UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT

(Mark One)

For the quarterly period ended July 3, 2016

OR

For the transition period from            to           

Commission file number: 1-36774

 

Metaldyne Performance Group Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code: (248) 727-1800

 

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):

 

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 August 2, 2016 the registrant had 67,253,173 shares of voting common stock outstanding.

 

 

 

 

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METALDYNE PERFORMANCE GROUP INC.

FORM 10-Q

QUARTER AND SIX MONTHS ENDED JULY 3, 2016

INDEX

 

 

 

 

 

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

METALDYNE PERFORMANCE GROUP INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions except per share data)

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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METALDYNE PERFORMANCE GROUP INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions except per share data)

 

 

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 millions)

 

 

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 millions)

 

 

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 millions)

 

 

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 or 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 and noise, vibration and harshness.

 

 

(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 July 3, 2016 and the results of operations, comprehensive income and cash flows for the quarters and six months ended July 3, 2016 and June 28, 2015. 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.

The condensed consolidated balance sheet as of December 31, 2015 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, 2015.

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 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 this guidance will have on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The primary focus of the standard addresses the accounting of lessees. It requires all lessees to recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease) on the balance sheet. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous GAAP. Operating leases will result in

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straight-line expense while finance leases will result in depreciation expense recorded on the right-of-use asset and interest expense recorded on the lease liability. Quantitative and qualitative disclosures are required to provide insight into the extent of revenue and expense recognized and expected to be recognized from leasing arrangements. This guidance becomes effective January 1, 2019. Early adoption is permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments.  This guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The amendments in this ASU require a four-step decision sequence when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We did not early adopt this guidance for the quarter and six months ended July 3, 2016.  However, we do not expect adoption of this ASU to impact the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This guidance updates several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Specific changes include that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity would also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits would be classified along with other income tax cash flows as an operating activity. Also, an entity can make an accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures when they occur. This ASU also amends guidance for the calculation of earnings per share under the treasury stock method by removing excess tax benefits as an assumed proceed from the exercise of options. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period.  We did not early adopt this guidance for the quarter and six months ended July 3, 2016, and are currently evaluating the impact on the consolidated financial statements.

 

 

(4) Recently Adopted Accounting Pronouncements

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 adopted this guidance during the quarter ended April 3, 2016. Unamortized debt issuance costs associated with our long-term debt totaled $18.3 million and $19.6 million as of July 3, 2016 and December 31, 2015, respectively, and are classified within long-term debt on the condensed consolidated balance sheets. The adoption of this standard had no impact on the Company’s condensed consolidated statements of operations, comprehensive income, stockholders’ equity, or cash flows.

 

 

(5) Receivables Allowances

Receivables were stated net of the following allowances:

 

 

 

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(6) Inventories

Inventories were as follows:

 

 

 

(7) Property and Equipment, Net

Accumulated depreciation as of July 3, 2016 and December 31, 2015 was $489.9 million and $419.6 million, respectively.

 

In May 2016, the Company announced plans to close its Bessemer, Alabama facility included within the Grede segment.  The closure, which is primarily due to declines in heavy truck and industrial equipment markets, is expected to be completed by the end of fiscal 2016.  The Company recorded a $2.3 million asset impairment charge within cost of sales for the three and six months ended July 3, 2016 in conjunction with this announcement.

 

 

 

(8) Amortizable Intangible Assets

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

 

 

 

 

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(9) Debt

The carrying value of debt was as follows:

 

 

Debt Activity

Accrued interest of $17.0 million and $16.5 million as of July 3, 2016 and December 31, 2015 was reflected in accrued liabilities.

 

 

(10) Equity and Dividends

Dividends

Our board of directors declared and the Company paid the following dividends during the six months ended July 3, 2016.

