S-1 1 d775944ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 22, 2014

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

Metaldyne Performance Group Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   3714   47-1420222

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

47659 Halyard Drive

Plymouth, MI 48170

(734) 207-6200

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

Mark Blaufuss

Chief Financial Officer

47659 Halyard Drive

Plymouth, MI 48170

(734) 207-6200 (Phone)

(734) 207-6500 (Fax)

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Alexander D. Lynch, Esq.

Weil, Gotshal & Manges LLP

767 Fifth Avenue

New York, New York 10153

(212) 310-8000 (Phone)

(212) 310-8007 (Fax)

  

Marc D. Jaffe, Esq.

Ian D. Schuman, Esq.

Latham & Watkins LLP

885 Third Avenue

New York, New York 10022

(212) 906-1200 (Phone)

(212) 751-4864 (Fax)

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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.

 

Large accelerated filer

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

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed
Maximum
Aggregate
Offering Price (1)(2)
  Amount of
Registration Fee

Common Stock, $0.001 par value per share

  $150,000,000   $19,320

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) promulgated under the Securities Act.
(2) Includes shares of common stock that may be issuable upon exercise of an option to purchase additional shares granted to the underwriters.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. The selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated August 22, 2014

PRELIMINARY    PROSPECTUS

             Shares

 

LOGO

Metaldyne Performance Group Inc.

Common Stock

 

 

This is the initial public offering of Metaldyne Performance Group Inc. The selling stockholders identified in this prospectus are selling              shares of our common stock in this offering. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders.

We expect the public offering price to be between $         and $         per share. Currently, no public market exists for the shares. After pricing the offering, we expect that the shares will trade on the New York Stock Exchange or the NASDAQ Global Market under the symbol “MPG.”

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 18 of this prospectus.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $           $     

Underwriting discount (1)

   $           $     

Proceeds, before expenses, to the selling stockholders

   $           $     

 

  (1) The underwriters will receive compensation in addition to the underwriting discount. See “Underwriting.”

The underwriters may also exercise their option to purchase up to an additional              shares from the selling stockholders, at the public offering price, less the underwriting discount, for 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about                     , 2014.

 

 

 

BofA Merrill Lynch   Goldman, Sachs & Co.   Deutsche Bank Securities
Barclays   Credit Suisse   RBC Capital Markets

 

 

The date of this prospectus is                     , 2014.


Table of Contents

TABLE OF CONTENTS

 

    

Page

 

SUMMARY

     1   

RISK FACTORS

     18   

FORWARD-LOOKING STATEMENTS

     43   

USE OF PROCEEDS

     44   

DIVIDEND POLICY

     45   

CAPITALIZATION

     46   

DILUTION

     47   

UNAUDITED PRO FORMA FINANCIAL DATA

     49   

SELECTED HISTORICAL FINANCIAL DATA

     55   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     58   

BUSINESS

     96   

MANAGEMENT

     112   

EXECUTIVE AND DIRECTOR COMPENSATION

     118   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     138   

PRINCIPAL AND SELLING STOCKHOLDERS

     141   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     143   

DESCRIPTION OF CAPITAL STOCK

     144   

SHARES ELIGIBLE FOR FUTURE SALE

     147   

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

     149   

UNDERWRITING

     153   

LEGAL MATTERS

     160   

EXPERTS

     160   

WHERE YOU CAN FIND MORE INFORMATION

     161   

INDEX TO FINANCIAL STATEMENTS

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free-writing prospectus we may authorize to be delivered or made available to you. Neither we, the selling stockholders, nor the underwriters (or any of our or their respective affiliates) have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we, the selling stockholders, nor the underwriters (or any of our or their respective affiliates) take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We, the selling stockholders and the underwriters (or any of our or their respective affiliates) are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is only accurate as of the date on the front cover page of this prospectus. Our business, financial condition, results of operations and prospectus may have changed since that date.

Basis of Presentation

The reorganization 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”) occurred on August 4, 2014 (the “Combination”) through mergers with three separate wholly-owned merger subsidiaries of Metaldyne Performance Group Inc. See “Summary—Company Organization and History.” Unless otherwise stated in this prospectus, references to “MPG,” the “Company,” “we,” “our,” “us” and similar terms refer to Metaldyne Performance Group Inc. and all of its subsidiaries, including HHI, Metaldyne and Grede.

 

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This prospectus presents HHI as the predecessor to MPG. HHI was acquired by a wholly-owned subsidiary of certain private equity funds affiliated with American Securities LLC (together with its affiliates, “American Securities”) and certain members of HHI management on October 5, 2012. Metaldyne was acquired by American Securities and certain members of Metaldyne management on December 18, 2012. The period from January 1, 2011 to October 5, 2012 is referred to as the Predecessor Period and the period from October 6, 2012 to June 29, 2014 is referred to as the Successor Period. The period from October 6, 2012 to December 31, 2012 is referred to as Successor Period 2012 and the period from January 1, 2012 to October 5, 2012 is referred to as Predecessor Period 2012. Grede was acquired by a wholly-owned subsidiary of American Securities and certain members of Grede management on June 2, 2014.

The following timeline illustrates the periods for which financial information for HHI, Metaldyne and Grede are included in this prospectus.

 

    

Six Months

Ended June 29,

2014

  

Year Ended
December 31,

2013

  

Year Ended
December 31,

2012

  

Year Ended
December 31,

2011

HHI

  

 

LOGO

   HHI, as the predecessor, is included from January 1, 2011 until June 29, 2014 in MPG. HHI was acquired by American Securities and certain members of HHI management on October 5, 2012.

Metaldyne

  

LOGO

   Metaldyne is included from the date of its acquisition, December 18, 2012 until June 29, 2014, in MPG.

Grede

  

LOGO

   Grede is included from the date of its acquisition, June 2, 2014 until June 29, 2014 in MPG.

This prospectus includes:

 

    audited consolidated balance sheets of MPG as of December 31, 2013 and 2012 and audited consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit) and cash flows of MPG for the year ended December 31, 2013, the periods from October 6, 2012 to December 31, 2012 and for MPG’s predecessor from January 1, 2012 to October 5, 2012 and the year ended December 31, 2011;

 

    unaudited condensed consolidated balance sheets of MPG as of June 29, 2014 and December 31, 2013 and unaudited condensed consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit) and cash flows of MPG for the six month periods ended June 29, 2014 and June 30, 2013;

 

    in accordance with Rule 3-05 of Regulation S-X, audited consolidated statements of operations, comprehensive income, stockholders’ equity (deficit) and cash flows of MD Investors Corporation, Metaldyne’s subsidiary, for the 352-day period ended December 17, 2012 and for the year ended December 31, 2011;

 

    in accordance with Rule 3-05 of Regulation S-X, Grede Holdings LLC’s audited consolidated statements of financial position as of December 29, 2013 and December 30, 2012 and audited consolidated statements of operations, comprehensive income, members’ equity (deficit) and cash flows for the years ended December 29, 2013, December 30, 2012 and January 1, 2012;

 

    unaudited condensed consolidated statements of financial position and members’ equity (deficit) of Grede Holdings LLC, Grede’s subsidiary, as of March 30, 2014 and December 29, 2013 and unaudited condensed consolidated statements of operations, comprehensive income and cash flows of Grede Holdings LLC for the three month periods ended March 30, 2014 and March 31, 2013; and

 

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    pro forma financial information as of June 29, 2014 and for the six months ended June 29, 2014 and the year ended December 31, 2013 after giving effect to the Grede Transaction, the Combination, the Refinancing (the Grede Transaction and the Refinancing as defined in “Summary—Company Organization and History”), the elimination of certain sponsor management fees and this offering.

We operate on a 13 week fiscal quarter which ends on the Sunday nearest to March 31, June 30 or September 30, as applicable. Our fiscal year ends on December 31. Further, prior to the Grede Transaction, Grede operated on a 52 or 53 week fiscal year which ends on the Sunday nearest to December 31. After the Grede Transaction, Grede’s fiscal year end will conform to our fiscal year end.

Certain Terms

We use the following industry terms in describing our business in this prospectus:

 

    Advanced Machining and Assembly: Value-added precision machining to improve form, finish and function of components, and the assembly of multiple components into a ready-to-install module.

 

    Aluminum Die Casting: A casting process where molten aluminum is injected under pressure into a solid mold to create a complex formed component.

 

    Forging: The shaping of metal by a number of processes, including pressing and forming, typically classified according to temperature (cold, warm or hot).

 

    Iron Casting: A manufacturing process by which molten iron (ductile or grey) is poured into a mold to produce components with complex dimensions.

 

    Net Formed: A manufacturing technique which allows production of the component at or very close to the final (net) shape, reducing or eliminating scrap material and the need for surface finishing.

 

    NVH: The noise, vibration and harshness characteristics of vehicles, particularly cars and trucks, which vehicle design engineers seek to reduce.

 

    OEMs: Original equipment manufacturers.

 

    Powder Metal Forming: The process of compacting metal powder in a mold, followed by heating the shaped component to just below the metal powder’s melting point to form complex Net Formed components.

 

    Powertrain: Components of the vehicle that generate power and transfer it to the road surface, typically including the engine, transmission and driveline.

 

    Rubber and Viscous Dampening Assemblies: Advanced rubber-to-metal bonded or silicone filled assemblies that reduce, restrict or prevent oscillations, torsion and bending in vehicle engines, thereby improving NVH characteristics.

 

    Safety-Critical: Components that assist in the control and stability of a vehicle in motion and are fundamental to performance and safety. These components typically include chassis, suspension, steering and brake components.

 

    Tier I suppliers: Suppliers of components and assemblies that are sold directly to OEMs.

 

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We use the following industry terms in this prospectus to describe our products and how they are organized and sourced in our industry:

 

    Platform: A shared set of common design, engineering, and production efforts over a number of Vehicle Nameplates or Powertrains with common architecture (e.g. BMW NGB, Ford Duratec35).

 

    Program: Manufacturing and development of certain automobile components including engines, transmissions and brake components (e.g. BMW B38 A15, Ford 6R80W).

 

    Vehicle Nameplate: A specific vehicle model built within a Platform for a vehicle OEM (e.g. BMW 335i, Ford F-150).

Illustrative examples of these terms are set forth below:

 

LOGO

Trademarks and Trade Names

We own or have the rights to use various trademarks, service marks and trade names referred to in this prospectus. Solely for convenience, we refer to trademarks, service marks and trade names in this prospectus without the ™, SM and ® symbols. Such references are not intended to indicate, in any way, that we will not assert, to the fullest extent permitted by law, our rights to our trademarks, service marks and trade names. Other trademarks, trade names or service marks appearing in this prospectus are the property of their respective owners.

Market and Industry Information

Market and industry data used throughout this prospectus, including information relating to our relative position in the vehicle components industry, is based on the good faith estimates of our management, which in turn are based upon our management’s review of internal surveys, surveys commissioned by us, independent industry surveys and publications and other publicly available information prepared by third parties, including publicly available information prepared by IHS Inc. (“IHS”), Americas Commercial Transportation Research (“ACT Research”), Yengst Associates, LMC Automotive US, Inc. (“LMC Automotive”), FTR Transportation Intelligence (“FTR”), International Council on Clean Transportation (Washington, DC) (“ICCT”) and McKinsey & Company (“McKinsey”). All of the market data and industry information used in this prospectus involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we believe that these sources are reliable, neither we nor the underwriters can guarantee the accuracy or completeness of this information and neither we nor the underwriters have independently verified this information. While we believe the estimated market position, market opportunity and market size information included in this prospectus is generally reliable, such information, which in part is derived from management’s estimates and beliefs, is inherently uncertain and imprecise.

Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Forward-Looking Statements” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in our estimates and beliefs and in the estimates prepared by independent parties.

 

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SUMMARY

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider. Therefore, you should also read the more detailed information set out in this prospectus, including the risk factors, the financial statements and related notes thereto, and the other documents to which this prospectus refers before making an investment decision. Unless otherwise stated in this prospectus, references to “MPG,” the “Company,” “we,” “our,” “us” and similar terms refer to Metaldyne Performance Group Inc. and all of its subsidiaries, including HHI, Metaldyne and Grede and their respective direct and indirect subsidiaries. References to Metaldyne and Grede are for periods subsequent to their acquisitions by American Securities unless otherwise stated in this prospectus.

See “Certain Terms” on page iii for certain industry terms used to describe our business.

Overview

We are a leading provider of highly-engineered components for use in Powertrain and Safety-Critical Platforms 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. Our components help OEMs meet fuel economy, performance and safety standards. Given these increasingly stringent standards, components for Powertrain and Safety-Critical Platforms are among the largest and fastest growing dollar content categories within a vehicle. At least one of our components was found in approximately 90% of the 16.2 million light vehicles built in North America. Furthermore, our components were found on over 60% of the top 20 engine and transmission Platform total units produced in North America and Europe during 2013.

Our metal-forming manufacturing technologies and processes include Aluminum Die Casting, Forging, Iron Casting and Powder Metal Forming as well as Advanced 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 transfer, strength and NVH.

For 2013, we generated on a pro forma basis:

 

    Net sales of $3.05 billion;

 

    Adjusted EBITDA of $508.8 million, or 17% of net sales;

 

    Net income of $79.9 million; and

 

    Adjusted EBITDA less capital expenditures, which we refer to as Adjusted Free Cash Flow, of $347.1 million.

We define, reconcile and explain the importance of Adjusted EBITDA and Adjusted Free Cash Flow, non-GAAP financial measures, in “—Summary Historical Financial and Other Data.”

 

 

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The charts below highlight our pro forma net sales for the year ended December 31, 2013 by segments, vehicle applications and end-markets.

 

Segments

  

Vehicle Applications

  

End-Markets

 

LOGO

  

 

LOGO

  

 

LOGO

Our portfolio of manufacturing capabilities in 11 countries provides us with a flexible and close-to-customer manufacturing footprint that would be difficult to replicate. We believe the magnitude of the investment and the length of time required to open facilities, acquire equipment and navigate environmental permitting processes provide significant economic and practical barriers to entry for new competitors. We believe additional barriers are created by the broad engineering, technical and manufacturing know-how within our global employee base and our demonstrated ability to produce our components within our customers’ stringent performance and delivery requirements. Moreover, during 2008 and 2009, a significant amount of the automotive Forging capacity was removed from the North American market. We believe the reduced industry capacity provides us with growth opportunities given our relevant expertise and existing footprint.

The following table provides a summary of our pro forma net sales for the year ended December 31, 2013 by metal-forming manufacturing technologies and value-added processes and their representative applications.

 

Portfolio of Manufacturing Technologies and Value-Added Processes

 

Vehicle

Applications

 

2013 Pro
Forma Net
Sales
(In millions)

 

Advanced Machining and Assembly

  Improving form, finish and function of components, and the assembly of multiple components into a ready-to-install module   Engine, Driveline,
Transmission, Brake, Chassis
and Suspension
  $ 600   

Aluminum Die Casting

  Injecting molten aluminum under pressure into a solid mold   Transmission     $60   

Cold and Warm Forging and Related Machining

  Forging at room temperature and below 950 degrees Celsius, respectively   Engine, Driveline,
Transmission
  $ 306   

Ductile Iron Casting and Related Machining

  Pouring molten ductile iron into a mold to produce components   Driveline, Brake, Chassis
and Suspension
  $ 841   

Grey Iron Casting and Related Machining

  Pouring molten grey iron into a mold to produce components   Engine, Driveline,
Transmission
  $ 148   

Hot Forging and Related

Machining

  Forging at temperatures above 1,200 degrees Celsius   Engine, Driveline,
Transmission, Brake, Chassis
and Suspension
  $ 474   

Powder Metal Forming and

Related Machining

  Compacting metal powder in a mold, followed by heating the shaped component to just below the metal powder’s melting point to form complex Net Formed components   Engine, Driveline,
Transmission
  $ 429   

Rubber and Viscous

Dampening Assemblies

  Advanced rubber-to-metal bonded or silicone filled assemblies that reduce, restrict or prevent oscillations, torsion and bending in vehicle engines   Engine   $ 195   

 

 

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Our geographic and customer mix based on pro forma net sales for the year ended December 31, 2013 are highlighted in the charts below.

 

Geography

  

Customer

LOGO    LOGO

We have strong and longstanding relationships with our customers; the relationships with our top five customers average more than 15 years. Once embedded in a Program, our products are difficult to displace due to the high costs and long lead times associated with re-engineering and revalidation, tooling development, and the use of sophisticated materials in an exacting manufacturing process. We are the sole-sourced provider for substantially all products that we manufacture for a Program, and we typically supply our customers for the life of the Program, which can exceed 10 years. This provides us with significant revenue visibility.

Our Industry

We primarily serve the 84.7 million unit global light vehicle and the approximately 728,000 unit North American commercial and industrial vehicle and equipment end-markets with a focus on components for Powertrain and Safety-Critical applications. Demand in these end-markets, and therefore, our products, is driven by consumer preferences, regulatory requirements (particularly related to fuel economy and safety standards) and macro-economic factors.

Powertrain: Consists of the engine, transmission and driveline categories of the vehicle which generate, manage and transfer power / torque from the engine to the road’s surface. OEMs continue to focus on improving fuel efficiency and reducing emissions in order to meet consumer preferences and increasingly stringent regulatory requirements. As a result, OEMs and suppliers are developing products in an effort to significantly improve vehicle performance to meet these standards.

Safety-Critical: Consists of categories such as chassis, suspension, steering and brake components. OEMs continue to focus on improving occupant safety in order to meet consumer preferences and increasingly stringent safety-related regulatory requirements. As a result, suppliers are developing stronger, higher performing content for OEMs that may be mandated by government regulators or added voluntarily to differentiate a vehicle from its competitors.

We anticipate that the following emerging trends in the global end-markets for these components will create growth and opportunity for suppliers.

 

 

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Growth in Vehicle End-Markets

The table below illustrates historical and projected light vehicle production.

 

    

Units

    

Total
Growth

 
    

2013A

    

2016E

    

Units

    

%

 
     (In millions)  

Global Light Vehicle

     84.7         93.8         9.1         10.8   

North American Light Vehicle

     16.2         17.5         1.3         8.0   

Europe Light Vehicle

     19.5         21.0         1.5         7.7   

Asia Light Vehicle

     43.0         48.7         5.7         13.3   

 

Source: IHS as of June 2014.

