchange rate
		(In millions)
Resulting change in carrying value of Euro denominated debt		$	25.2			$	(25.2	)

 

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ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company evaluated the effectiveness of disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The evaluation was to ensure information required to be disclosed in periodic reports filed under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of September 27, 2015, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of September 27, 2015, because we continued to have a material weakness in our internal controls related to inadequate controls around program change, system access, computer operations, and system development for certain IT systems that management relies upon for preparation and review of financial information.

Remediation Efforts to Address Material Weakness

To address the material weakness identified at December 31, 2014 and discussed above, the Company has designed new and enhanced controls. The new and enhanced controls have been implemented and are in the process of being tested.

The Company believes the new and enhanced controls will be sufficient to remediate the identified material weakness and will strengthen our internal controls over financial reporting. The material weakness will not be considered remediated until the implemented controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

Other than as discussed above under “Remediation Efforts to Address Material Weakness” there were no changes in our internal control over financial reporting, as defined in Rule 13a-15(e) under the Exchange Act, during the quarter ended September 27, 2015.

 

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PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

Discussion of legal matters is incorporated by reference from Part I, Item 1, Note 15, “Commitments and Contingencies” of this document, and should be considered an integral part of Part II, Item 1, “Legal Proceedings.”

 

ITEM 1A.

RISK FACTORS

For information regarding factors that could affect our results of operations, financial condition and liquidity, see the risk factors discussion in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 as filed on March 16, 2015 with the SEC. See also, “Information about Forward-Looking Statements” included in Part I, Item 2 of this Quarterly Report on Form 10-Q.

 

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ITEM 6.

EXHIBITS

 

Number		Exhibit
31.1		Rule 13a-14(a)/15d-14(a), Certification of the Chief Executive Officer, filed herewith.
31.2		Rule 13a-14(a)/15d-14(a), Certification of the Chief Financial Officer, filed herewith.
32.1		Section 1350 Certification of the Chief Executive and Chief Financial Officers, filed herewith.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Metaldyne Performance Group Inc.

/s/ George Thanopoulos George Thanopoulos		Chief Executive Officer (Principal Executive Officer)		November 3, 2015
/s/ Mark Blaufuss Mark Blaufuss		Chief Financial Officer (Principal Financial and Accounting Officer)		November 3, 2015

 

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