    

Share repurchases

On February 24, 2016, our board of directors authorized a share repurchase program (the “Share Repurchase Program”) pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate repurchase price not to exceed $25.0 million. Subject to applicable rules and regulations, the shares may be repurchased through open market purchases, privately negotiated transactions, or otherwise. The Share Repurchase Program expires in February 2017, and may be terminated or amended by the Company’s board of directors at any time. As of July 3, 2016, cumulative shares repurchased totaled 946,256 shares at an average purchase price per share of $15.54.  The repurchased shares are presented as common stock held in treasury, at cost, on the condensed consolidated balance sheets.  

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Changes in Accumulated Other Comprehensive Loss, Net of Tax

 

 

 

(11) Other, net

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

 

 

Foreign currency losses (gains) pertain to realized and unrealized losses (gains) on foreign currency denominated transactions with customers and suppliers, short-term intercompany balances with foreign subsidiaries, and the re-measurement of our Euro denominated term loan as of July 3, 2016.

 

 

(12) Stock-based Compensation

In August 2014, our board of directors approved an equity incentive plan (the “MPG Plan”) for officers, key employees and non-employees. 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 April and May 2016, the Company granted restricted stock unit awards (“RSUs”) to certain employees and nonemployee directors.  

The following table summarizes the terms of the RSUs:

 

 

Restricted stock awards and RSUs (together, the “Restricted Shares”) issued under the MPG Plan 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 values of the Restricted Shares were determined using the fair value of the Company’s common stock as of the grant date.

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Changes in the number of Restricted Shares outstanding for the six months ended July 3, 2016 were as follows:

 

 

Options

In April 2016, the Company granted options to certain employees with the following terms:

 

 

The options are being expensed based on their grant-date fair value of $5.79 per option on a straight-line basis over the requisite service period for the entire award.  The grant-date fair value of the options was determined using a Black-Scholes valuation model based on the following weighted average assumptions:

 

 

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 Company’s historical volatility as well as 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 six months ended July 3, 2016 were as follows:

 

 

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Stock-based Compensation Expense

 

 

Compensation expense associated with the outstanding stock-based awards was recognized within selling, general and administrative expense. Total unrecognized compensation cost related to non-vested awards as of July 3, 2016 was approximately $31.8 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 July 3, 2016 and June 28, 2015 was $15.0 million and $14.2 million, respectively. Income tax expense for the six months ended July 3, 2016 and June 28, 2015 was $24.2 million and $31.5 million, respectively. The effective income tax rate for the quarter ended July 3, 2016 and June 28, 2015 was 29.6% and 24.4%, respectively. The effective income tax rate for the six months ended July 3, 2016 and June 28, 2015 was 28.5% and 29.1%, respectively. Income tax expense for the quarter and six months period ended July 3, 2016 includes a net tax benefit of $0.8 million, primarily as a result of a favorable court ruling in Spain. Income tax expense for the quarter and six month period ended June 28, 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.

The effective tax rate for periods ended July 3, 2016 and June 28, 2015 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.

    

 

(14) Retirement Plans

  

The net expense recognized for the Company’s defined benefit pension plans was $0.2 million and $0.5 million for the quarters ended July 3, 2016 and June 28, 2015, respectively, and $0.4 million and $0.7 million for the six months ended July 3, 2016 and June 28, 2015, respectively.

 

 

(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. A reserve estimate for each environmental matter is established using standard engineering cost estimating techniques on an 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.

 

 

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(16) Fair Value

 

 

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:

 

 

 

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(18) 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:

 

 

 

Elimination and other above reflects the elimination of intercompany sales.

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

 

 

 

(19) Guarantor

Our senior 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 senior 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

July 3, 2016

(In millions)

 

 

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Unaudited Condensed Consolidating Balance Sheet

December 31, 2015

(In millions)

 

 

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Unaudited Condensed Consolidating Statements of Operations

(In millions)

 

 

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 Unaudited Condensed Consolidating Statements of Operations (Continued)

(In millions)

 

 

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Unaudited Condensed Consolidating Statements of Comprehensive Income

(In millions)

 

 

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Unaudited Condensed Consolidating Statements of Cash Flows

(In millions)

 

 

 

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(20) Subsequent Events

Dividend

On August 3, 2016, our board of directors declared a dividend of $0.0925 per share of common stock outstanding, payable on September 20, 2016 to stockholders of record as of September 6, 2016.