The table below illustrates historical and projected commercial vehicle, construction equipment and agricultural equipment production.

 

    

Units

    

Total
Growth

 
    

2013A

    

2016E

    

Units

    

%

 
     (In thousands)  

North American Commercial Vehicle—Medium and Heavy Duty Trucks

     444.0         498.4         54.4         12.3   

North American Construction Equipment

     179.2         239.7         60.5         33.8   

North American Agricultural Equipment

     105.0         133.5         20.5         27.1   

 

Source: Yengst Associates as of June 2014. ACT Research and FTR as of June 2014.

 

As shown above, each of the major global light vehicle markets and the North American commercial vehicle and construction and agricultural equipment markets we serve is forecasted to increase total units sold through 2016.

Trends Enhancing Demand for Powertrain and Safety-Critical Components

Demand for vehicle components is a function of the number of vehicles produced and trends in content per vehicle for specific component categories. These variables are driven by consumer preferences and regulatory requirements, particularly related to fuel economy and safety standards. OEMs continue to source vehicle components that improve fuel economy and safety in order to meet increasingly stringent regulatory requirements around the world. In particular, the cost of failure in Powertrain and Safety-Critical applications is very high relative to the underlying component costs, and customers seek proven and reliable Powertrain and Safety-Critical component suppliers. McKinsey forecasts that Powertrain and Safety-Critical applications will account for 68% of total growth in component costs between 2010 and 2020.

To meet global emission requirements, OEMs utilize a variety of strategies, including increasing energy efficiency, changing engine and transmission types, using lighter weight materials, electrification and improved aerodynamics. For example, LMC Automotive forecasts increased production of light vehicles will create demand for more efficient engines and higher speed transmissions for use in North America.

Vehicle safety regulations continue to tighten, resulting in increased demand for high quality and high strength components for Safety-Critical applications such as brake components, steering knuckles and control arms. These components must be able to bend or twist without breaking while remaining cost competitive. We believe these trends provide growth opportunities for Powertrain and Safety-Critical component suppliers.

 

 

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Favorable Supply and Demand Dynamics

During 2008 and 2009, a significant amount of the automotive Forging capacity was removed from the North American market. In addition, the number of automotive components suppliers for Powertrain and Safety-Critical systems declined significantly during 2008 and 2009. The magnitude of the investment and the length of time required to open facilities, acquire equipment and navigate environmental permitting processes provide significant economic and practical barriers to entry for new competitors. Additionally, in other process technology categories such as Powder Metal Forming, we believe that while capacity has not changed materially, demand and the number of vehicle applications has increased substantially. Powder Metal Forming technology is being utilized in a higher number of Powertrain applications due to its Net Formed capabilities, which significantly reduces waste compared to other technologies. These supply and demand dynamics are expected to continue to provide growth opportunities for those companies with existing asset bases, technical know-how, global footprints and relevant metal-forming expertise.

Consolidation of Global Platforms and Localization of Sourcing by OEMs

Light vehicle OEMs are increasingly consolidating vehicle engine and transmission designs across Platforms with localized sourcing to improve supply chain efficiency, reduce unit cost and increase profitability. In engine and transmission, OEMs differentiate on the basis of power and torque delivery, overall performance, reliability and fuel economy. OEMs have reduced their engine architectures globally into high volume engine families because these differentiating attributes require significant investment and many years of research and development. These engine families are now utilized across an increasing number of Vehicle Nameplates and are typically used for seven years or longer.

OEMs require suppliers to have robust engineering and product development expertise to optimize performance, profitability and overall cost. Furthermore, given the need to adapt to variations in regional markets and mitigate transportation and production risks, OEMs seek suppliers with manufacturing and product launch expertise near OEM locations.

Our Competitive Strengths

We believe we benefit from the following competitive strengths:

Market Leader with a Broad Portfolio of Metal-Forming Manufacturing Technologies and Processes

We are a leading provider of highly-engineered components used in Powertrain and Safety-Critical Platforms for the global light vehicle, commercial and industrial vehicle markets. We generated approximately 44% of our pro forma net sales in the growing engine and transmission categories. Our broad portfolio of metal-forming manufacturing technologies and process expertise is used in a wide range of highly-engineered and complex components, including engine connecting rods, balance shaft modules, turbo-charger housings; transmission gears, shafts and valve bodies; brake components; and wheel and axle components. At least one of our components was found on approximately 90% of the 16.2 million light vehicles built in North America in 2013, including all of the top 20 selling Platforms. Furthermore, our components were found on over 60% of the top 20 engine and transmission Platform total units produced in North America and Europe during 2013.

Focus on High Growth Product Categories

We provide a diverse range of metal-formed components used in key vehicle applications where power generation, power / torque transfer, strength and NVH are essential to performance, fuel economy and safety. Our broad product portfolio focuses on Powertrain and Safety-Critical applications, components which are

 

 

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among the largest and fastest growing dollar content categories within the vehicle. These product categories are expected to continue to grow in excess of broader vehicle production volume due to OEMs’ use of advanced engine and transmission technologies to meet increasingly stringent fuel economy and safety regulations. We believe we are well positioned to drive profitable sales growth by leveraging our core technologies, proven processes and strong customer relationships to capitalize on the positive secular and global market trends impacting Powertrain and Safety-Critical applications.

Difficult to Replicate Global Manufacturing Footprint

Our broad portfolio of global manufacturing assets provides us with a flexible and close-to-customer footprint that is difficult to replicate and creates substantial barriers to entry. Furthermore, our sophisticated engineering, technical and manufacturing teams bring decades of product and operations know-how to efficiently manufacture our products within the demanding performance and delivery requirements of our customers. Our worldwide manufacturing base includes 56 production facilities in 11 countries. Our broad portfolio of Advanced Machining and Assembly, Aluminum Die Casting, Forging, Iron Casting and Powder Metal Forming facilities gives us flexibility to produce complex, highly-engineered products on either a high or low volume basis.

Diversified and Long-Term Blue-Chip Customer Base

We have strong and longstanding relationships with leading global OEMs and Tier I suppliers, including Ford Motor Company (“Ford”), General Motors Company (“General Motors”), ZF Friedrichshafen AG (“ZF”), Toyota Motor Company (“Toyota”), Deere & Company (“Deere”) and Daimler Trucks North America LLC (“Daimler Trucks”). Our relationships with our five largest customers average more than 15 years. We believe these long-tenured relationships are the result of our ability to align with our customers to help them meet the industry’s increasingly stringent fuel economy, performance and safety standards. We are the sole-sourced provider for substantially all products we manufacture for a Program, and we typically supply our customers for the life of the Program, which can exceed 10 years. This provides us with significant revenue visibility. Once embedded in a Program, our products are difficult for competitors to displace due to the high costs and long lead times associated with re-engineering and revalidation, tooling development and the use of sophisticated materials in an exacting manufacturing process.

Technology and Manufacturing Leadership with Advanced Engineering and Demonstrated Launch Capabilities

We develop high quality, cost-effective solutions through our process expertise and our collaborative working relationships with our customers. In 2013, we successfully launched over 490 customized products for our customers across our global manufacturing base in 11 countries. Our launches and product and process development are supported by over 400 degreed engineers that use leading edge Computer Aided Design (“CAD”), Finite Element Analysis (“FEA”) and modeling and simulation tools to provide the design capabilities required by our customers. In addition to our core engineering talent, the success of our global product development and launch capability is supported by our entire workforce.

Culture of Continuous Improvement

We are committed to continuous improvement across our global operations and seek to generate ongoing efficiencies and cost savings while adhering to high standards of quality, safety and environmental compliance. Our manufacturing disciplines have a high level of conformity across sites, with a focus on sharing best practices, setting and measuring goals and monitoring key production indicators. Our culture of continuous improvement allows for product and process improvements throughout all of our operations, which have historically generated significant cost savings and increased efficiencies.

 

 

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This culture of continuous improvement has led to our customers’ recognition of our technical capabilities, on-time delivery and quality performance. Over the past three years, we have received over 50 awards, and recently, Metaldyne received the 2013 GM Supplier of the Year—Powertrain Division Award, HHI received the 2013 Toyota Excellent Quality Performance Award and Grede received the 2013 Honda Excellence in Quality Award.

Strong Financial Profile with Focus on Cash Flow Generation

In 2013, we generated pro forma Adjusted EBITDA margin of 17% and pro forma Adjusted Free Cash Flow of $347.1 million. Our attractive financial performance with strong cash flow generation is a result of our:

 

    focus on Powertrain and Safety-Critical applications;

 

    flexible, highly-variable cost structure;

 

    culture of continuous improvement; and

 

    disciplined capital investment philosophy.

We seek volume and pricing terms in our customer contracts based on generating sustainably attractive returns on invested capital and strong margins. We consistently evaluate our business portfolio and prioritize capital investment to optimize margins and overall returns.

Experienced and Entrepreneurial Management Team

Our management consists of an accomplished team with a history of generating attractive returns, accelerating growth, implementing operational productivity improvement plans and integrating businesses. Our senior leadership team is comprised of four executives who have over 110 years of combined relevant industry experience, and have established an entrepreneurial spirit and accountability throughout our company. Our senior leadership along with several levels of our management team has successfully led the identification, due diligence and integration of 15 strategic acquisitions over the past 10 years to support our global growth, further develop core competencies and expand manufacturing capabilities. Our management team also has extensive experience revitalizing businesses through cost management, plant rationalization and focusing product portfolios to improve revenues, expand margins and diversify end-markets and geographical presence. We have historically increased margins, cash flow and liquidity under the leadership of our management team.

Our Strategy

Our goal is to enhance our position as an industry leader in complex metal-formed components in Powertrain and Safety-Critical applications. The key elements of our strategy to achieve our goal are:

Capture Expected Growth in Powertrain and Safety-Critical Components

We will continue to develop customized and innovative products, technologies and processes to assist OEMs to meet increasingly stringent fuel efficiency, safety and performance standards. We believe our strong capabilities in metal-forming manufacturing technologies and value-added processes, highly trained personnel and broad portfolio of manufacturing assets will enable us to capture expected growth in Powertrain and Safety-Critical components, which are experiencing growth in excess of vehicle production volumes due to the trends in fuel economy and safety regulations.

 

 

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Deliver Strong Profitability and Cash Flow Generation

We intend to maintain our financial discipline, and are focused on future Adjusted EBITDA growth, cash flow generation and return on invested capital. This culture is supported by our highly-variable cost structure and flexible capacity enabling us to manage our operations and costs to meet changing market conditions. We maintain raw material price pass-through contracts with customers on substantially all of our products to reduce our exposure to raw material price fluctuations. We will continue to employ a disciplined approach to capital investment, focusing on projects with the most attractive rates of return. We believe our approach to new business opportunities, flexibility, highly-variable cost structure, culture of continuous improvement and disciplined capital investment philosophy positions us for strong growth, improved efficiencies and attractive margins in the future.

Capitalize on Global Scale and Capabilities

We will continue to support our global OEM and Tier I supplier customers with our close-to-customer footprint, global engineering and product launch capabilities. OEMs are increasingly standardizing engine and transmission designs to facilitate sharing across multiple Platforms and in some cases across different geographic regions. Our global customer base and manufacturing footprint also diversifies our revenue across various end-markets, geographies and industry cycles. We plan to continue to build our presence outside of North America, particularly in China, Mexico and Eastern Europe, where we have existing operations and are experiencing increased customer demand.

Take Advantage of Cross-Sell and Other Opportunities

We intend to cross-sell products and optimize capacity across our consolidated portfolio. As more of our customers adopt external value-added strategies, we believe that we are well positioned to capture this additional growth. We believe that we will continue to generate additional revenue and increase our value-added content by applying our core technologies and processes across our combined product offerings. We intend to leverage our combined manufacturing footprint across four continents and our technical and commercial centers in North America, Europe and Asia.

For example, HHI’s hot Forging product offerings are primarily located in North America. With Metaldyne’s global footprint and in-country know-how, we believe we can expand HHI’s product offering globally and capture additional market opportunities that were unavailable to HHI on a stand-alone basis. Further, Grede’s strong customer relationships outside of the light vehicle market provide HHI and Metaldyne access to blue-chip industrial equipment and heavy truck customers such as Deere, Caterpillar Inc. (“Caterpillar”) and Daimler Trucks (Freightliner, Western Star). In addition, through a coordinated approach on new Program opportunities and by accessing our broad portfolio of manufacturing technologies, customer relationships, global footprint and engineering expertise, we believe we will win incremental new business. We also expect to realize savings by pursuing selective vertical integration opportunities, taking advantage of our increased scale and certain cost synergy initiatives.

Pursue Selected Acquisitions and Strategic Alliances

We intend to opportunistically leverage our experience in identifying, acquiring and integrating acquisitions that allow us to grow globally, enhance our product portfolio and technologies, further diversify our customer base and generate synergies. While we have no present commitments or agreements to enter into any such acquisitions, we believe there are numerous attractive opportunities given the large number of complementary businesses in the industry, further supplier consolidation trends and a large number of private equity owned companies in the industry. We may also seek strategic alliances which allow us to pursue new opportunities with greater flexibility and lower capital at risk as well as provide us with access to new technologies, products and markets.

 

 

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Company Organization and History

The reorganization of HHI, Metaldyne and Grede occurred on August 4, 2014 through the mergers of three separate wholly-owned merger subsidiaries of MPG. A brief summary of the history of each of HHI, Metaldyne and Grede follows:

 

    HHI was formed in 2005 and, from 2005 through 2009, completed the strategic acquisitions of Impact Forge Group, LLC and Cloyes Gear and Products, Inc. and, following a §363 U.S. Bankruptcy Court supervised sale process, acquired certain assets and assumed specified liabilities from FormTech LLC, Jernberg Holdings, LLC and Delphi Automotive PLC’s wheel bearing operations. HHI was acquired by American Securities and certain members of HHI management on October 5, 2012 (the “HHI Transaction”).

 

    Metaldyne was formed in 2009 as a new entity to acquire certain assets and assume specified liabilities from the former Metaldyne Corporation (“Oldco M Corporation”) following a §363 U.S. Bankruptcy Court supervised sale process. Oldco M Corporation was previously formed when MascoTech, Inc., a then-publicly traded company, was taken private and acquired Simpson Industries, Inc., another then-public company. Metaldyne was acquired by American Securities and certain members of Metaldyne management on December 18, 2012 (the “Metaldyne Transaction”).

 

    Grede was formed in 2010 through a combination of the assets of the former Grede Foundries, Inc. and Citation Corporation, following a §363 U.S. Bankruptcy Court supervised sale process. Subsequently, Grede acquired Foseco-Morval Inc., GTL Precision Patterns Inc., Paxton-Mitchell Corporation, Virginia Castings Industries LLC, Teknik, S.A. de C.V. and Novocast, S.A. de C.V. and established a global alliance with Georg Fischer Automotive AG (Europe / China). Grede was acquired by American Securities and certain members of Grede management on June 2, 2014 (the “Grede Transaction”).

The following chart illustrates our simplified ownership structure after the Combination and immediately prior to this offering:

 

LOGO

The Refinancing

Prior to the consummation of this offering, we expect to enter into debt financing transactions to refinance the existing long-term indebtedness of HHI, Metaldyne and Grede (the “Refinancing”).

 

 

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Our Principal Stockholders

Immediately following the closing of this offering, American Securities is expected to own approximately             % of our outstanding common stock, or     % if the underwriters exercise their option to purchase additional shares in full from the selling stockholders. As a result, American Securities will be able to exert significant voting influence over fundamental and significant corporate matters and transactions. See “Risk Factors—Risks Related to Our Company and Our Organizational Structure” and “Principal and Selling Stockholders.”

American Securities may acquire or hold interests that compete directly with us, or may pursue acquisition opportunities which are complementary to our business, making such an acquisition unavailable to us. Our amended and restated certificate of incorporation will contain provisions renouncing any interest or expectancy held by our directors affiliated with American Securities in certain corporate opportunities. For further information, see “Risk Factors—Risks Related to Our Company and Our Organizational Structure.”

Headquartered in New York with an office in Shanghai, American Securities is a leading U.S. middle-market private equity firm that invests in market-leading North American companies. American Securities now has approximately $10 billion of assets under management and is investing from its sixth fund. The firm traces its roots to the family office founded in 1947 by William Rosenwald to invest and manage his share of the Sears, Roebuck & Co. fortune. American Securities focuses its core investments in the industrial sector including, general industrial, aerospace and defense, agriculture, environmental, automotive, recycling paper and packaging, power and energy, and specialty chemicals. American Securities has a strong understanding of our business and close relationships with the existing management. American Securities has a proven track record of successfully working with management teams to develop and implement strategies for sustained profitability.

Risks Affecting Our Business

Investing in our common stock involves substantial risk. Before participating in this offering, you should carefully consider all of the information in this prospectus, including risks discussed in “Risk Factors” beginning on page 18. Some of our most significant risks are:

 

    volatility in the global economy impacting demand for new vehicles and our products;

 

    a decline in vehicle production levels, particularly with respect to Platforms for which we are a significant supplier, or the financial distress of any of our major customers;

 

    our dependence on large-volume customers for current and future sales;

 

    our inability to realize all of the sales expected from awarded business or fully recover pre-production costs;

 

    our inability to realize revenue expected from incremental business backlog;

 

    a reduction in outsourcing by our customers, the loss of material production or Programs, or a failure to secure sufficient alternative Programs;

 

    our significant competition;

 

    our failure to offset continuing pressure from our customers to reduce our prices;

 

    our failure to maintain our cost structure;

 

    potential significant costs at our facility in Sandusky, Ohio;

 

    disruption from the Combination of our operations and diversion of management’s attention; and

 

    our limited history of working as a single company and the inability to successfully integrate HHI, Metaldyne and Grede.

 

 

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Corporate Information

We are a Delaware corporation. MPG was incorporated on June 9, 2014. Our principal executive offices are located at 47659 Halyard Drive, Plymouth, MI 48170. Our telephone number at our principal executive offices is (734) 207-6200. Our corporate website is www.metaldyneperformancegroup.com. The information that appears on our website is not part of, and is not incorporated into, this prospectus.

 

 

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The Offering

 

Common stock offered by the selling stockholders

             shares (             shares if the underwriters exercise their option to purchase additional shares in full).

 

Selling stockholders

The selling stockholders in this offering are affiliates of American Securities. See “Principal and Selling Stockholders.”

 

Common stock to be outstanding after this offering

             shares (             shares if the underwriters exercise their option to purchase additional shares in full).

 

Option to purchase additional shares of common stock

The underwriters have the option to purchase up to an additional              shares of common stock from the selling stockholders identified in this prospectus. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We will not receive any net proceeds from the sale of shares by the selling stockholders, including with respect to the underwriters’ option to purchase additional shares from the selling stockholders. See “Use of Proceeds” for additional information.

 

Dividend policy

After the completion of this offering, we intend to pay cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements, business prospects and other factors that our board of directors may deem relevant. Future agreements may also limit our ability to pay dividends. See “Dividend Policy” and “Description of Certain Indebtedness.”

 

Voting rights

Each share of our common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally. See “Description of Capital Stock.”

 

Risk factors

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 18 of this prospectus for a discussion of factors you should carefully consider before investing in our common stock.

 

Proposed NYSE or NASDAQ symbol

“MPG”

Unless otherwise indicated, the number of shares of common stock to be outstanding after this offering is based on              shares outstanding as of                     , 2014 and:

 

    excludes              shares of our common stock issuable upon exercise of outstanding stock options and reserved for issuances under our 2014 Equity Incentive Plan (the “2014 Equity Incentive Plan”).

 

 

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Unless otherwise indicated, all information in this prospectus:

 

    gives effect to the Grede Transaction, the Combination and the Refinancing;

 

    gives effect to our amended and restated certificate of incorporation, which will be in effect prior to the consummation of this offering;

 

    assumes no exercise of the underwriters’ option to purchase up to              additional shares of common stock from the selling stockholders; and

 

    assumes an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

 

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SUMMARY HISTORICAL FINANCIAL AND OTHER DATA

The following table sets forth our summary historical financial and other data for the periods and as of the dates indicated. We derived our summary consolidated statement of operations data for the year ended December 31, 2013, Successor Period 2012, Predecessor Period 2012 and the year ended December 31, 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We derived our summary consolidated statement of operations data for the six months ended June 29, 2014 and the six months ended June 30, 2013 and our balance sheet data as of June 29, 2014 from our unaudited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, our unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and results of operations as of such dates and for such periods. The Combination has been accounted for as a reorganization of entities under common control in a manner similar to a pooling of interests, and, as such, the bases of accounting of HHI, Metaldyne and Grede were carried over to MPG. These financial statements reflect the retrospective application of MPG’s capital structure and consolidated presentation of the Combination for all Successor Periods. Our historical capital structure has been retroactively adjusted to reflect our post-Combination capital structure for all periods presented.

The summary unaudited pro forma information has been prepared to give pro forma effect to the Grede Transaction, the Combination, the Refinancing, the elimination of certain sponsor management fees and the issuance of              shares of our common stock offered by the selling stockholders in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus. The following summary unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the relevant transactions had been consummated on the date indicated, nor is it indicative of future operating results.

Our historical results are not necessarily indicative of future operating results and results of interim periods are not necessarily indicative of results for the entire year. You should read the information set forth below in conjunction with “Unaudited Pro Forma Financial Data,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto included elsewhere in this prospectus.

 

 

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    Successor          Predecessor     Pro Forma (2)  
   

Six Months Ended

   

Year Ended

December 31,
2013

   

Successor
Period
2012 (1)

   

 

 

Predecessor

Period
2012 (1)

   

Year Ended

December 31,
2011

   

Six Months
Ended
June 29,
2014

   

Year Ended

December 31,
2013

 
   

June 29,
2014

   

June 30,
2013

               
    (In millions, except per share amounts)                    
    (unaudited)                                 (unaudited)  

Statement of Operations Data:

                   

Net sales

  $ 1,181.8      $ 1,011.0      $ 2,017.3      $ 205.3          $     680.5      $     787.3      $ 1,608.8      $ 3,052.9   

Cost of sales

    994.4        857.9        1,708.7        199.5            559.0        643.4        1,345.8        2,575.9   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    187.4        153.1        308.6        5.8            121.5        143.9        263.0        477.0   

Selling, general and administrative expenses

    69.6        58.6        123.2        14.4            116.6        34.7        100.0        203.0   

Acquisition costs

    13.0        —          —          25.9            13.4        —          13.0        18.2   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    104.8        94.5        185.4        (34.5         (8.5     109.2        150.0        255.8   

Interest expense, net

    42.3        36.2        74.7        11.1            25.8        31.6        56.1        107.5   

Other, net

    4.4        (3.9     17.8        1.5            2.4        6.3        4.4        17.8   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Other expense, net

    46.7        32.3        92.5        12.6            28.2        37.9        60.5        125.3   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before tax

    58.1        62.2        92.9        (47.1         (36.7     71.3        89.5        130.5   

Income tax expense (benefit)

    19.9        20.6        35.0        (15.2         (11.1     24.6        32.8        50.6   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    38.2        41.6        57.9        (31.9         (25.6     46.7        56.7        79.9   

Income attributable to noncontrolling interest

    0.2        0.1        0.3        0.0            0.2        0.1        0.2        0.3   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to stockholders

  $ 38.0      $ 41.5      $ 57.6      $ (31.9       $ (25.8   $ 46.6      $ 56.5      $ 79.6   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to stockholders: (3)

                   

Basic

  $ 2.83      $ 3.10      $ 4.29      $ (2.38       $ (1.46   $ 2.64      $               $            

Diluted

    2.81        3.10        4.29        (2.38         (1.46     2.64       
 

Basic weighted average shares outstanding

    13.4        13.4        13.4        13.4            17.7        17.7       

Diluted weighted average shares

    13.5        13.4        13.4        13.4            17.7        17.7       
 

Statements of Cash Flows Data:

                   

Cash flows from operating activities

  $ 111.6      $ 83.4      $ 234.3      $ (1.8       $ 64.7      $ 50.9       

Cash flows from investing activities

    (887.6     (60.9     (116.7     (1,515.0         (31.3     (22.7    

Cash flows from financing activities

    833.0        (19.8     (91.1     1,557.1            (27.3     (24.3    

Effect of exchange rates on cash

    0.8        (1.1     1.4        —              0.3        (0.5    
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Net increase in cash and cash equivalents

  $ 57.8      $ 1.6      $ 27.9      $ 40.3          $ 6.4      $ 3.4       
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

     

Other Data:

                   

Adjusted EBITDA (4)

  $ 222.7      $ 181.3      $ 363.1      $ 29.4          $ 113.8      $ 132.5      $ 289.9      $ 508.8   

Adjusted Free Cash Flow (4)

  $ 164.6      $ 120.3      $ 240.8      $ 19.0          $ 81.2      $ 108.3      $ 220.0      $ 347.1   

Incremental business backlog (5)

                    $ 435.0   

 

 

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As of June 29, 2014

 
   

Actual

   

Pro

Forma

 
    (In millions)  
    (unaudited)  

Balance Sheet Data:

   

Cash and cash equivalents

  $ 126.1      $                    

Property and equipment. net

    731.5     

Total assets

    3,291.2     

Long-term debt (including current portion)

    1,961.6     

Total debt

    1,990.6     

Total liabilities

    2,776.6     

Total stockholders’ equity

    514.6     

 

(1) The period from January 1, 2012 to October 5, 2012 is referred to as “Predecessor Period 2012.” The period from October 6, 2012 to December 31, 2012 is referred to as “Successor Period 2012.”
(2) Does not reflect the impact of the Refinancing or this offering.
(3) For the year ended December 31, 2013 and Successor Period 2012, the weighted average shares outstanding were retrospectively adjusted to reflect our common stock outstanding upon completion of the Combination, and the equivalent shares for outstanding stock-based compensation awards were retrospectively adjusted to reflect the conversion of those awards into options to purchase shares of our common stock. For Predecessor Period 2012 and the year ended December 31, 2011, the weighted average shares outstanding reflect the capital structure of HHI prior to the HHI Transaction, and the equivalent shares for outstanding stock-based compensation reflect awards issued by HHI.
(4) 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 fee;

 

    non-recurring acquisition and purchase accounting related items; and

 

    non-recurring operational items.

Adjusted Free Cash Flow is calculated as Adjusted EBITDA less capital expenditures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics—Adjusted Free Cash Flow.”

Adjusted EBITDA and Adjusted Free Cash Flow eliminate the effects of items that we do not consider indicative of our core operating performance. Adjusted EBITDA and Adjusted Free Cash Flow are supplemental measures of operating performance that do not represent and should not be considered as alternatives to net income, as determined under U.S. generally accepted accounting principles (“GAAP”), and our calculation of Adjusted EBITDA and Adjusted Free Cash Flow may not be comparable to those reported by other companies.

Management believes the inclusion of the adjustments to Adjusted EBITDA and Adjusted Free Cash Flow 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 these non-GAAP financial measures, 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 and Adjusted Free Cash Flow are used by investors as supplemental measures to evaluate the overall operating performance of companies in our industry.

Management uses Adjusted EBITDA, Adjusted Free Cash Flow 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 and Adjusted Free Cash Flow have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under GAAP. Some of the limitations are:

 

    Adjusted EBITDA and Adjusted Free Cash Flow do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

    Adjusted Free Cash Flow 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 and Adjusted Free Cash Flow do not reflect the cash requirements for such replacements;

 

    Adjusted EBITDA and Adjusted Free Cash Flow do not reflect our tax expense or the cash requirements to pay our taxes; and

 

    Adjusted EBITDA and Adjusted Free Cash Flow do not reflect the non-cash component of employee compensation.

To address these limitations, we reconcile Adjusted EBITDA and Adjusted Free Cash Flow 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 or Adjusted Free Cash Flow.

The following table reconciles net income to Adjusted EBITDA and Adjusted Free Cash Flow for the periods presented:

 

    Successor          Predecessor     Pro Forma (2)  
   

Six Months Ended

   

Year Ended

December 31,
2013

   

Successor

Period
2012

        

Predecessor

Period
2012 (1)

   

Year Ended

December 31,
2011

   

Six Months
Ended

June 29,
2014

   

Year Ended
December 31,
2013

 
   

June 29,
2014

   

June 30,
2013

               
   

(In millions)                  

 

 

Net income (loss)

  $ 38.2      $ 41.6      $ 57.9      $ (31.9       $ (25.6   $ 46.7      $ 56.7      $ 79.9   

Interest expense

    42.3        36.2        74.7        11.1            25.8        31.6        56.1        107.5   

Income tax expense (benefit)

    19.9        20.6        35.0        (15.2         (11.1     24.6        32.8        50.6   

Depreciation and amortization

    90.5        77.8        163.4        18.7            20.0        22.9        117.6        227.1   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    190.9        176.2        331.0        (17.3         9.1        125.8        263.2        465.1   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

(Gain) loss on foreign currency

    1.7        (5.8     2.3        1.5            —          —          0.8        4.1   

(Gain) loss on fixed assets

    1.2        0.6        1.4        —              (1.1     0.1        1.0        1.5   

Debt transaction expenses

    2.8        2.6        6.0        —              2.4        6.4        2.8        6.5   

Stock-based compensation

    4.6        3.1        6.2        0.1            —          —          4.6        6.2   

Sponsor management fee

    2.2        2.0        4.0        0.6            0.7        1.2        —          —     

Non-recurring acquisition and purchase accounting related items (a)

    18.1        0.7        10.5        44.5            103.4        —          13.9        13.7   

Non-recurring operational items (b)

    1.2        1.9        1.7        —              (0.7     (1.0     3.6        11.7   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    222.7        181.3        363.1        29.4            113.8        132.5        289.9        508.8   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures

    58.1        61.0        122.3        10.4            32.6        24.2        69.9        161.7   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Free Cash Flow

  $ 164.6      $ 120.3      $ 240.8      $ 19.0          $ 81.2      $ 108.3      $ 220.0      $ 347.1   
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Acquisition and related purchase accounting items includes transaction costs, adjustments to inventory step-ups and other.
  (b) Non-recurring operational items includes charges for disposed operations, impairment charges, insurance proceeds, curtailment gain and other.

 

(5) Incremental business backlog is calculated as anticipated net product sales from incremental business for the next three years at each year end, net of Programs being phased out and any foreign currency fluctuations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Metrics—Incremental Business Backlog.”

 

 

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RISK FACTORS

An investment in our common stock involves a number of risks. Before making a decision to purchase our common stock, you should carefully consider the following risks, as well as the other information contained in this prospectus. The risks described below are those that we believe are the material risks we face. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. As a result, the trading price of our common stock could decline and you may lose part or all of your investment.

Risks Relating to Our Business and Our Industry

Volatility in the global economy has, and may continue to have, a severe and negative impact on the demand for new vehicles and, in turn, our products.

The demand for and pricing of our products are subject to economic conditions and other factors present in the geographic markets where our products are sold. Demand for our products correlates to consumer demand for new vehicles containing our products. A worsening of global economic and political conditions, including through rising interest rates or inflation, high unemployment, increasing energy and fuel prices, declining real estate values, increased volatility in global capital markets, international conflicts, sovereign debt concerns, the potential for currency devaluation, an increase in protectionist measures and/or other factors, may result in lower consumer confidence, which has a significant impact on consumer demand for vehicles. In addition, the level of new vehicle purchases is affected by factors such as consumer preferences, consumer spending patterns and the vehicle replacement cycle. Our customers continually adjust their production of new vehicles in response to such conditions. If we are unsuccessful or are less successful than our competitors in adjusting to our customers’ responses to such conditions, we may be placed at a competitive disadvantage, which could have a material adverse effect on our business, financial condition and results of operations.

A decline in vehicle production levels, particularly with respect to Platforms for which we are a significant supplier, or the financial distress of any of our major customers, could have a material adverse effect on our business, financial condition and results of operations.

Demand for our products is directly related to the vehicle production levels of our OEM end-customers. New vehicle sales and production can be affected by general economic or industry conditions, the level of consumer demand, labor relations issues, fuel prices, fuel efficiency and vehicle safety regulations and other regulatory requirements, government initiatives, trade agreements, the availability and cost of credit, the availability to our customers and suppliers of critical components needed to complete the production of vehicles, restructuring actions of our customers, end-OEMs and suppliers and other factors. Financial difficulties experienced by any major customer could have a material adverse effect on us if such customer were unable to pay for the products we provide or we experienced a loss of, or material reduction in, business from such customer.

As a result of such difficulties, we could experience lost revenues, significant write-offs of accounts receivable, significant impairment charges or additional restructurings, sometimes significantly, from year-to-year, which, in turn, causes fluctuations in the demand for our products. The automotive industry is cyclical and sensitive to general economic conditions and other factors, including the global credit markets, interest rates, consumer credit and consumer spending and preferences. An economic downturn, severe weather or other adverse industry conditions that result in even a relatively modest decline in vehicle production levels could reduce our sales and thereby adversely affect our financial condition, results of operations and cash flows.

We are dependent on large-volume customers for current and future sales. The loss of any of these customers or a reduction in sales to these customers could have a material adverse impact on our business, financial condition and results of operations.

We depend on major vehicle OEMs for our sales. For example, Ford accounted for approximately 14% of our pro forma net sales for the year ended December 31, 2013. Furthermore, our financial results are closely

 

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correlated to production by Ford, General Motors, Chrysler Group LLC (“Fiat Chrysler”), Hyundai Motor Company (“Hyundai”) and Toyota, given our higher sales to these customers. For the year ended December 31, 2013, sales to these end-OEMs accounted for approximately 59% of our pro forma net sales. We may make fewer sales to these customers for a variety of reasons, including:

 

    loss of awarded business;

 

    reduced or delayed customer requirements;

 

    customers insourcing business traditionally outsourced to us;

 

    discontinuation of particular Platforms or Programs for which we are a significant or sole supplier;

 

    strikes or other work stoppages affecting production by our customers;

 

    disruption in the credit markets reducing the availability of financing for our customers’ businesses; or

 

    reduced demand for our customers’ products.

The loss of, or consolidation of any one of these customers, or a significant decrease in business from, one or more of these customers could harm our business and reduce our revenues and cash flows and limit our ability to spread fixed costs over a larger sales base, which could have a material adverse effect on our business, financial condition and results of operations.

We may not realize all of the sales expected from awarded business and we may not fully recover pre-production costs, which could have a material adverse effect on our business, financial condition and results of operations.

The sales to be generated from awarded business are inherently subject to a number of risks and uncertainties, including the number of vehicles produced, the timing of vehicle production and the mix of options our customers, and the ultimate consumers, may choose. In addition, these factors together with industry conditions and competition could lead our customers to attempt to reduce fixed costs, including through facility closures. Facility closures relating to vehicle models for which we are a significant supplier could reduce our sales and result in losses and impairments with respect to certain of our Programs. Many customer purchase orders contain provisions that permit our customers to unilaterally cancel our contracts with limited or no notice. Our ability to obtain compensation from our customers for such cancellation, if the cancellation is through no fault of our own, is generally limited to the direct costs we have incurred for raw materials and work-in-process and, in certain instances, unamortized investment costs. If we do not realize all of the sales expected from awarded business, it could have a material adverse effect on our business, financial condition and results of operations.

Typically, it takes two to three years from the time an OEM or Tier I supplier awards us a Program until the Program is launched and we begin production. In many cases, we must commit substantial resources in preparation for production under awarded business well in advance of the customer’s production start date. If we are unable to recover pre-production costs, it could have a material adverse effect on our business, financial condition and results of operations.

We may not realize all of the revenue expected from incremental business backlog.

The realization of incremental revenues from awarded business is inherently subject to a number of risks and uncertainties, including estimates with respect to vehicle production levels on new and replacement

 

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Programs, customer price reductions, currency exchange rates and the timing of Program launches. We typically enter into agreements for the customers’ purchasing requirements for the entire production life of the vehicle. However, industry standard terms may contain certain provisions that allow for cancellation for convenience. In addition, anticipated net product sales information could differ significantly from actual firm orders or firm commitments, and awards of business do not represent guarantees of production volumes or revenues. We may not realize substantially all of the revenue from our incremental business backlog, which could have a material adverse effect on our business, financial condition and results of operations.