Share Repurchase Program

On August 3, 2016, our board of directors authorized an increase to the Company’s Share Repurchase Program, permitting the Company to repurchase an additional $10 million in aggregate purchase price of shares of common stock beyond the originally authorized $25 million program. The other terms of the program remain substantially unchanged.

Debt Reduction Plan

On August 3, 2016, our board of directors approved a debt reduction plan, authorizing the Company to retire or purchase up to $10 million of outstanding debt, including the USD Term Loan, Euro Term Loan or Registered Notes, in open market purchases, privately negotiated transactions, or otherwise. Such purchase, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors.

 

  

 

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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 Condition and Results of Operations included in our Annual Report for the year ended December 31, 2015 as filed on February 29, 2016 with the Securities and Exchange Commission (“SEC”) and the Notes to our Unaudited 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 of Part II” 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 OEMs and tier I suppliers. We are headquartered in Southfield, Michigan, and our manufacturing is conducted in 55 production facilities located throughout North and South America, Europe and Asia.

Our Segments

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

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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 July 3, 2016 compared to Quarter Ended June 28, 2015

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

 

 

Net Sales

Net sales were $728.4 million for the quarter ended July 3, 2016, as compared to $800.2 million for the quarter ended June 28, 2015, a decrease of $71.8 million. The decrease was primarily driven by an industrial and commercial sales decline of approximately $27 million, lower raw material surcharge pass-through of approximately $17 million, a decrease of approximately $24 million from the scheduled attrition of wheel bearing programs, and net price decreases of approximately $10 million, partially offset by an increase of $7 million from increased light vehicle volumes.

The following table sets forth our net sales by segment for the quarters ended July 3, 2016 and June 28, 2015:

 

 

The decrease in HHI net sales was primarily attributable to lower raw material surcharge pass-through of approximately $9 million, scheduled attrition of wheel bearing programs of approximately $24 million, net price decreases of approximately $7 million, and a decrease in light vehicle volumes of approximately $4 million.

The increase in Metaldyne net sales was primarily attributable to increased light vehicle volumes of approximately $15 million, partially offset by net price decreases of approximately $2 million and lower raw material surcharge pass-through of approximately $3 million.

The decrease in Grede net sales was primarily attributable to the decrease in industrial and commercial volumes of approximately $27 million, a decrease in light vehicle volumes of approximately $4 million, lower raw material surcharge pass-through of approximately $5 million, and net price reductions of approximately $1 million.

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Cost of Sales

Cost of sales was $598.1 million for the quarter ended July 3, 2016, as compared to $658.1 million for the quarter ended June 28, 2015, a decrease of $60.0 million. This decrease was primarily driven by the lower raw material surcharge costs of approximately $23 million, scheduled attrition of wheel bearing programs, net manufacturing cost reductions, and lower depreciation and lower industrial and commercial volumes, partially offset by increased costs from higher light vehicle volumes.

The following table sets forth our cost of sales by segment for the quarters ended July 3, 2016 and June 28, 2015:

 

 

The decrease in HHI cost of sales was primarily due to lower raw material surcharge costs of approximately $15 million, lower volumes in light vehicle production and lower manufacturing costs from scheduled attrition of wheel bearing programs.

The increase in Metaldyne cost of sales was primarily attributable to increased volumes of approximately $10 million, partially offset by foreign currency movements, lower raw material surcharge costs, and net manufacturing costs reductions.

The decrease in Grede cost of sales was primarily attributable to lower volume of approximately $22 million, raw material surcharge costs of approximately $5 million, and net manufacturing cost reductions.  

 

Gross Profit

Gross profit was $130.3 million for the quarter ended July 3, 2016, as compared to $142.1 million for the quarter ended June 28, 2015, a decrease of $11.8 million. The decrease was primarily driven by the factors discussed above.  

The following table sets forth our gross profit by segment for the quarters ended July 3, 2016 and June 28, 2015:

 

 

Operating Income

Operating income was $70.3 million for the quarter ended July 3, 2016, as compared to $84.3 million for the quarter ended June 28, 2015, a decrease of $14.0 million. This decrease was primarily driven by the impact of lower gross profit of $11.8 million described above and a $2.2 million increase in selling, general, and administrative expenses.   The increase in selling, general, and administrative expenses was primarily due to increased wages and benefits and higher stock-based compensation.

The following table sets forth our operating income by segment for the quarters ended July 3, 2016 and June 28, 2015:

 

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The decrease in HHI operating income was primarily attributable to the decrease in gross profit.

The increase in Metaldyne operating income was primarily attributable to the increase in gross profit, partially offset by higher wages and benefits within selling, general, and administrative expenses which were driven by added engineering and management positions associated with new product launches and plant expansions.

The decrease in Grede operating income was primarily attributable to the decrease in gross profit.

Interest Expense, Net

Interest expense, net was $25.9 million for the quarter ended July 3, 2016, as compared to $26.9 million for the quarter ended June 28, 2015, a decrease of $1.0 million. The decrease in interest expense, net reflected lower average outstanding borrowings due to the pay down of long-term debt in 2015 and lower average interest rates.

Other, Net

Other, net reflected income of $6.3 million for the quarter ended July 3, 2016, as compared to income of $1.3 million for the quarter ended June 28, 2015, a favorable change of $5.0 million. The change in other, net from the quarter ended June 28, 2015 was primarily due to a $4.2 million increase in foreign currency transaction gains.

Income Taxes

The income tax provision for the quarter ended July 3, 2016 and June 28, 2015 was $15.0 million and $14.2 million, respectively. Our effective tax rate for the quarter ended July 3, 2016 and June 28, 2015 was 29.6% and 24.4%, respectively. The increase in the effective tax rate is primarily the result of recording a $3.1 million tax benefit in the quarter ended June 28, 2015, relating to the enactment of Senate Bill 441 in the state of Indiana, eliminating the throwback rule for calculating state income tax expense. The increase in our effective tax rate is partially offset by the impact of a net discrete tax benefit of $0.8 million, primarily related to a favorable court ruling in Spain.

Net Income Attributable to Stockholders

Net income attributable to stockholders was $35.5 million, or 4.9% of net sales for the quarter ended July 3, 2016, as compared to $44.1 million, or 5.5% of net sales for the quarter ended June 28, 2015, a decrease of $8.6 million. The decrease 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.

 

 

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

 

 

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:

Included within non-recurring operational items are impairment charges and exit costs associated with the closures of Grede’s Berlin, Wisconsin, and Bessemer, Alabama facilities.

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 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 a supplemental measure to evaluate the overall operating performance of companies in our industry.

Management uses Adjusted EBITDA or comparable metrics:

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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:

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

Six Months Ended July 3, 2016 compared to Six Months Ended June 28, 2015

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

 

 

Net Sales

Net sales were $1,467.9 million for the six months ended July 3, 2016, as compared to $1,565.4 million for the six months ended June 28, 2015, a decrease of $97.5 million. The decrease was primarily driven by the impact of lower raw material surcharge pass-through of approximately $54 million, a decrease in industrial and commercial sales of approximately $47 million, a decrease of approximately $41 million from the scheduled attrition of wheel bearing programs, unfavorable foreign currency movements of approximately $4 million, and net price decreases of approximately $14 million, partially offset by an increase of $63 million from increased light vehicle volumes.

The following table sets forth our net sales by segment for the six months ended July 3, 2016 and June 28, 2015:

 

 

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The decrease in HHI net sales was primarily attributable to scheduled attrition of wheel bearing programs of approximately $41 million, lower raw material surcharge pass-through of approximately $25 million, and net price decreases of approximately $10 million, partially offset by an increase in light vehicle volumes.