A reduction in outsourcing by our customers, or the loss of a material number of Programs, combined with a failure to secure sufficient alternative Programs, could have a material adverse effect on our business, financial condition and results of operations.

We depend on the outsourcing of components, modules and assemblies by vehicle manufacturers. The extent of vehicle manufacturer outsourcing is influenced by a number of factors, including: relative cost, quality and timeliness of production by suppliers as compared to vehicle manufacturers, capacity utilization, vehicle manufacturers’ perceptions regarding the strategic importance of certain components/modules to them, labor relations among vehicle manufacturers, their employees and unions, and other considerations. A reduction in outsourcing by vehicle manufacturers, or the loss of a material number of Programs combined with the failure to secure alternative Programs with sufficient volumes and margins, could have a material adverse effect on our business, financial condition and results of operations.

We face significant competition that could have a material adverse effect on our business, financial condition and results of operations.

The automotive supply industry is highly competitive. We compete with other automotive suppliers on the basis of price, technological innovation, quality, delivery, Program launch support and overall customer service, among other factors. Our competitors include a number of domestic and international suppliers, some of which have established strong relationships with OEMs. Our ability to compete successfully depends, in large part, on our success in continuing to innovate and manufacture products utilized in Programs or Platforms that have commercial success with consumers, differentiate our products from those of our competitors, continue to deliver quality products in the time frames required by our customers and maintain low-cost production. Our competitors may develop products that are superior to ours, produce similar products at a lower cost or adapt more quickly than we do to new technologies or evolving customer requirements. Competition can lead to price reductions, reduced margins and an inability to gain or hold market share. The inability to compete successfully could have a material adverse effect on our business, financial condition and results of operations.

We are under continuing pressure from our customers to reduce our prices.

As is common practice in the automotive industry, the majority of our products are sold under long-term contracts with prices scheduled at the time the contracts are established. Many of these contracts require us to reduce our prices in subsequent years. The inability to offset the impact of such price reductions through continued technology improvements, cost reductions or other productivity initiatives could have a material adverse effect on our business, financial condition and results of operations.

We could be materially adversely affected by any failure to maintain cost structure.

We believe that our strong operating margins and cash flow generation are the result of our strong customer relationships, innovative technologies, broad product portfolio and disciplined capital investment approach. There are many factors that could affect our ability to manage our cost structure that we are not able to control, including the need for unexpected significant capital expenditures and unexpected changes in commodity or component pricing that we are unable to pass on to our suppliers or customers. As a result, we may be unable to manage our operations to profitably meet current and expected market demand. Additionally, we have

 

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substantial indebtedness of approximately $             million as of June 29, 2014 on a pro forma basis after giving effect to the Refinancing. Our inability to maintain our cost structure could adversely impact our operating margins and our results of operations.

We may incur significant costs at our facility in Sandusky, Ohio.

We currently manufacture wheel bearings for a large OEM customer at our facility in Sandusky, Ohio (the “Sandusky facility”). As part of our customer contract, we currently receive labor subsidies from this OEM customer which are scheduled to expire in September 2015. Concurrently with such expiration, our union contract at the Sandusky facility will expire. Although we plan to re-negotiate this union contract before expiration, we may be unsuccessful in doing so, which may cause significant labor disruptions at the Sandusky facility.

If we are unable to utilize the Sandusky facility to manufacture other products for current or new customers or to replace known attrition, we may discontinue operations at the Sandusky facility in the future. We may operate the Sandusky facility for a period of time with losses if we are unable to generate enough new revenue from current or new customers to offset known attrition. Further, we may operate the facility at losses for a period of time while we implement wind down and closure.

If we cease operations at the Sandusky facility, we may incur closure costs such as employee severance, asset disposition and other costs. For example, the lease term of the Sandusky facility continues to 2033, and we are currently contracted for approximately $4 million per year until the termination of the lease. We may be unsuccessful in renegotiating the Sandusky facility lease or we may need to make settlements or take other actions to terminate this lease and related obligations. The closure of the Sandusky facility could result in adverse publicity and have a material adverse effect on our business, financial condition and results of operations.

We may not be successful in consistently developing innovative products, processes and use of materials, which could have a material adverse effect on our business, financial condition and results of operations.

We continue to invest in technology and innovation which we believe will be critical to our long-term growth. Our ability to anticipate changes in technology and to successfully develop and introduce new and enhanced products and/or manufacturing processes on a timely basis will be a significant factor in our ability to remain competitive. If we are unsuccessful or are less successful than our competitors in consistently developing innovative products, processes and/or use of materials, we may be placed at a competitive disadvantage, which could have a material adverse effect on our business, financial condition and results of operations.

Vehicle models, engines or transmissions for which we manufacture products may be discontinued, which could have a material adverse effect on our business, financial condition and results of operations.

Our typical sales contract provides for supplying a customer with its product requirements for particular Programs, rather than manufacturing a specific quantity of components and systems. The initial terms of our sales contracts typically range from one to six years, with automatic renewal provisions that generally result in our contracts running for the life of the Program. Our contracts do not require our customers to purchase a minimum number of components or systems. The loss of awarded business or significant reduction in demand for vehicles for which we produce components and systems could have a material adverse effect on our business, financial condition, results of operations and cash flows.

If we experience Program launch difficulties, it could have a material adverse effect on our business, financial condition and results of operations.

The launch of new business is complex, and its success depends on a wide range of factors, including the production readiness of our and our suppliers’ manufacturing facilities and manufacturing processes, tooling,

 

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equipment, employees, initial product quality and other factors. Our failure to successfully launch new business could result in a loss of Program wins or a customer’s business, which could have a material adverse effect on our business, financial condition and results of operations.

The prices of raw materials and commodities we use could increase significantly, which could have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to volatility in pricing of raw materials used in our manufacturing processes, such as steel scrap, steel bar, pig iron, aluminum, copper, molybdenum and other metallic materials. The costs of these products are subject to inflationary and market pricing pressures, and as such, have fluctuated over the past several years. Certain raw materials and other commodities used in our operations are generally only available from a few suppliers. Agreements with our suppliers generally contain pass-through price adjustments, therefore leaving our business vulnerable to increasing costs.

Although we also maintain pass-through arrangements with most of our customers, we may not always be able to effectively offset all of our increased raw material costs. Our ability to pass through increased raw material costs to our customers may be limited, and the recovery may be less than our cost and may be on a delayed basis, which impacts our operating income. These pricing pressures put significant operational and financial burdens on us and our suppliers. Our suppliers’ inability to handle raw material cost increases may lead to delivery delays, additional costs, production issues or quality issues with our suppliers in the future. To the extent we are unable to offset raw material and commodity price increases and fluctuations by passing price increases to our customers, by engineering products with reduced commodity content or otherwise, such price fluctuations or delays could have a material adverse effect on our business, financial condition and results of operations.

Our relationships with key third-party suppliers could be damaged or terminated, which could have a material adverse effect on our business, financial condition and results of operations.

We obtain raw materials and components from third-party suppliers. Some raw materials or components are purchased primarily from a single supplier, and, in some cases, it could be difficult and expensive for us to change suppliers. Various factors could result in the termination of our relationship with any supplier or the inability of suppliers to continue to meet our requirements on favorable terms. For example, volatility in the political or financial markets and uncertainty in the automotive sector could negatively impact the financial viability of certain key third-party suppliers. Severe financial difficulties at any of our suppliers could result in us being unable to obtain, on a timely basis and on similar economic terms, the quantity and quality of components and raw materials we require for the production of our products. In response to financial pressures, suppliers may also exit certain business lines or change the terms on which they are willing to provide raw materials and components to us. The loss of or damage to our relationships with these suppliers or any delay in receiving raw materials and components could impair our ability to deliver products to our customers and, accordingly, could have a material adverse effect on our business, financial condition and results of operations.

We rely on key machinery and tooling to manufacture components for Powertrain and Safety-Critical systems that cannot be easily replicated.

We currently depend on key machinery and tooling used to manufacture components for Powertrain and Safety-Critical systems. Our machinery and tooling are complex, cannot be easily replicated and have a long lead-time to manufacture. If there is a breakdown in such machinery and tooling, and we or our service providers are unable to repair in a timely fashion, obtaining replacement machinery or rebuilding tooling could involve significant delays and costs, and may not be available to us on reasonable terms. If we or our service providers our unable to repair our equipment or tooling, in some cases, it could take several months, or longer, for a supplier to begin providing machinery and tooling to specification. Any disruption of machinery and tooling supplies could result in lost or deferred sales and customer charges which could have a material adverse effect on our business, financial condition and results of operations.

 

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A disruption in our supply or delivery chain could cause one or more of our customers to halt production, which could have a material adverse effect on our business, financial condition or results of operations.

In certain instances, we ship our products to customer vehicle assembly plants on a “just-in-time” basis in order for our customers to maintain low inventory levels. Our suppliers use a similar method in providing raw materials to us. However, the “just-in-time” method makes the logistics supply chain in our industry very vulnerable to disruptions. These disruptions may result for many reasons, including closures of supplier plants or critical manufacturing lines due to strikes, mechanical breakdowns, electrical outages, fire, explosions, as well as logistical complications resulting from weather or other natural disasters, mechanical failures and delayed customs processing. In addition, we may need to rely on suppliers in local markets that have not yet proven their ability to meet our requirements. The lack of even a small single subcomponent necessary to manufacture one of our products, for whatever reason, could force us to cease production, possibly for a prolonged period. Similarly, a potential quality issue could force us to halt deliveries while we validate our products. Even where products are ready to be shipped, or have been shipped, delays may arise before they reach our customer. If we fail to timely deliver, we may have to absorb our own costs for identifying the cause and solving the problem, as well as expeditiously producing and shipping replacement products. Additionally, if we are unable to deliver our products to our customers in a timely manner, our customers may be forced to cease production and may seek to recover losses from us, which could be significant. Thus, any supply chain disruption could cause the complete shutdown of an assembly line of one of our customers, which could expose us to material claims for compensation and have a material adverse effect on our business, financial condition and results of operations.

Our failure to increase production capacity could harm our business and damage our customer relationships. Conversely, expanding our production in times of overcapacity could have a material adverse effect on our results of operations.

We may be unable to expand our business, satisfy customer requirements, maintain our competitive position and improve profitability if we are unable to increase production capacity at our facilities to meet any increased demand for our products. Moreover, we may experience delays in receiving equipment and be unable to meet any increases in customer demand. Failure to satisfy customer demand may result in a loss of market share to competitors and may damage our relationships with key customers.

Due to the lead time required to produce the equipment used in our manufacturing process, it can take months and even years to obtain new machines after they are ordered. Accordingly, we are required to order production equipment well in advance of supplying components. In addition, the equipment used in our manufacturing process requires large capital investments. If our manufacturing facilities are not expanded or completed on a timely basis or if anticipated customer orders do not materialize, we may not be able to generate sufficient sales to offset the costs of new production equipment, which could have a material adverse effect on our results of operations. Furthermore, we rely on longer-term forecasts from our customers to plan our capital expenditures. If these forecasts prove to be inaccurate, either we may have spent too much on capacity growth, which could require us to consolidate facilities, or we may have spent too little on capital expenditures, in which case we may be unable to satisfy customer demand, either of which could have a material adverse effect on our business. Furthermore, our ability to establish and operate new manufacturing facilities and expand production capacity is subject to significant risks and uncertainties, including:

 

    limitations in the agreements governing our indebtedness that restrict the amount of capital that can be spent on manufacturing facilities;

 

    inability to raise additional funds or generate sufficient cash flow from operations to purchase raw material inventory and equipment or to build additional manufacturing facilities;

 

    delays and cost overruns as a result of a number of factors, many of which are beyond our control, such as increases in raw material prices and long lead times or delays with equipment vendors;

 

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    delays or denials of required approvals by relevant government authorities;

 

    diversion of significant management attention and other resources;

 

    inability to hire qualified personnel; and

 

    failure to execute our expansion plan effectively.

If we are unable to establish or successfully increase production capacity, as a result of the risks described above or otherwise, we may not be able to expand our business to meet any increased demand for our products. Alternatively, if we increase production capacity at our existing facilities, we may not be able to generate sufficient customer demand for our products to support the increased production levels, which could have a material adverse effect on our business, financial condition and results of operations.

We, our customers or our suppliers may be unable to obtain and maintain sufficient debt financing, including working capital lines.

Interest rate fluctuations, financial market volatility and global credit market disruptions have made, and may continue to make, it difficult for companies to raise and maintain necessary operating liquidity. While we believe we have sufficient liquidity to operate, there can be no assurance that we will continue to have such ability. Our working capital requirements can vary significantly depending, in part, on the level, variability and timing of the worldwide vehicle production of our OEM customers and the payment terms with our customers and suppliers. Our liquidity could be adversely impacted if circumstances arose causing our suppliers to suspend trade credit terms and require payment in advance or payment upon delivery. In addition, we may be required to raise capital from other sources, which may not be available to us on satisfactory terms and in adequate amounts, if at all.

Many of our customers and suppliers require significant financing to operate their businesses. Longer-term disruptions in the credit markets could further adversely affect our customers by making it increasingly difficult for them to obtain financing for their businesses and for their customers to obtain financing for vehicle purchases. If capital is not available to our customers and suppliers, or if its cost is prohibitively high, their businesses would be negatively impacted, which could result in their restructuring or even reorganization or liquidation under applicable bankruptcy laws. As a result, the need of our customers for, and their ability to purchase, our products may decrease, and our suppliers may increase their prices, reduce their output or change their terms of sale. Any inability of our customers to pay us for our products and services, or any demands by suppliers for different payment terms, could have a material adverse effect on our business, financial condition and results of operations. Furthermore, our suppliers may not be successful in generating sufficient sales or securing alternate financing arrangements and therefore may no longer be able to supply goods and services to us. In that event, we would need to find alternate sources of these goods and services, and there is no assurance that we would be able to find such alternate sources on favorable terms, if at all. Any such disruption in our supply chain could adversely affect our ability to manufacture and deliver our products on a timely basis, which in turn could have a material adverse effect on our business, financial condition and results of operations. We may be unable to fully mitigate or offset the adverse impact of such events.

If we are unable to satisfy our significant lease obligations, it could have a material adverse effect on our business, financial condition and results of operations.

We lease many of our manufacturing facilities and certain capital equipment. Rental expense for operating leases was $11.5 million, $1.6 million, $5.3 million and $7.2 million for the year ended December 31, 2013, Successor Period 2012, Predecessor Period 2012 and the year ended December 31, 2011, respectively. A failure to pay our lease obligations would constitute a default allowing the applicable landlord or lessor to pursue remedies available to it under our leases and applicable law, which could include taking possession of

 

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property that we utilize in our business resulting in our failure to supply customers and, in the case of facility leases, evicting us, which could have a material adverse effect on our business, financial condition and results of operations.

We may incur significant costs if we close any of our manufacturing facilities.

Although there are no plans to do so at this time, we may, from time to time, close high cost or less efficient manufacturing facilities. If we must close any of our facilities because of the consolidation of facilities, loss of business, or due to cancellation of Programs for which we manufacture products, the employee severance, asset retirement and other costs to close these facilities may be significant. In certain locations where our facilities are subject to leases, we may continue to incur significant costs in accordance with the existing lease terms. We may be unsuccessful in renegotiating these leases or we may need to make large settlements or take other actions to terminate our leases. We attempt to align production capacity with demand; however, we cannot provide any assurance that we will not close manufacturing facilities in the future, which could result in adverse publicity and have a material adverse effect on our business, financial condition and results of operations.

A catastrophic loss of one of our key manufacturing facilities could have a material adverse effect on our business, financial condition and results of operations.

While we manufacture our products in several facilities and maintain insurance covering our facilities, including business interruption insurance, a catastrophic loss of the use of all or a portion of one of our manufacturing facilities due to accident, labor issues, weather conditions, acts of war, political unrest, terrorist activity, natural disaster or otherwise, whether short- or long-term, could have a material adverse effect on our business, financial condition and results of operations.

Our ability to operate effectively could be impaired if we are unable to recruit and retain key personnel.

Our success depends, in part, on the efforts of our executive officers and other key senior managers and employees. In addition, our continued success depends in part on our ability to recruit, retain and motivate highly skilled sales, manufacturing and engineering personnel. Competition for persons in our industry is intense, and we may not be able to successfully recruit, train or retain qualified personnel. If we fail to recruit and retain the necessary personnel, our ability to obtain new customers and retain existing customers, develop new products and provide acceptable levels of customer service could suffer, which could have a material adverse effect on our business, financial condition and results of operations.

We have entered into employment agreements with certain of our key personnel. However, we cannot ensure that these individuals will stay with us. If any of these persons were to leave our company, it could be difficult to replace them, and our operations, ability to manage day-to-day aspects of our business and efforts to improve our cost competitiveness may be impaired, which could have a material adverse effect on our business, financial condition and results of operations.

Any failure to maintain satisfactory labor relations could have a material adverse effect on our business, financial condition and results of operations.

Approximately 22% of our employees are members of U.S. industrial trade unions employed under the terms of collective bargaining agreements and approximately 16% of our employees are employed under international workers councils. There can be no assurance that future negotiations with our labor unions will be resolved favorably or that we will not experience a work stoppage or disruption that could have a material adverse impact on our business, financial condition and results of operations. Certain terms contained in existing collective bargaining agreements may reduce our flexibility, or result in increased labor costs, to close or repurpose our manufacturing facilities. In addition, there can be no assurance that such future negotiations will not result in labor cost increases or other terms and conditions that could have a material adverse effect on our business, financial condition and results of operations.

 

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We face pension and other postretirement benefit obligations.

Although most of our legacy pension and other postretirement benefit obligations were eliminated through our prior restructuring processes, we have limited pension and other postretirement benefit obligations to certain of our associates and retirees. Our ability to satisfy the funding requirements associated with our pension and other postretirement benefit obligations to our employees and retirees will depend on our cash flow from operations and our ability to access credit and the capital markets. The funding requirements of these benefit plans and the related expense reflected in our financial statements are affected by several factors that are subject to an inherent degree of uncertainty and volatility including government regulation. For example, the pensions regulator in the United Kingdom has power in certain circumstances to issue contribution notices (“CNs”) or financial support directions (“FSDs”) to MPG in respect of the underfunded U.K. defined benefit pension scheme (the “U.K. DB Plan”) which, if issued, could result in additional liabilities. Liabilities imposed under a CN or a FSD may equal the difference between the value of the assets of the U.K. DB Plan and the cost of buying out the benefits of participants of the U.K. DB Plan. In practice, the risk of a CN being imposed may inhibit our freedom to undertake certain corporate activities without first seeking the agreement of the trustees of the U.K. DB Plan. Additional security may need to be provided to the trustees of the U.K. DB Plan before certain corporate activities can be undertaken (such as the payment of an unusual dividend) and any additional funding of the U.K. DB Plan may have an adverse effect on our financial condition and the results of our operations. Key assumptions used to value our benefit obligations and the cost of providing such benefits, funding requirements and expense recognition include the discount rate, the expected long-term rate of return on pension assets, the health care cost trend rate and assumptions underlying actuarial methods. If the actual trends in these factors are less favorable than our assumptions, we may have to contribute cash to fund our obligations under these plans, thereby reducing the funds available to fund our operations, which could have a material adverse effect on our business, financial condition and results of operations. As of December 31, 2013, our pro forma unfunded pension obligations were approximately $30.5 million.

Product recalls by vehicle manufacturers could negatively impact our production levels, which could have a material adverse effect on our business, financial condition and results of operations.

Historically, there have been significant product recalls by some of the world’s largest vehicle manufacturers. Recalls may result in decreased vehicle production as a result of a manufacturer focusing its efforts on the problems underlying the recall rather than generating new sales volume. In addition, consumers may elect not to purchase vehicles manufactured by the vehicle manufacturer initiating the recall, or by vehicle manufacturers in general, while the recalls persist. We do not maintain insurance in the United States for product recall matters, as such insurance is not generally available on acceptable terms. Any reduction in vehicle production volumes, especially by our OEM customers, could have a material adverse effect on our business, financial condition and results of operations.

We are subject to risks related to our global operations.

For the year ended December 31, 2013, 27% of our pro forma net sales were derived from sales to customers outside the United States. We have manufacturing facilities in Brazil, China, the Czech Republic, France, Germany, India, Mexico, South Korea, Spain and the United Kingdom which accounted for 23% of our pro forma net sales for the same period. We also sell our products to customers in countries in which we do not have manufacturing facilities, such as Canada, Austria, Sweden, Hungary and Italy. Our global operations are subject to various risks, including:

 

    exposure to local economic conditions;

 

    exposure to local political conditions, including expropriation of our facilities and nationalization by a government;

 

    compliance with export control provisions in several jurisdictions, including the United States, the European Union and China;

 

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    changes in laws and regulations, including the laws and policies of the United States and other countries affecting trade and foreign investment;

 

    transport availability and costs;

 

    changes in tax law (including as related to the Combination);

 

    unexpected changes in regulatory requirements;

 

    exposure to liabilities under the U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act and similar laws;

 

    government imposed investment and other restrictions or requirements;

 

    exposure to local social unrest, including any resultant acts of war, terrorism or similar events;

 

    exposure to local public health issues and the resultant impact on economic and political conditions;

 

    increased risk of corruption;

 

    currency exchange rate and interest rate fluctuations;

 

    hyperinflation in certain countries;

 

    increased reliance on local suppliers that have not proven their ability to meet our requirements;

 

    the risk of government-sponsored competition;

 

    difficulty enforcing agreements and collecting receivables through certain legal systems;

 

    variations in protection of intellectual property and other legal rights;

 

    more expansive legal rights of labor unions;

 

    social laws that prohibit or make cost-prohibitive certain restructuring actions;

 

    adverse weather and natural disasters, such as heavy rains and flooding;

 

    increases in working capital requirements related to long supply chains or regional terms of business;

 

    controls on the repatriation of cash, including the imposition or increase of withholding and other taxes on remittances and other payments by our subsidiaries; and

 

    foreign currency exchange controls, export and import restrictions, such as antidumping duties, tariffs and embargoes, including restrictions promulgated by the Office of Foreign Assets Control of the United States Department of the Treasury, and other trade protection regulations.

As we continue to expand our business globally, our success will depend in large part on our ability to anticipate and effectively manage these and other risks associated with our global operations. However, any of these factors could adversely affect our global operations and, consequently, have a material adverse effect on our business, financial condition and results of operations.

 

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Expanding our global operations and entering new geographic markets pose competitive threats and commercial risks.

As part of our long-term growth strategy, we seek to further expand our operations globally and enter into new geographic markets. Such growth requires investments and resources that may not be available to us as needed. We cannot guarantee that we will be successful in our global expansion and, if we sign new contracts, we cannot guarantee that we will meet the needs of these customers and compete favorably in these markets. If these customers experience reduced demand for their products or financial difficulties, our future prospects will be negatively affected as well, and we may not be able to recover the costs associated with such efforts, which could have a material adverse effect on our business, financial condition and results of operations.

Foreign exchange rate fluctuations may have a material adverse effect on our results of operations.

As a result of our global operations, we generate a significant portion of our sales and incur a significant portion of our expenses in currencies other than the U.S. dollar. To the extent that we have significantly more costs than sales generated in a currency other than the U.S. dollar, we are subject to risk if the currency in which our costs are paid appreciates against the currency in which we generate sales because the appreciation effectively increases our cost in that country. We may selectively employ derivative instruments to reduce our foreign currency exchange risk. These instruments may be ineffective or may not offset more than a portion of the adverse financial impact resulting from foreign currency variations. The financial condition, results of operations and cash flows of some of our operating entities are reported in currencies other than the U.S. dollar and then translated into U.S. dollars at the applicable exchange rate for inclusion in our financial statements. As a result, appreciation of the U.S. dollar against these other currencies generally will have a negative impact on our reported sales and profits while depreciation of the U.S. dollar against these other currencies will generally have a positive effect on reported sales and profits. Our primary currency exposures are the Euro, Mexican Peso, Korean Won and Chinese Renminbi. Any significant decline in the value of these currencies as compared to the U.S. dollar may have a material adverse effect on our results of operations.

We are subject to governmental regulations that are already extensive and are growing, which will increase our costs and could have a material adverse effect on our business, financial condition and results of operations.

We and the automotive industry are subject to a variety of federal, state, local and international laws and regulations, including those relating to the reporting of certain claims, and those affecting taxes and levies, healthcare costs, and safety and international trade and immigration, among other things, all of which may have a direct or indirect effect on our business. In addition, compliance with complex U.S. and international laws and regulations that apply to our international operations increases our cost of doing business and, in some cases, restricts our ability to conduct business. These regulations are numerous and sometimes conflicting, and include import and export laws, sanctioned country restrictions, competition (or anti-trust) laws, anti-corruption laws, such as the FCPA and the U.K. Bribery Act, data privacy requirements, tax laws and accounting requirements. Violations of these laws and regulations could result in civil and criminal fines, penalties and sanctions against us, our officers or our employees, as well as prohibitions on the conduct of our business and on our ability to offer our products in one or more countries, and could have a material adverse effect on business, financial condition and results of operations.

We may incur material costs related to legal proceedings, which could have a material adverse effect on our business, financial condition and results of operations.

From time to time, we are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business. Some of these proceedings could allege damages against us relating to product warranties, product liability claims, environmental liabilities, personal injury claims, taxes, employment matters, intellectual property infringement or commercial or contractual disputes. Estimated warranty costs related to

 

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product warranties are accrued once the liability has become both probable and reasonably estimable, and we do not maintain insurance for warranty matters in the United States. We may incur substantial warranty expense related to existing or new products now or in the future or expansion in customer warranty programs. We cannot ensure that the costs, charges and liabilities associated with legal proceedings, claims or investigations will not be material or that those costs, charges and liabilities will not exceed any related amounts accrued in our financial statements or be mitigated in any way by insurance. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved unfavorably to us. These proceedings and claims may have a material adverse effect on our business, financial condition and results of operations.

We rely upon trademarks, copyrights, patents and contractual restrictions to protect our know-how, trade secrets and other intellectual property. Failure to protect our intellectual property rights may undermine our competitive position and protecting our rights or defending against third-party allegations of infringement may be costly, which could have a material adverse effect on our business, financial condition and results of operations.

Protection of proprietary processes, know-how, trade secrets, documentation and other technology is critical to our business. Failure to protect, monitor and control the use of our existing know-how, trade secrets and other intellectual property rights could cause us to lose our competitive advantage and incur significant expenses. We rely on trademarks, copyrights, patents and contractual restrictions to protect our know-how, trade secrets and other intellectual property rights. However, the measures we take to protect our know-how, trade secrets and other intellectual property rights may be insufficient. While we enter into confidentiality and proprietary rights agreements and agreements for assignment of invention with our employees and third parties to protect our know-how, trade secrets and intellectual property rights, such agreements and assignments could be breached and may not provide meaningful protection. Also, others may independently develop technologies or products that are similar to ours. In such case, our know-how and trade secrets would not prevent third parties from competing with us. Third parties may seek to oppose, cancel or invalidate our intellectual property rights, which could have a material adverse effect on our business, financial condition and results of operations. As of June 29, 2014, we held approximately 130 issued patents in the United States and foreign jurisdictions covering a number of innovations and product ideas. Our patents expire on various dates through 2031.

The costs associated with the protection of our know-how, trade secrets, intellectual property and our proprietary rights and technology are ongoing. Third parties or employees may infringe or misappropriate our proprietary technologies or other intellectual property rights, which could harm our business and operating results. Policing unauthorized use of intellectual property rights can be difficult and expensive, and adequate remedies may not be available. Failure to protect or enforce our intellectual property rights may undermine our competitive position and protecting our rights or defending against third-party allegations of infringement may be costly, which could have a material adverse effect on our business, financial condition and results of operations.

If we fail to comply with our obligations in our intellectual property license agreements with third parties we could lose license rights that are important to our business.

We are a party to a number of intellectual property license agreements with third parties and expect to enter into additional license agreements in the future. Our existing license agreements impose, and we expect that any future license agreements will impose, various diligence, royalty and other obligations on us. If we fail to comply with these obligations, our licensors may have the right to terminate these agreements, in which event we might not be able to develop and market any product that is covered by these agreements. Termination of these licenses or reduction or elimination of our licensed rights may result in our having to negotiate new or reinstated licenses with less favorable terms. The occurrence of such events could have a material adverse effect on our business, financial condition and results of operations.

If our technology infringes on the proprietary rights of others, our ability to compete may be impaired.

Third parties may bring legal claims, or threaten to bring legal claims, against us that their intellectual property rights are being infringed or violated by our use of intellectual property. Litigation or threatened

 

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litigation, regardless of merit, could be costly, time consuming to defend, require us to redesign our products or manufacturing processes, if feasible, distract our senior management from operating our business and require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property. Any such royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. If we were to be found liable for any such infringement, we could be required to pay substantial damages and could be subject to injunctions preventing further infringement. In addition, any payments we are required to make and any injunctions with which we are required to comply as a result of infringement claims could be costly. Any legal claims or litigation could have a material adverse effect on our business, financial condition and results of operations.

If a third party claims to have licensing rights with respect to components we purchased from a vendor, we may be obligated to cease using these components, incur associated costs associated if the vendor is unwilling or unable to reimburse us and be subject to liability under various civil and criminal causes of action, including damages and injunctions. Additionally, we will be required to purchase new components to replace any we have purchased and are unable to use. Any such events could have a material adverse effect on our business, financial condition and results of operations.

We may not be able to respond quickly enough to changes in technology and technological risks and to develop our intellectual property into commercially viable products, through our research and development or otherwise, which could have a material adverse effect on our business, financial condition and results of operations.

Changes in legislative, regulatory or industry requirements or in competitive technologies, including manufacturing processes, may render certain of our products obsolete or less attractive or may result in our operations not being cost-competitive. Our ability to anticipate changes in technology and regulatory requirements and to successfully develop and introduce new and enhanced products on a timely basis will be a significant factor in our ability to remain competitive. Although we invest resources in research and development in order to do so, we cannot ensure that we will be able to achieve the technological advances that may be necessary for us to remain competitive or that certain of our products will not become obsolete. Research and development process is time-consuming and costly, and offers uncertain results. We may not be able through our research and development efforts to keep pace with improvements in technology of our competitors, and licenses for technologies that would enable us to keep pace with our competitors may not be available on commercially reasonable terms if at all.

We are also subject to the risks generally associated with new product introductions and applications, including lack of market acceptance of our customers’ Programs or Platforms, delays in product development and failure of products to operate properly. If we are unable to respond quickly to changes in technology, customer demands or regulatory requirements, it could have a material adverse effect on our business, financial condition and results of operations.

To compete effectively in the automotive supply industry, we must be able to launch new products to meet our customers’ demands in a timely manner. We cannot ensure, however, that we will be able to install and validate the equipment needed to produce products for new customer Programs in time for the start of production or that the transitioning of our manufacturing facilities and resources to full production under new product Programs will not impact production rates or other operational efficiency measures at our facilities. In addition, we cannot ensure that our customers will execute on schedule the launch of their new product Programs, for which we might supply products. We may fail to successfully launch or be affected by our customers’ delay in introducing new Programs, and our customers may fail to successfully launch new Programs, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Any acquisitions or joint ventures we make could disrupt and materially harm our business.

We may grow through acquisitions of complementary businesses, products or technologies, or by entering into joint ventures. Acquisitions or strategic alliances involve numerous risks, including:

 

    difficulties in the integration of the acquired businesses or incorporating joint ventures;

 

    the diversion of our management team’s attention from other business concerns;

 

    uncertainties in assessing the value, strengths and potential profitability of, and identifying the extent of all weaknesses of, acquisition candidates;

 

    the assumption of unknown liabilities, including environmental, tax, pension and litigation liabilities, and undisclosed risks impacting the target;

 

    adverse effects on existing customer and supplier relationships;

 

    incurrence of substantial indebtedness;

 

    potentially dilutive issuances of equity securities;

 

    integration of internal controls;

 

    entry into markets in which we have little or no direct prior experience;

 

    the potential loss of key customers, management and employees of an acquired business;

 

    potential integration or restructuring costs;

 

    the ability to achieve operating and financial synergies; and

 

    unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying our rationale for pursuing the acquisition or joint venture.

We cannot ensure that we will be able to successfully integrate acquisitions or incorporate joint ventures that we undertake or that such acquisitions or joint ventures will perform as planned or prove to be beneficial to our business and results of operations. The occurrence of any one or more of these factors could cause us not to realize the benefits anticipated to result from an acquisition or a joint venture, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to environmental requirements and risks as a result of which we may incur significant costs, liabilities and obligations, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to a variety of environmental laws, regulations, initiatives and permits that govern, among other things: activities or operations that may have an adverse environmental effect; soil, surface water and groundwater contamination; the generation, storage, handling, use, disposal and transportation of hazardous materials and hazardous waste; the emission and discharge of materials, including greenhouse gases into the environment; and health and safety. Failure to comply with these laws, regulations or permits could result in fines or sanctions, obligations to investigate or remediate existing or potential contamination, third-party property damage claims, personal injury claims, or modification or revocation of operating permits and may lead to temporary or permanent business interruptions. Environmental laws, regulations and permits, and the

 

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enforcement thereof, change frequently, and have tended to become increasingly stringent over time which may necessitate substantial capital expenditures or operating costs or may require changes of production processes. Compliance with the requirements of laws and regulations affect ongoing operations and may increase capital costs and operating expenses, particularly if the applicable laws and regulations become increasingly stringent or more stringently enforced in the future. In addition, we may be required to use different materials in our production due to changing environmental restrictions or due to customer specifications. Material substitution may cause us to incur additional capital and operating costs.

We endeavor to conduct our operations according to all legal requirements, but we may not be in complete compliance with such laws and regulations at all times. We use, and in the past have used, hazardous materials and we generate, and in the past have generated, hazardous wastes. In addition, many of the locations that we own or operate used hazardous materials either before or after we were involved with those locations. We may be subject to claims under international, federal and state statutes and/or common law doctrines for personal injury, property damages, natural resource damages and other damages, as well as the investigation and clean up of soil, surface water, groundwater and other media. Such claims may arise, for example, out of current or former activities at sites that we own or operate currently, as well as at sites that we owned or operated in the past, and at contaminated sites that have always been owned or operated by third parties. Our liability for such claims may be joint and several, so that we may be held responsible for more than our share of the remediation costs or other damages, or even for the entire cost without being entitled to claim compensation from third parties. We have from time to time been subject to claims arising out of contamination at our own and other facilities and may incur such liabilities in the future. Our costs, liabilities and obligations relating to environmental matters may have a material adverse effect on our business, financial condition and results of operations.

Additionally, our OEM customers are subject to significant environmentally focused state, federal, international and foreign laws and regulations that regulate vehicle emissions, fuel economy and other matters related to the environmental impact of vehicles. To the extent that such laws and regulations ultimately increase or decrease automotive vehicle production, such laws and regulations could have a material adverse effect on our business, financial condition and results of operations.

We could be adversely impacted by climate change and related energy legislation and regulation.

Foreign, federal, state and local regulatory and legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating greenhouse gas emissions and energy policies. Due to the uncertainty in the regulatory and legislative processes, as well as the scope of such requirements and initiatives, we cannot currently determine the effect such legislation and regulation may have on our operations or on the production of, or demand for, vehicles.

In addition, the physical occurrence of severe weather conditions or one or more natural disasters, whether due to climate change or naturally occurring, such as tornadoes, hurricanes and earthquakes in the United States or in a country in which we operate or in which our suppliers or customers are located could have a material adverse effect on our business, financial condition and results of operations. Such events could result in:

 

    physical damage to and complete or partial closure of one or more of our or our customers’ manufacturing facilities;

 

    temporary or long-term disruption in the supply of raw materials from our suppliers;

 

    disruptions to our production or ability of our employees to work efficiently; and/or

 

    disruptions or delays in the transport of our products to our customers or their vehicles to their customers.

 

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Seasonality in the automotive industry could have a material adverse effect on our business, financial condition and results of operations.

The automotive industry in which we operate is seasonal. Some of our largest OEM customers typically shut down vehicle production during certain months or weeks of the year. For example, our OEM customers in Europe typically shut down operations during portions of July and August and one week in December, while our OEM customers in North America typically close assembly plants for two weeks in July and one week in December. During these downturns, our customers will generally reduce the number of production days because of lower demands and reduce excess vehicle inventory. Such seasonality could have a material adverse effect on our business, financial condition and results of operations.