The increase in Metaldyne net sales was primarily attributable to increased light vehicle volumes of approximately $55 million, partially offset by lower raw material surcharge pass-through of approximately $7 million, unfavorable foreign currency movements of approximately $4 million, and net price decreases of approximately $3 million.

The decrease in Grede net sales was primarily attributable to the decrease in industrial and commercial volumes of approximately $47 million, lower raw material surcharge pass-through of approximately $22 million, and net price reductions of approximately $2 million, partially offset by increased light vehicle volumes.  

Cost of Sales

Cost of sales was $1,201.1 million for the six months ended July 3, 2016, as compared to $1,294.8 million for the six months ended June 28, 2015, a decrease of $93.7 million. This decrease was primarily driven by the lower raw material surcharge costs of approximately $63 million, lower costs due to foreign currency exchange of approximately $5 million, net manufacturing cost reductions, and lower depreciation and lower industrial and commercial volumes, partially offset by increased costs from higher light vehicle volumes.

The following table sets forth our cost of sales by segment for the six months ended July 3, 2016 and June 28, 2015:

 

 

The decrease in HHI cost of sales was primarily due to lower raw material surcharge costs of approximately $34 million and the scheduled attrition of wheel bearing programs, partially offset by higher net manufacturing costs due to unfavorable product mix.

The increase in Metaldyne cost of sales was primarily attributable to increased volumes of approximately $38 million, partially offset by foreign currency movements of approximately $5 million, lower raw material surcharge costs of approximately $6 million, and net manufacturing cost reductions.

The decrease in Grede cost of sales was primarily attributable to lower volumes of approximately $35 million, lower raw material surcharge costs of approximately $22 million, and net manufacturing cost reductions.

Gross Profit

Gross profit was $266.8 million for the six months ended July 3, 2016, as compared to $270.6 million for the six months ended June 28, 2015, a decrease of $3.8 million. The decrease was primarily driven by the factors discussed above.

The following table sets forth our gross profit by segment for the six months ended July 3, 2016 and June 28, 2015:

 

 

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Operating Income

Operating income was $146.0 million for the six months ended July 3, 2016, as compared to $156.6 million for the six months ended June 28, 2015, a decrease of $10.6 million. This decrease was primarily driven by the impact of lower gross profit of $3.8 million described above and a $6.8 million increase in selling, general, and administrative expenses.   The increase in selling, general, and administrative expenses was primarily due to increased wages and benefits, 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 six months ended July 3, 2016 and June 28, 2015:

 

 

The decrease in HHI operating income was primarily attributable to the decrease in gross profit.

The increase in Metaldyne operating income was primarily attributable to the increase in gross profit, partially offset by higher wages and benefits in selling, general, and administrative expenses which were driven by added engineering and management positions associated with new product launches and plant expansions.

The decrease in Grede operating income was primarily attributable to the decrease in gross profit.

Interest Expense, Net

Interest expense, net was $52.4 million for the six months ended July 3, 2016, as compared to $54.5 million for the six months ended June 28, 2015, a decrease of $2.1 million. The decrease in interest expense, net reflected lower average outstanding borrowings due to the pay down of long-term debt and lower average interest rates due to the re-pricing of our term loan debt in May 2015.

Other, Net

Other, net reflected a loss of $8.7 million for the six months ended July 3, 2016, as compared to income of $6.5 million for the six months ended June 28, 2015, an unfavorable change of $15.2 million. The change in other, net from 2015 was primarily due to approximately $15.1 million increase in foreign currency transaction losses.  Approximately $9.5 million of the $15.1 million in losses were due to the remeasurement of our Euro Term Loan.  

Income Taxes

The income tax provision for the six months ended July 3, 2016 and June 28, 2015 was $24.2 million and $31.5 million, respectively. The $7.3 million decrease was primarily attributable to lower income before taxes due to the factors discussed above. Income tax expense for the six months ended July 3, 2016 included a discrete net tax benefit of $0.8 million, primarily related to a favorable court ruling in Spain. During the six months ended June 28, 2015, the Company recorded a $3.1 million tax benefit relating to the enactment of Senate Bill 441 in the state of Indiana, eliminating the throwback rule for calculating state income tax expense. Our effective tax rate for the six months ended July 3, 2016 and June 28, 2015 was 28.5% and 29.1%, respectively.

Net Income Attributable to Stockholders

Net income attributable to stockholders was $60.4 million, or 4.1% of net sales for the six months ended July 3, 2016, as compared to $76.5 million, or 4.9% of net sales for the six months ended June 28, 2015, a decrease of $16.1 million. The decrease 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.

 

 

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

 

 

Liquidity and Capital Resources

As of July 3, 2016, we had cash and cash equivalents of $168.5 million and total indebtedness, inclusive of capitalized lease obligations, of $1,864.2 million. We also have access to additional liquidity pursuant to the terms of our revolving credit facility. As of April 3, 2016, $236.8 million was available on our revolving credit facility after giving effect to letters of credit of $13.2 million.

During the six months ended July 3, 2016, our board of directors declared and the Company paid the following dividends on shares of our common stock outstanding:

 

 

On August 3, 2016, our board of directors declared a dividend of $0.0925 per share of common stock outstanding, payable on September 20, 2016 to stockholders of record as of September 6, 2016.

 

On February 24, 2016, our board of directors authorized a share repurchase program (the “Share Repurchase Program”) pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate repurchase price not to exceed $25.0 million. Subject to applicable rules and regulations, the shares may be repurchased through open market purchases, privately negotiated transactions, or otherwise. The Share Repurchase Program expires in February 2017, and may be terminated or amended by the Company’s board of directors in its discretion at any time. As of July 3, 2016, the Company has repurchased 946,256 shares of its common stock at an average price per share of $15.54. On August 3, 2016, the board of directors authorized an increase to the Company’s Share Repurchase Program, permitting the Company to repurchase an additional $10 million in aggregate purchase price of shares of common stock beyond the originally authorized $25 million.  The other terms of the program remain substantially unchanged.

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On August 3, 2016, our board of directors approved a debt reduction plan, authorizing the Company to retire or purchase up to $10 million of outstanding debt, including the USD Term Loan, Euro Term Loan or Registered Notes, in open market purchases, privately negotiated transactions, or otherwise. Such purchase, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors.  

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”):

 

 

As of July 3, 2016, $104.7 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.

Cash Flows

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

 

 

For the six months ended July 3, 2016, cash flows from operating activities reflected results of operations exclusive of non-cash income and expenses, primarily depreciation and amortization, deferred income taxes, foreign currency adjustment, and stock-based compensation, offset by a net increase in working capital. For the six months ended June 28, 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 decrease in working capital.

For the six months July 3, 2016 and June 28, 2015, cash flows from investing activities primarily reflected capital expenditures of $94.2 million and $115.0 million, respectively.

For the six months ended July 3, 2016, the cash flows from financing activities primarily reflected $14.7 million in purchases of treasury stock, $12.5 million of dividends paid to common stockholders, and $7.9 million in repayments of long-term and other debt. For six months ended June 28, 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 our current U.S. Dollar and Euro term loans. Also reflected in cash flows from financing activities were a $20.0 million prepayment made on the U.S. Dollar term loan, a $10.0 million dollar prepayment made on our previous term loan, and a $6.0 million dividend paid to common stockholders.

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 7A—Quantitative and Qualitative Analysis of Market Risk,” in our 2015 Annual Report on Form 10-K filed on February 29, 2016.

The Euro Term Loan 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 July 3, 2016:

 

 

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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 July 3, 2016, 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 effective.

Changes in Internal Control over Financial Reporting

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 July 3, 2016.

 

 

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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, 2015 as filed on February 29, 2016 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

 

 

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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.

 

 

 

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