We are exposed to a number of different tax uncertainties, which could have a material adverse effect on our results of operations.

We are required to pay taxes in multiple jurisdictions. We determine the tax liability we are required to pay based on our interpretation of applicable tax laws and regulations in the jurisdictions in which we operate. We may be subject to unfavorable changes, including retroactive changes, in the tax laws and regulations to which we are subject. We are subject to tax audits by governmental authorities in the United States and numerous non-U.S. jurisdictions, which are inherently uncertain. Negative or unexpected results from one or more such tax audits could adversely affect our results of operations. Tax controls and changes in tax laws or regulations or the interpretation given to them may expose us to negative tax consequences, including interest payments and potential penalties, which could have a material adverse effect on our results of operations.

We or certain of our subsidiaries may become subject to net income taxation in additional jurisdictions, which could have a material adverse effect on our results of operations.

We or one or more of our subsidiaries may become treated as resident or as otherwise being engaged in a trade or business or having a permanent establishment in one or more jurisdictions in which we currently believe we or the relevant subsidiary is not so treated. If that were to happen, we or the relevant subsidiary would be subject to net income taxation in that jurisdiction on some or all of our or the relevant subsidiary’s income (depending on the jurisdiction and the circumstances). There could be many possible causes for such treatment, including activities indicating that management and control of our company or of the relevant subsidiaries are exercised in that jurisdiction, the nature of our activities and operations in that jurisdiction, or the location of our assets or use of our products in that jurisdiction. No assurance can be given that we will not be subject to such taxes retroactively or prospectively or that such taxes will not be substantial. The imposition of such taxes could have a material adverse effect on our results of operations.

The mix of profits and losses in the various jurisdictions in which we conduct our business may impact our overall tax rate, which could have a material adverse effect on our results of operations.

Our overall effective tax rate is equal to our total tax expense as a percentage of our income or loss before tax. However, tax expenses and benefits are determined separately for each of our taxpaying entities or groups of entities that are combined for tax purposes in each jurisdiction. Losses in such jurisdictions may provide no current financial statement tax benefit. As a result, changes in the mix of projected profits and losses among jurisdictions could have a significant impact on our overall effective tax rate, which could have a material adverse effect on our results of operations.

A failure of or disruptions in our information technology (“IT”) networks and systems, or the inability to successfully implement upgrades to our enterprise resource planning (“ERP”) systems, could have a material adverse effect on our business, financial condition and results of operations.

We rely upon IT networks and systems to process, transmit and store electronic information, and to manage or support a variety of business processes or activities. Additionally, we and certain of our third-party

 

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vendors collect and store personal information in connection with human resources operations and other aspects of our business. The secure operation of these IT networks and systems and the proper processing and maintenance of this information are critical to our business operations. Despite the implementation of security measures, our IT systems are at risk to damages from computer viruses, unauthorized access, cyber-attack and other similar disruptions. The occurrence of any of these events could compromise our networks, and the information stored there could be accessed, publicly disclosed or lost. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, the disruption of our operations or damage to our reputation. We may also be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. Any of these issues could have a material adverse effect on our business, financial condition and results of operations.

Further, we plan to expand and update our networks and systems in the normal course and in response to the changing needs of our business, which may include a new ERP system to upgrade our operating and financial systems. Should the systems not be implemented successfully, or if the systems do not perform in a satisfactory manner once implementation is complete, our business and operations could be materially adversely affected.

Risks Relating to the Combination

The Combination and the related integration could divert management’s attention from our operations and executing our strategy and be disruptive to our operations which could have a material adverse effect on our business, financial condition and results of operations.

The process of integrating the administrative operations of HHI, Metaldyne and Grede may continue to require a disproportionate amount of resources and management attention. Our management team may encounter unforeseen difficulties in managing the reorganization of these businesses. To successfully combine and operate these businesses, our management team will need to continue to focus on realizing anticipated benefits on a timely basis while maintaining customer relationships and the efficiency of our operations. For example, we expect to devote substantial management attention to implement financial reporting and other systems that will permit us to use a shared service business model (for certain processes). Any substantial diversion of management attention or difficulties in operating the combined business could adversely affect our sales and ability to achieve operational, financial and strategic objectives, which could have a material adverse effect on our business, financial condition and results of operations.

HHI, Metaldyne and Grede do not have a long history of working as a single company. We may not be successful in integrating the administrative operations of these companies, which could have a material adverse effect on our business, financial condition and results of operations.

We are in the process of integrating the administrative operations of HHI, Metaldyne and Grede, which previously operated as separate entities and businesses. The integration process is complex and the difficulties of combining the operations of these companies include:

 

    managing a significantly larger and more global company;

 

    creating uniform standards, controls, procedures, policies and information systems and minimizing the costs associated with such matters;

 

    integrating information, purchasing, accounting, finance, sales, billing, payroll and regulatory compliance systems;

 

    retaining customers and key suppliers;

 

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    retaining key employees;

 

    integrating personnel from different companies while maintaining focus on providing consistent, high-quality products and customer service;

 

    unanticipated changes in applicable laws and regulations; and

 

    unforeseen issues, liabilities, expenses or delays associated with the integration.

Any of the above difficulties could adversely affect our ability to successfully integrate the businesses and maintain relationships with customers, suppliers and employees. If we are not successful in completing the integration of the businesses, if the integration takes longer or is more complex or expensive than anticipated, if we cannot operate the combined businesses as effectively as we anticipate, it could harm our operating performance, margins, sales and reputation and could have a material adverse effect on our business, financial condition and results of operations.

We may not achieve the anticipated benefits from the Combination.

The combined company may not perform as we expect or achieve the benefits we anticipate. As a result of the Combination, we expect to leverage certain cross-selling opportunities, professional service fees and purchasing volume while gaining operational synergies across our global platform. In connection with pursuing these benefits, we may incur costs that are in excess of the realized savings and those costs may be borne in advance of achieving any incremental savings. A variety of factors could cause us not to achieve the benefits we anticipate, or could have an adverse effect on our business. For example, we could discover that our indirect spend is not synergistic after incurring costs to analyze the spend. We could also experience higher than historical turnover or be required to incur employee retention costs. Additional factors include:

 

    higher than expected or unanticipated costs to implement the Combination and to operate the business;

 

    inadequate resources to implement the Combination and to operate the business;

 

    our inability to effectively capture global platforms;

 

    our inability to cross-sell our products and technologies into different markets;

 

    our inability to leverage geographic footprint and distribution channels; and

 

    our inability to leverage corporate or administrative expenses.

As a result, we may not achieve our expected benefits in the time anticipated, or at all. If we are unable to achieve such benefits, or if our costs are in excess of the realized savings, it could have a material adverse effect on our financial condition and results of operations.

Our historical and pro forma financial information may not reflect what our actual results of operations and financial condition would have been had we been a combined company for the periods presented and thus these results may not be indicative of our future financial condition and results of operations.

The historical financial information included in this prospectus is constructed from the separate financial statements of HHI, Metaldyne and Grede for periods prior to the consummation of the Combination. The pro forma financial information presented in this prospectus is based in part on certain assumptions regarding the Combination that we believe are reasonable. Our assumptions may prove to be inaccurate over time. See “Unaudited Pro Forma Financial Data.”

 

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Although Adjusted EBITDA is derived from our financial statements (pro forma or historical, as the case may be), the calculation of Adjusted EBITDA contains a number of estimates and assumptions that may prove to be incorrect. Although our management believes that these estimates and assumptions are reasonable and correct, investors should not place undue reliance upon Adjusted EBITDA as an indicator of current and future performance.

Our limited operating history as a combined company and the challenge of integrating previously independent businesses make evaluating our business and our future results of operations difficult. Our potential for future business success and operating profitability must be considered in light of the risks, uncertainties, expenses and difficulties typically encountered by recently organized or combined companies.

Accordingly, the historical and pro forma financial information included in this prospectus may not reflect what our results of operations and financial condition would have been had we been a combined entity during the periods presented, or what our financial condition and results of operations will be in the future.

Risks Related to Our Company and Our Organizational Structure

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.

We have a high level of indebtedness. The majority of our indebtedness consists of indebtedness under several term loans and revolving lines of credit at our HHI, Metaldyne and Grede segments. We expect to refinance these existing term loans and lines of credit prior to this offering as part of the Refinancing. Our high level of indebtedness could have significant negative consequences, including:

 

    increasing our vulnerability to adverse economic, industry or competitive developments;

 

    requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities and to pay any future dividends;

 

    exposing us to the risk of increased interest rates because certain of our borrowings, including and most significantly borrowings under our senior secured credit facility, are at variable rates of interest;

 

    making it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing such indebtedness;

 

    restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; and

 

    limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

We may not be able to refinance our term loans and revolving lines of credit at our HHI, Metaldyne and Grede segments or any other existing indebtedness because of our high level of debt, debt incurrence restrictions under our debt agreements or because of adverse conditions in credit markets generally, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Despite our high indebtedness level, we still may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although agreements governing our indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and, under certain circumstances, the amount of indebtedness we could incur in compliance with these restrictions could be substantial. If we add new debt to our outstanding debt levels, the risks related to our indebtedness would increase.

We are a holding company with no significant independent operations and, therefore, rely on our subsidiaries to make funds available to us.

We are a holding company with no significant independent operations and no significant assets other than the capital stock of our subsidiaries. Therefore, we depend on the receipt of dividends or other distributions from our subsidiaries. We expect that the agreements governing our indebtedness will contain a number of significant covenants that, among other matters, restrict our ability to incur additional indebtedness, incur capital lease obligations, pay dividends, make acquisitions or engage in mergers or consolidations, make capital expenditures, and receive dividends and distributions from our subsidiaries except to fund our operating expenses in the ordinary course of business. In addition, we are required to comply with specified financial ratios and tests. Our inability to receive funds from our operating subsidiaries could adversely affect our ability to meet our obligations and to make dividend payments and other distributions to holders of our common stock.

American Securities independently has substantial control over us and will be able to influence corporate matters with respect to us. American Securities may have interests that differ from each other and from those of our other stockholders

After giving effect to this offering, American Securities will directly or indirectly hold, in the aggregate, approximately     % of the voting power of our outstanding common stock. As a result, American Securities will be able to strongly influence the election of our directors and potentially control the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions.

The interests of American Securities may not coincide with each other or the best interests of other holders of our common stock. This concentration of voting power could also have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to the stockholders of our common stock.

We have elected to take advantage of the “controlled company” exemption to the corporate governance rules for publicly-listed companies, which could make our common stock less attractive to some investors or otherwise harm our stock price.

Because we qualify as a “controlled company” under the corporate governance rules for publicly-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, we do not expect that the majority of our directors will be independent or that our compensation committee or nominating and corporate governance committee will be comprised entirely of independent directors. Accordingly, should the interests of American Securities, as our controlling stockholder, differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for publicly-listed companies. Our status as a controlled company could make our common stock less attractive to some investors or otherwise harm our stock price.

 

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We will incur increased costs and obligations as a result of being a public company.

As a privately held company, we were not required to comply with certain corporate governance and financial reporting practices and policies required of a publicly traded company. As a publicly traded company, we will incur significant legal, accounting and other expenses that we were not required to incur in the recent past. After this offering, we will be required to file with the SEC annual and quarterly information and other reports that are specified in Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We will also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. We will also become subject to other reporting and corporate governance requirements, including the requirements of the NASDAQ or NYSE, and certain provisions of the Sarbanes-Oxley Act and the regulations promulgated thereunder, which will impose significant compliance obligations upon us. As a public company, we will, among other things:

 

    prepare and distribute periodic public reports and other stockholder communications in compliance with our obligations under the federal securities laws and applicable NASDAQ or NYSE rules;

 

    create or expand the roles and duties of our board of directors and committees of the board;

 

    institute more comprehensive financial reporting and disclosure compliance functions;

 

    supplement our internal accounting, internal controls, auditing and reporting function, including hiring additional staff with expertise in accounting and financial reporting for a public company;

 

    enhance and formalize closing procedures at the end of our accounting periods;

 

    enhance our internal audit and tax functions;

 

    enhance our investor relations function;

 

    establish new internal policies, including those relating to disclosure controls and procedures; and

 

    involve and retain to a greater degree outside counsel and accountants in the activities listed above.

These changes will require a significant commitment of additional resources and many of our competitors already comply with these obligations. We may not be successful in implementing these requirements and the significant commitment of resources required for implementing them could adversely affect our business, financial condition and results of operations. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our results of operations on a timely and accurate basis could be impaired and we could suffer adverse regulatory consequences or violate NASDAQ or NYSE listing standards. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

The changes necessitated by becoming a public company require a significant commitment of resources and management oversight that has increased and may continue to increase our costs and might place a strain on our systems and resources. As a result, our management’s attention might be diverted from other business concerns.

If we are unable to offset these costs through other savings then it could have a material adverse effect on our business, financial condition and results of operations.

 

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Our internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business, financial condition and results of operations.

As a privately held company, we do not currently document or test our compliance with these controls on a periodic basis in accordance with Section 404. Furthermore, we have not tested our internal controls in accordance with Section 404 and, due to our lack of documentation, such a test would not be possible to perform at this time.

We are in the early stages of addressing our internal control procedures to satisfy the requirements of Section 404, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to attest to the effectiveness of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our credit facilities. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements.

In addition, we will incur additional costs in order to improve our internal control over financial reporting and comply with Section 404, including increased auditing and legal fees and costs associated with hiring additional accounting and administrative staff.

Some provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated bylaws may deter third parties from acquiring us and diminish the value of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws provide for, among other things:

 

    restrictions on the ability of our stockholders to call a special meeting and the business that can be conducted at such meeting;

 

    prohibition on the ability of our stockholders to remove directors elected by the holders of our common stock without cause;

 

    our ability to issue additional shares of common stock and to issue preferred stock with terms that the board of directors may determine, in each case without stockholder approval (other than as specified in our amended and restated certificate of incorporation);

 

    the absence of cumulative voting in the election of directors;

 

    supermajority approval requirements for amending or repealing provisions in the amended and restated certificate of incorporation and bylaws;

 

    a classified board of directors;

 

    a prohibition on action by written consent of stockholders following the date when American Securities ceases to beneficially own 40% or more of our outstanding shares of common stock; and

 

    advance notice requirements for stockholder proposals and nominations.

 

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These provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a transaction involving a change in control of our company that is in the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts. These provisions could also make it more difficult for stockholders to nominate directors for election to our board of directors and take other corporate actions.

Risks Related to this Offering

An active, liquid trading market for our common stock may not develop.

Prior to this offering, there has been no public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any of our shares that you purchase. The initial public offering price of our common stock will be determined by negotiation between us and the underwriters and may not be indicative of prices that will prevail after the completion of this offering. The market price of our common stock may decline below the initial public offering price, and you may not be able to resell your shares at, or above, the initial public offering price.

Future sales of our common stock or securities convertible into or exchangeable for common stock could depress the market price of our common stock.

Sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common stock. Our directors, executive officers and American Securities will be subject to the lock-up agreements described in “Underwriting” and are subject to the Rule 144 holding period requirements described in “Shares Eligible for Future Sale—Lock-up Arrangements and Registration Rights.” As of June 29, 2014, after giving effect to this offering, we had             shares of common stock outstanding (or             shares if the underwriters exercise in full their option to purchase additional shares). After this offering and the lock-up agreements have expired, and subject to vesting requirements and the requirements of Rule 144 of the Securities Act of 1933, as amended (the “Securities Act”), approximately              additional shares will be eligible for sale in the public market (or             shares if the underwriters exercise in full their option to purchase additional shares).

American Securities has demand registration rights pursuant to the Stockholders’ Agreement as described in “Certain Relationships and Related Person Transaction—Stockholders’ Agreement.” We have also registered             shares of our common stock that we have issued or have reserved for issuance under our 2014 Equity Incentive Plan. These shares may be sold in the public market upon issuance and once vested, subject to the 180-day lock-up period for awards held by our executive officers and directors and other restrictions provided under the terms of the 2014 Equity Incentive Plan and applicable award agreement.

Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of the underwriters, may, in its sole discretion and without notice, release all or any portion of the shares subject to lock-up agreements prior to expiration of the lock-up period. Subject to the terms of the lock-up agreements, we also may issue our shares of common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition, investments or otherwise. Any such issuance could result in substantial dilution to our existing stockholders. Due to these factors, sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to or could sell shares, could reduce the market price of our common stock. Any decline in the price of shares of our common stock could impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.

 

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The price of our common stock may be volatile.

Securities markets worldwide have experienced, and are likely to continue to experience, significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions could reduce the market price of our common stock regardless of our results of operations. The trading price of our common stock is likely to be highly volatile and could be subject to wide price fluctuations in response to various factors, including, among other things, the risk factors described herein, and other factors beyond our control. Factors affecting the trading price of our common stock could include:

 

    market conditions in the broader stock market;

 

    actual or anticipated variations in our quarterly financial and operating results;

 

    variations in operating results of similar companies;

 

    introduction of new services by us, our competitors or our customers;

 

    issuance of new, negative or changed securities analysts’ reports, recommendations or estimates;

 

    investor perceptions of us and the industries in which we or our customers operate;

 

    sales, or anticipated sales, of our stock, including sales by existing stockholders;

 

    additions or departures of key personnel;

 

    regulatory or political developments;

 

    stock-based compensation expense under applicable accounting standards;

 

    litigation and governmental investigations; and

 

    changing economic conditions.

These and other factors may cause the market price and demand for shares of our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have sometimes instituted securities class action litigation against the company that issued the stock. Securities litigation against us, regardless of the merits or outcome, could result in substantial costs and divert the time and attention of our management from our business, which could significantly harm our business, profitability and reputation.

We cannot assure you that we will pay dividends on our common stock, and our indebtedness could limit our ability to pay dividends on our common stock.

After the completion of this offering, we intend to pay cash dividends on our common stock, subject to our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements, business prospects and other factors that our board of directors may deem relevant. For more information, see “Dividend Policy.” There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence paying dividends.

 

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If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

The initial public offering price per share is expected to be substantially higher than the pro forma net tangible book value per share immediately after this offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting the book value of our liabilities. Based on our pro forma net tangible book value as of                     , 2014 and assuming an offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, you will incur immediate and substantial dilution in the amount of $         per share. See “Dilution.”

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our common stock and our trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no or too few securities or industry analysts commence coverage of our company, the trading price for our common stock would likely be negatively affected. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, the price of our common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause the price of our common stock and trading volume to decline.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact or relating to present facts or current conditions included in this prospectus are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. 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,” “project,” “plan,” “intend,” “believe,” “may,” “should,” “can have,” “likely” 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 prospectus are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this prospectus, 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. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. We believe these factors include, but are not limited to, those described under “Risk Factors” and “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 prospectus 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 any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

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USE OF PROCEEDS

All of the shares of common stock offered by this prospectus are being sold by the selling stockholders. The selling stockholders in this offering are affiliates of American Securities. We will not receive any of the proceeds from the sale of shares by the selling stockholders in this offering, including from any exercise by the underwriters of their option to purchase additional shares from the selling stockholders. For information about the selling stockholders, see “Principal and Selling Stockholders.”

 

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DIVIDEND POLICY

After the completion of this offering, we intend to pay cash dividends, subject to the discretion of our board of directors and our compliance with applicable law, and depending on, among other things, our results of operations, financial condition, level of indebtedness, capital requirements, contractual restrictions, restrictions in our debt agreements, business prospects and other factors that our board of directors may deem relevant. We expect to pay a quarterly cash dividend on our common stock of $         per share, or $         per annum, commencing in                     . The payment of such quarterly dividends and any future dividends will be at the discretion of our board of directors.

Our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of our subsidiaries or covenants under any existing and future outstanding indebtedness we or our subsidiaries incur. Future agreements may also limit our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Certain Indebtedness” for a description of the restrictions on our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 29, 2014:

 

    on an actual basis;

 

    on a pro forma basis to give effect to the Combination and the Refinancing; and

 

    on a pro forma as adjusted basis to give effect to consummation of this offering, including payment of related fees and expenses.

This table should be read in conjunction with “Use of Proceeds,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and our financial statements and the related notes thereto included elsewhere in this prospectus.

 

     As of June 29, 2014  
     Actual    

Pro Forma

    

Pro Forma
As Adjusted

 
     (In millions, except share data)  

Cash and cash equivalents

   $ 126.1      $                    $                
  

 

 

   

 

 

    

 

 

 

Total debt

   $ 1,990.6      $         $     
  

 

 

   

 

 

    

 

 

 

Equity:

       

Common stock, $0.001 par value;             shares authorized,              shares issued and              shares outstanding, actual;              shares authorized,              shares issued and             shares outstanding, pro forma;              shares authorized,              shares issued and              shares outstanding, pro forma as adjusted

     0.0        

Preferred stock, $0.001 par value;              shares authorized,              shares issued and              shares outstanding, actual;              shares authorized,              shares issued and             shares outstanding, pro forma;              shares authorized,              shares issued and              shares outstanding, pro forma as adjusted

     —          

Additional paid-in-capital

     818.3        

Accumulated other comprehensive loss

     (1.5     

Deficit

     (304.5     

Noncontrolling interest

     2.3        
  

 

 

   

 

 

    

 

 

 

Total stockholders’ equity

     514.6        
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 2,505.2      $         $     
  

 

 

   

 

 

    

 

 

 

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the net tangible book value per share of our common stock upon the consummation of this offering. Dilution results from the fact that the per share offering price of our common stock is substantially in excess of the book value per share attributable to our existing investors.

As of June 29, 2014, we had net tangible book value of approximately $         million, or $         per share. Net tangible book value per share represents total tangible assets less total liabilities divided by the number of shares of common stock outstanding. After giving effect to (i) the sale of              shares of common stock in this offering, based upon an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the Combination and (iii) the Refinancing, our net tangible book value as of June 29, 2014 would have been approximately $         million, or $         per share. This represents an immediate increase in net tangible book value of $         per share to existing stockholders and an immediate dilution of $         per share to new investors purchasing common stock in this offering. The following table illustrates this dilution on a per share of common stock basis:

 

Assumed initial public offering price per share

      $                

Net tangible book value per share as of June 29, 2014

   $                   

Increase in pro forma net tangible book value per share attributable to new investors

     
  

 

 

    

Net tangible book value per share after this offering

     
     

 

 

 

Dilution per share to new investors

      $     
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) our net tangible book value by $         million, the net tangible book value per share after this offering by $         and the dilution per share to new investors by $         assuming the number of shares offered by the selling stockholders, as set forth on the cover page of this prospectus, remains the same.

If the underwriters were to fully exercise their option to purchase additional share of our common stock from the selling stockholders, the net tangible book value per share after this offering would be $         per share, and the dilution in pro forma in net tangible book value per share to new investors in this offering would be $         per share.

The following table sets forth, as of June 29, 2014, the total number of shares of common stock owned by existing stockholders, including the selling stockholders, and to be owned by new investors, the total consideration paid, and the average price per share paid by our existing stockholders and to be paid by new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

    

 Shares Purchased 

   

 Total Consideration 

   

Average Price
Per Share

 
    

Number

  

Percent

   

Amount

    

Percent

   

Existing stockholders

               $                                     $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100   $           100   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

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If the underwriters were to fully exercise their option to purchase              additional shares of our common stock from the selling stockholders, the percentage of shares of our common stock held by existing stockholders would be     %, and the percentage of shares of our common stock held by new investors would be     %.

The above discussion and tables are based on              shares outstanding at June 29, 2014. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.

 

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UNAUDITED PRO FORMA FINANCIAL DATA

The following unaudited pro forma consolidated financial data as of June 29, 2014 and for the year ended December 31, 2013 and the six months ended June 29, 2014 has been derived by giving effect to the following pro forma adjustments to our historical consolidated financial statements appearing elsewhere in this prospectus:

 

    the Grede Transaction;

 

    the Combination;

 

    the Refinancing;

 

    the elimination of certain sponsor management fees; and

 

    the issuance of shares of our common stock offered by the selling stockholders in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus.

The Grede Transaction became effective on June 2, 2014. The unaudited pro forma condensed consolidated balance sheet as of June 29, 2014 does not include pro forma adjustments related to the Grede Transaction, as that acquisition is already reflected in our historical financial statements.

For the purposes of the unaudited pro forma condensed consolidated statement of operations for the six months ended June 29, 2014, we assumed that the Grede Transaction occurred on January 1, 2013. As a result, the unaudited pro forma condensed consolidated statement of operations was derived from our unaudited historical statement of operations for the period from January 1, 2014 to June 29, 2014 and the unaudited historical statement of operation of Grede for the period from January 1, 2014 to June 29, 2014.

For the purposes of the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2013, we assumed that the Grede Transaction occurred on January 1, 2013. As a result, the unaudited pro forma condensed consolidated statement of operations was derived from our audited historical statement of operations for the period from January 1, 2013 to December 31, 2013 and the audited historical statement of operations of Grede for the period from December 31, 2012 to December 29, 2013.

In connection with the Combination, we expect to incur additional professional fees and stock-based compensation expenses resulting from equity grants pursuant to the 2014 Equity Incentive Plan.

The pro forma adjustments for the Refinancing relates to the debt financing transactions to refinance the existing long-term indebtedness of HHI, Metaldyne and Grede we expect to enter into prior to the consummation of this offering. For the purposes of the unaudited pro forma condensed consolidated statements of operations for the six months ended June 29, 2014 and the year ended December 31, 2013, we assumed the Refinancing occurred on January 1, 2013. For the purposes of the unaudited pro forma condensed consolidated balance sheet, we assumed the Refinancing occurred on June 29, 2014.

The pro forma adjustments for this offering relate to the management consulting agreements between American Securities and each of HHI, Metaldyne and Grede. See “Certain Relationships and Related Person Transactions—Management Consulting Agreements.” These agreements will terminate pursuant to their respective terms upon consummation of this offering. For the purposes of the unaudited pro forma condensed consolidated statements of operations for the six months ended June 29, 2014 and the year ended December 31, 2013, we assumed the consummation of this offering occurred on January 1, 2013 and, therefore, reversed all sponsor management fees paid to American Securities during those periods. In addition, we incurred certain non-recurring costs associated with this offering. For the purposes of the unaudited pro forma condensed consolidated statements of operations for the six months ended June 29, 2014 and the year ended December 31, 2013, we have reversed such costs.

 

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The pro forma adjustments related to the Grede Transaction are preliminary and are based on information available to date, and are subject to revision as additional information becomes available as to, among other things, the fair value of acquired assets and liabilities and the final determination of acquisition-related costs. The actual adjustments described herein have been made as of the closing date of the Grede Transaction and are expected to change based upon the finalization of appraisals and other valuation studies we have arranged to obtain. Revisions to the preliminary purchase price allocation of the Grede Transaction could materially change the pro forma amounts of total assets, total liabilities and stockholders’ equity, depreciation and amortization and income tax expense.

The unaudited pro forma condensed consolidated financial information is presented for informational purposes only. The unaudited pro forma condensed consolidated financial information does not purport to represent what our results of operations or financial condition would have been had the pro forma adjustments actually occurred on the dates indicated, and they do not purport to project our results of operations or financial condition for any future period or as of any future period.

The unaudited pro forma condensed consolidated financial information should be read in conjunction with “Summary—Summary Historical Financial and Other Data,” “Risk Factors,” “Use of Proceeds,” “Capitalization,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto included elsewhere in this prospectus.

 

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UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED BALANCE SHEET

As of June 29, 2014

(Dollars in millions)

 

    

Consolidated
MPG

   

The
Combination
Pro Forma
Adjustments

    

The
Refinancing

Pro Forma

Adjustments

    

Offering
Pro Forma
Adjustments

    

Pro Forma
as Adjusted

 

Assets

             

Cash and cash equivalents

   $ 126.1      $                    $                    $                    $ 126.1   

Receivable, net

             

Trade

     392.6                 392.6   

Other

     26.7                 26.7   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total receivables, net

     419.3                 419.3   

Inventories

     193.7                 193.7   

Deferred income taxes

     10.0                 10.0   

Prepaid expenses

     18.8                 18.8   

Other assets

     11.9                 11.9   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     779.8                 779.8   

Plant and equipment, net

     731.5                 731.5   

Goodwill

     894.9                 894.9   

Amortizable intangible assets, net

     813.9                 813.9   

Deferred income taxes, non current

     1.9                 1.9   

Other assets

     69.2                 69.2   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 3,291.2      $         $         $         $ 3,291.2   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities and Equity:

             

Accounts payable

   $ 292.8      $         $         $         $ 292.8   

Accrued compensation

     47.4                 47.4   

Accrued liabilities

     85.5                 85.5   

Deferred income taxes

     16.6                 16.6   

Short-term debt

     28.9                 28.9   

Current portion, long-term debt

     21.8                 21.8   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     493.0                 493.0   

Long-term debt, less current maturities

     1,939.8                 1,939.8   

Deferred income taxes

     293.0                 293.0   

Other long-term liabilities

     50.8                 50.8   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     2,776.6                 2,776.6   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Equity:

             

Common stock

     0.0                 0.0   

Paid-in capital

     818.3                 818.3   

Deficit

     (304.5              (304.5

Accumulated other comprehensive loss

     (1.5              (1.5
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total equity attributable to stockholders

     512.3                 512.3   

Noncontrolling interest

     2.3                 2.3   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total stockholder’s equity

     514.6                 514.6   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and stockholders equity

   $ 3,291.2      $         $         $         $ 3,291.2   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet

 

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UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED STATEMENTS OF OPERATIONS

Six Months Ended June 29, 2014

(Dollars in millions)

 

   

Consolidated

MPG

   

Grede

   

Acquisition

Pro Forma

Adjustments

         

The

Combination

Pro Forma

Adjustments(k)

   

The

Refinancing

Pro Forma

Adjustments(i)

   

Offering

Pro Forma

Adjustments(j)

         

Pro Forma

as Adjusted

 

Net sales

  $ 1,181.8      $ 427.0      $       $        $        $        $ 1,608.8   

Cost of sales

    994.4        352.2        (0.8     a,b                     1,345.8   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Gross profit

    187.4        74.8        0.8                       263.0   

Selling, general and administrative expenses

    69.6        72.4        (39.1     e,f        (0.8       (2.1       100.0   

Acquisition costs

    13.0                                     13.0   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Operating profit

    104.8        2.4        39.9          0.8          2.1          150.0   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Interest expense, net

    42.3        17.4        (3.6     g                56.1   

Other, net

    4.4                                     4.4   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Other expense, net

    46.7        17.4        (3.6                    60.5   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Income (loss) before tax

    58.1        (15.0     43.5          0.8          2.1          89.5   

Income tax expense

    19.9        3.7        8.0        h        0.3          0.9        h        32.8   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Net income (loss)

    38.2        (18.7     35.5          0.5          1.2          56.7   

Income attributable to noncontrolling interest

    0.2                                     0.2   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Net income (loss) attributable to stockholders

  $ 38.0      $ (18.7   $ 35.5        $ 0.5      $                   $ 1.2        $ 56.5   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Net income (loss) attributable to stockholders:

                 

Basic

                  $     

Diluted

                  $     

 

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UNAUDITED PRO FORMA CONDENSED

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31, 2013

(Dollars in millions)

 

   

Consolidated

MPG

   

Grede

   

Acquisition

Pro Forma

Adjustments

       

The
Combination
Pro Forma
Adjustments(k)

   

The
Refinancing

Pro Forma

Adjustments(i)

   

Offering

Pro Forma

Adjustments(j)

         

Pro Forma

as Adjusted

 

Net sales

  $ 2,017.3      $ 1,035.6      $ —          $                   $                   $ —          $ 3,052.9   

Cost of sales

    1,708.7        858.2        9.0      a,b,c,d         —            2,575.9   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Gross profit

    308.6        177.4        (9.0               477.0   

Selling, general and administrative expenses

    123.2        56.0        27.8      e         (4.0       203.0   

Long-lived asset impairment

    —          18.2        —                —            18.2   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Operating profit (loss)

    185.4        103.2        (36.8           4.0          255.8   

Interest expense, net

    74.7        20.4        12.4      g             107.5   

Other, net

    17.8        —          —                —            17.8   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Other expense, net

    92.5        20.4        12.4              —            125.3   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Income (loss) before tax

    92.9        82.8        (49.2           4.0          130.5   
 

 

 

   

 

 

   

 

 

         

 

 

     

Income tax expense

    35.0        7.0        6.9      h         1.7        h        50.6   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Net income (loss)

    57.9        75.8        (56.1           2.3          79.9   

Income attributable to noncontrolling interest

    0.3        —          —                —            0.3   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

Net income (loss) attributable to stockholders

  $ 57.6      $ 75.8      $ (56.1    

$

 

  

  $        $ 2.3        $ 79.6   
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

     

 

 

 

 

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Table of Contents

Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations

 

  a) Estimates the impact on cost of sales for additional depreciation as if purchase accounting related to plant and equipment was applied as of January 1, 2013. The adjustment amounts to $4.5 million and $3.6 million for the year ended December 31, 2013 and six month period ended June 29, 2014, respectively.

 

  b) Estimates the impact on cost of sales related to the step-up of inventory as if purchase accounting was applied on January 1, 2013. The additional cost of sales for the step-up of inventory balance is based on average historic inventory turns and amounts to $4.4 million for the year ended December 31, 2013 and $(4.4) million for the six month period ended June 29, 2014, respectively.

 

  c) Estimates the impact on cost of sales for the alignment of accounting policies for supplies inventory between Grede and MPG. The adjustment amounts to $0.6 million for the year ended December 31, 2013.

 

  d) Estimates the impact on cost of sales due to the fair value of the pension obligation as of the opening balance sheet resulting in a reduction of the amortization of prior service cost as part of the historical accounting for the pension obligation. The adjustment amounts to $0.5 million for the year ended December 31, 2013.

 

  e) Estimates the impact of additional amortization expense for intangible assets as if purchase accounting was applied as of January 1, 2013. The adjustment amounts to $27.8 million and $11.7 million for the year ended December 31, 2013 and six month period ended June 29, 2014, respectively.

 

  f) Eliminates $50.8 million of incurred one-time transaction expenses related to the acquisition of Grede in the six month period ended June 29, 2014.

 

  g) Estimates the impact to interest expense as if the debt obligations related to the acquisition of Grede were incurred on January 1, 2013. The interest expense adjustment for the acquisition was calculated as follows:

 

    

Year ended

December 31,

2013

   

Six Months Ended

June 29,

2014

 
     (In millions)  

Interest on Grede acquisition debt

   $ 29.8      $ 12.5   

Amortization of deferred financing costs

     3.0        1.3   

Less: historical Grede interest expense

     (20.4     (17.4
  

 

 

   

 

 

 

Total interest expense adjustment

   $ 12.4      $ (3.6
  

 

 

   

 

 

 

 

  h) The adjustments to income tax provision (benefit) applied U.S. statutory rates collectively to the Grede historical results and the pro forma adjustments using rates of 41.5% and 41.0% for the year ended December 31, 2013 and the six months ended June 29, 2014, respectively.

 

  i) Relates to the debt financing transactions to refinance the existing long-term indebtedness of HHI, Metaldyne and Grede that we expect to enter into prior to the consummation of this offering.

 

  j) Relates to the management consulting agreements between American Securities and each of HHI, Metaldyne and Grede. These agreements will terminate pursuant to their respective terms upon consummation of this offering. As such, we have reversed such costs.

 

  k) Relates to expenses incurred in connection with the Combination.

 

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Table of Contents

SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth our selected historical financial and other data for the periods and as of the dates indicated. The consolidated statement of operations data for each of the years ended December 31, 2009 and 2010, and the consolidated balance sheets data as of December 31, 2009 and 2010 is derived from the audited consolidated financial statements of HHI that are not included elsewhere in this prospectus. The consolidated statements of operations data for the year ended December 31, 2011, the period from January 1 to October 5, 2012, the period from October 6, 2012 to December 31, 2012 and the year ended December 31, 2013 and the consolidated balance sheet data as of December 31, 2011, 2012, and 2013 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2013 and June 29, 2014, and the consolidated balance sheet data as of June 29, 2014 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. In our opinion, such financial statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. The results for any interim period are not necessarily indicative of the results that may be expected for a full year.

Our historical results are not necessarily indicative of future operating results. You should read the information set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and the related notes thereto included elsewhere in this prospectus.

 

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Table of Contents
    Successor           Predecessor  
   

Six Months Ended

   

Year Ended

December 31,
2013

   

Successor

Period
2012 (1)

         

Predecessor

Period

2012 (1)

   

Year Ended

December 31,

2011

   

Year Ended

December 31,

2010

   

Year Ended

December 31,

2009

 
 

June 29,
2014

   

June 30,
2013

                
    (In millions, except per share amounts)  

Statement of Operations Data:

                    

Net sales

  $ 1,181.8      $ 1,011.0      $ 2,017.3      $ 205.3           $ 680.5      $ 787.3      $ 750.8      $ 478.3   

Cost of sales

    994.4        857.9        1,708.7        199.5             559.0        643.4        612.4        414.9   
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    187.4        153.1        308.6        5.8             121.5        143.9        138.4        63.4   

Selling, general and administrative expenses

    69.6        58.6        123.2        14.4             116.6        34.7        35.1        29.5   

Acquisition costs

    13.0        —          —          25.9             13.4        —          —          4.4   
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

    104.8        94.5        185.4        (34.5          (8.5     109.2        103.3        29.5   

Interest expense, net

    42.3        36.2        74.7        11.1             25.8        31.6        25.8        11.7   

Other, net

    4.4        (3.9     17.8        1.5             2.4        6.3        2.2        —     
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Other expense. net

    46.7        32.3        92.5        12.6             28.2        37.9        28.0        11.7   
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before tax

    58.1        62.2        92.9        (47.1          (36.7     71.3        75.3        17.8   

Income tax expense (benefit)

    19.9        20.6        35.0        (15.2          (11.1     24.6        28.2        6.7   
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    38.2        41.6        57.9        (31.9          (25.6     46.7        47.1        11.1   

Income attributable to noncontrolling interest

    0.2        0.1        0.3        —               0.2        0.1        0.7        (0.0
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to stockholders

  $ 38.0      $ 41.5      $ 57.6      $ (31.9        $ (25.8   $ 46.6      $ 46.4      $ 11.1   
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to stockholders (2)

                    

Basic

  $ 2.83      $ 3.10      $ 4.29      $ (2.38        $ (1.46   $ 2.64      $ 2.67      $ 0.96   

Diluted

    2.81        3.10        4.29        (2.38          (1.46     2.64        2.64        0.91   

Basic weighted average shares outstanding

    13.4        13.4        13.4        13.4             17.7        17.7        17.4        11.6   

Diluted weighted average shares outstanding

    13.5        13.4        13.4        13.4             17.7        17.7        17.6        12.2   

Statements of Cash Flows Data:

                    

Cash flows from operating activities

  $ 111.6      $ 83.4      $ 234.3      $ (1.8        $ 64.7      $ 50.9      $ 52.3      $ 55.4   

Cash flows from investing activities

    (887.6     (60.9     (116.7     (1,515.0          (31.3     (22.7     (16.6     (63.3

Cash flows from financing activities

    833.0        (19.8     (91.1     1,557.1             (27.3     (24.3     (60.5     29.7   

Effect of exchange rates on cash

    0.8        (1.1     1.4        —               0.3        (0.5     0.2        (0.3
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

  $ 57.8      $ 1.6      $ 27.9      $ 40.3           $ 6.4      $ 3.4      $ (24.6   $ 21.5   
 

 

 

   

 

 

   

 

 

   

 

 

        

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Successor          Predecessor  
   

As of

June 29,
2014

   

As of

December 31,
2013

   

As of

December 31,
2012

        

As of

December 31,
2011

   

As of

December 31,
2010

   

As of

December 31,
2009

 
    (unaudited)                                     
    (In millions)  

Balance Sheet Data:

               

Cash and cash equivalents

  $ 126.1      $ 68.2      $ 40.3          $ 4.2      $ 0.8      $ 25.4   

Property and equipment, net

    731.5        539.5        546.2            130.0        128.3        124.6   

Total assets

    3,291.2        2,216.8        2,250.2            361.5        332.4        317.2   

Long-term debt (including current portion)

    1,961.6        1,259.7        1,075.7            331.4        251.6        112.5   

Total liabilities

    2,776.6        1,891.6        1,729.7            453.2        371.6        211.7   

Total stockholders’ equity

    514.6        325.2        520.5            (91.7     (39.2     105.5   

 

(1) The period from January 1, 2012 to October 5, 2012 is referred to as “Predecessor Period 2012.” The period from October 6, 2012 to December 31, 2012 is referred to as “Successor Period 2012.”
(2) For the year ended December 31, 2013 and Successor Period 2012, the weighted average shares outstanding were retrospectively adjusted to reflect our common stock outstanding upon completion of the Combination, and the equivalent shares for outstanding stock-based compensation awards were retrospectively adjusted to reflect the conversion of those awards into options to purchase shares of our common stock. For Predecessor Period 2012 and the year ended December 31, 2011, the weighted average shares outstanding reflect the capital structure of HHI prior to the HHI Transaction, and the equivalent shares for outstanding stock-based compensation reflect awards issued by HHI.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our historical combined financial statements covers periods before the Combination. Accordingly, the discussion and analysis of such periods does not reflect the significant impact the Combination will have on our results of operations. As a result, our historical results of operations and our pro forma results of operations may not be indicative of our future results of operations. See “Risk Factors,” “Unaudited Pro Forma Financial Data” and “—Liquidity and Capital Resources.” In addition, the statements in the discussion and analysis regarding industry outlook, our expectations regarding the performance of our business, our liquidity and capital resources and the other non-historical statements in the discussion and analysis are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in “Risk Factors” and “Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by the forward-looking statements. You should read the following discussion together with the sections entitled “Risk Factors,” “Unaudited Pro Forma Financial Data” and “Selected Historical Financial Data” and the financial statements and the related notes thereto included elsewhere in this prospectus.

We operate on a 13 week fiscal quarter which ends on the Sunday nearest to March 31, June 30, June 30 or September 30, as applicable. Our fiscal year ends on December 31. Further, prior to the Grede Transaction, Grede operated on a 52 or 53 week fiscal year which ends on the Sunday nearest to December 31. After the Grede Transaction, Grede’s fiscal year end will conform to our fiscal year end.

Overview

We are a leading provider of highly-engineered components for use in Powertrain and Safety-Critical Platforms 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 Plymouth, Michigan, and our manufacturing is conducted in 56 production facilities located throughout North and South America, Europe and Asia.

Our History and the Combination

Our business represents the reorganization of the businesses of HHI, Metaldyne and Grede.

HHI manufactures highly-engineered components for the North American light vehicle market. These components include transmission components, drive line components, wheel hubs, axle ring and pinion gears, sprockets, balance shaft gears, timing drive systems, variable valve timing (“VVT”) components, transfer case components and wheel bearings. HHI was formed in 2005, completed the strategic acquisitions of Impact Forge Group, LLC and Cloyes Gear and Products, Inc. and, following a §363 U.S. Bankruptcy Court supervised sale process, acquired certain assets and assumed specified liabilities from FormTech LLC, Jernberg Holdings, LLC and Delphi Automotive PLC’s wheel bearing operations. HHI was acquired by American Securities and certain members of HHI management on October 5, 2012. The purchase price for the HHI Transaction, net of cash and cash equivalents acquired, was $722.2 million. The purchase price was funded by cash from capital contributions of $254.7 million and $505.0 million in term loan debt.

Metaldyne manufactures highly-engineered components for the global light vehicle markets. Metaldyne’s components include connecting rods, VVT components, balance shaft systems, and engine crankshaft dampers, net forged differential gears and pinions, differential assemblies, valve bodies, hollow shafts, clutch modules and end covers. Metaldyne was formed in 2009 as a new entity to acquire certain assets and assume specified liabilities from Oldco M Corporation following a §363 U.S. bankruptcy court supervised sale process. Oldco M Corporation was previously formed when MascoTech, Inc., a then-publicly traded company, was taken private and acquired Simpson Industries, Inc., another then-public company. Metaldyne was acquired

 

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by American Securities and certain members of Metaldyne management on December 18, 2012. The purchase price for the Metaldyne Transaction, including contingent consideration, was $796.6 million, net of cash and cash equivalents acquired. The Metaldyne Transaction was financed through a $620.0 million senior secured credit facility, which included a $75.0 million revolving credit facility (of which $6.0 million was outstanding at December 18, 2012), by cash from capital contributions of $295.0 million and $175.0 million of Metaldyne’s existing cash at December 18, 2012.

Grede manufactures highly-engineered components for the light, commercial and industrial vehicle and industrial (agriculture, construction, mining, rail, wind energy and oil field) vehicle end-markets. These components include turbocharger housings, differential carriers and cases, scrolls and covers, brake calipers and housings, knuckles, control arms, and axle components. Grede was formed in 2010 through a combination of the assets of the former Grede Foundries, Inc. and Citation Corporation, following a §363 U.S. bankruptcy court supervised sale process. Subsequently, Grede acquired Foseco-Morval Inc., GTL Precision Patterns Inc., Paxton-Mitchell Corporation, Virginia Castings Industries LLC, Teknik S.A. de C.V. and Novocast S.A. de C.V. and established global alliances, including with Georg Fischer Automotive AG (Europe / China). Grede was acquired by American Securities and certain members of Grede management on June 2, 2014. In this discussion and analysis, we refer to the HHI Transaction, the Metaldyne Transaction and the Grede Transaction as the “Transactions.” The purchase price for the Grede Transaction was $829.7 million, net of cash and cash equivalents acquired. The purchase price was funded by $258.6 million in cash from capital contributions, $600.0 million in borrowings under Grede’s term loan credit facility and $75.0 million in borrowings under Grede’s revolving credit facility (of which $1.0 million was outstanding at June 2, 2014).

The Combination

HHI, Metaldyne and Grede were reorganized on August 4, 2014 through the mergers of three separate wholly-owned merger subsidiaries of MPG. As a result, HHI, Metaldyne and Grede became wholly-owned subsidiaries of MPG. In addition, following the Combination, Grede will be treated as a corporation for U.S. tax purposes. These transactions are referred to as the “Combination.” The Combination has been 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 and Metaldyne were carried over to MPG. See “Summary—Company Organization and History.”

The Refinancing

Prior to the consummation of this offering, we expect to enter into debt financing transactions to refinance the outstanding indebtedness of HHI, Metaldyne and Grede, which we refer to as the “Refinancing”.

Basis of Presentation

As a result of the Transactions and the Combination, our results of operations include:

 

    the results of HHI for all periods presented in this discussion and analysis;

 

    the results of Metaldyne for the periods from December 18, 2012 through December 31, 2012, the year ended December 31, 2013 and the six months ended June 30, 2013 and June 29, 2014; and

 

    the results of Grede from June 2, 2014 through June 29, 2014.

Accordingly, in the following discussion and analysis:

 

    the results of operations for the periods from January 1, 2011 to October 5, 2012, the date of the HHI Transaction, are referred to as the “Predecessor Periods”;

 

    the results of operations for the periods from October 6, 2012 to June 29, 2014 are referred to as the “Successor Periods”;

 

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    the period from January 1, 2012 to October 5, 2012 is referred to as “Predecessor Period 2012”;

 

    the period from October 6, 2012 to December 31, 2012 is referred to as “Successor Period 2012”;

 

    Predecessor Period 2012 reflects the results of HHI prior to the HHI Transaction and no results for either Metaldyne or Grede; and

 

    Successor Period 2012 reflects the results of HHI for the entire period, the results of Metaldyne from December 18, 2012 to December 31, 2012 and no results for Grede.

Factors Affecting the Comparability of Our Results of Operations

As a result of a number of factors, our results of operations for the Predecessor Periods are not comparable to the Successor Periods, our historical results of operations may not be comparable to our results of operations in future periods and our results of operations may vary from period to period. Set forth below is a brief discussion of the key factors impacting the comparability of our results of operations.

The Transactions and the Combination

As a result of each of the Transactions and the Combination, our revenue and expenses have increased significantly and periods prior to each of the Transactions or the Combination are not comparable to periods after each of them. The main aspects of the Transactions and the Combination affecting comparability include:

 

    Our Historical Results Do Not Reflect All of Our Businesses. Our results for the year ended December 31, 2011 and the 352 day period ended December 17, 2012 only include results for HHI and do not include the results for Metaldyne. In addition, our results for the periods prior to June 2, 2014, the date of the Grede Transaction, do not include the results of Grede.

 

    Transaction Related Costs. In connection with the HHI Transaction, the Metaldyne Transaction and the Grede Transaction, we incurred $23.7 million, $15.6 million and $13.0 million, respectively, of non-recurring transaction related expenses, principally professional and sponsor fees. These transaction costs were included in acquisition costs for the relevant periods and will not recur in future periods. In addition, in connection with the Combination, we incurred additional transaction related expenses of $0.8 million that were recorded as transaction-related costs in the six months ended June 29, 2014.

 

    Increased Interest Expense. In connection with each of the Transactions, we assumed indebtedness and incurred additional indebtedness which increased our interest expense.

 

    Increased Depreciation and Amortization Expense. Each of the Transactions was accounted for as a purchase. As such, the assets acquired and liabilities assumed and non-controlling interests were measured and reported in our financial statements at fair value. Since and including the HHI Transaction, we recorded (i) goodwill and other net intangible assets of $1,708.8 million and (ii) significantly increased the value of property and equipment with the step-up to fair value in connection with the Transactions and our other acquisitions. We also made capital expenditures since the HHI Transaction associated with growth and cost reduction activities. As a result, our depreciation and amortization expenses have increased significantly since the HHI Transaction.

 

    Stock-Based Compensation. In connection with each of the Transactions and the Combination, we incurred stock-based compensation expense, which is included in selling, general and administrative expense for the relevant period. We will incur additional stock-based compensation expense in future periods.

 

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    Income Taxes. In connection with each of the Transactions, significant book and tax differences were accounted for in deferred taxes. In addition, prior to the Grede Transaction, Grede operated as a limited liability company and, accordingly, all of the earnings of Grede passed through to its members for U.S. federal income tax purposes. Grede was subject to tax in Mexico and certain states within the United States. As a part of the Combination, Grede became a corporation subject to corporate level income taxes in future periods.

Operational Changes

As a result of several factors, including our assessment of plant performance, facilities and equipment operating condition, availability of labor, and related operating costs, we may close or consolidate production lines or entire plants. These changes can result in the transfer or reduction of business, impairment losses, costs to transfer operations to a new plant and other expenses. In 2013, Grede closed three plants, which resulted in an impairment loss and a decrease in net sales in subsequent periods.

Foreign Currency Fluctuations

As a result of our global operations, we generate a significant portion of our net sales and incur a substantial portion of our expenses in currencies other than the U.S. dollar. As a result, our net sales, cost of sales, operating expenses and certain assets and liabilities fluctuate as the value of such currencies fluctuate in relation to the U.S. dollar. In addition, the results of operations of some of our operating entities are reported in currencies other than the U.S. dollar and then translated into U.S. dollars at the applicable exchange rate for inclusion in our financial statements. As a result, appreciation of the U.S. dollar against these other currencies generally will have a negative impact on our reported sales and profits while depreciation of the U.S. dollar against these other currencies will generally have a positive effect on reported sales and profits. Our primary currency exposures are the Euro, Mexican Peso, Korean Won and Chinese Renminbi. We do not enter into foreign currency exchange contracts to mitigate this risk. In addition, our Euro denominated debt with a principal balance of €98.8 million and €99.0 million as of June 29, 2014 and December 31, 2013, respectively, is subject to translation gains and losses each period.

Commodity Price Risk

We maintain raw material price pass-through contracts with our customers on substantially all of our products to reduce exposure to raw material price fluctuations. In instances where the risk is not covered contractually, we have generally been able to adjust customer prices to recover commodity cost increases. As a result, our net sales and cost of sales may increase or decrease based on fluctuations in prevailing commodity prices during the period.

Debt Refinancings

From time to time, we have completed several debt refinancing transactions to take advantage of favorable market conditions and fund the return of capital to our stockholders. These transactions have increased our indebtedness, increased our interest expense and resulted in debt refinancing costs. In addition, we expect to incur additional debt refinancing expenses as a result of the Refinancing.

Interest Rate Fluctuations

Our indebtedness contains variable interest rate provisions. As a result our interest expense may vary from period to period due to variations in prevailing interest rates.

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;

 

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    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.

Factors Affecting our Results of Operations

Industry Trends

We primarily serve the global light vehicle and the North American commercial and industrial vehicle and equipment end-markets with a focus on Powertrain and Safety-Critical applications. Our net sales are impacted by demand in these end-markets. Demand in these end-markets is driven by consumer preferences and regulatory requirements (particularly related to fuel economy and safety standards), and macro-economic factors.

Economic Conditions

Our net sales are driven by the strength of the global light vehicle industry, particularly in North America, as well as the North American commercial and industrial vehicle industry, each of which tends to be highly correlated to macro-economic conditions. The level of demand for our products depends primarily upon the level of consumer demand for new vehicles, as well as the demand for commercial and industrial vehicles, that are manufactured with our products. Variations in global macro-economic conditions, particularly in North America and Europe that result in changes in vehicle sales and production by our customers, have impacted and will continue to impact our net sales.

Consumer Preferences and Government Regulations

Demand for our component parts is a function of the number of vehicles produced and trends in content per vehicle for specific component categories. These variables are driven by consumer preferences and regulatory requirements, particularly related to fuel economy and safety standards. OEMs continue to source vehicle component parts that improve fuel economy and safety in order to meet increasingly strict regulatory requirements around the world. These trends have impacted and will continue to impact our net sales.

Supply Dynamics

During 2008 and 2009, a significant amount of the automotive forging capacity was removed from the North American market. In addition, the number of light vehicle Powertrain and Safety-Critical component suppliers declined significantly during 2008 and 2009. Capacity has not rebounded to historical levels due to the magnitude of the investment and the length of time required to open new facilities, acquire equipment and navigate environmental permitting processes. These trends have impacted and will continue to impact our net sales and gross profit.

Globalization of Platforms

In recent years, light vehicle OEMs have increasingly consolidated their vehicle engine and transmission Platforms with localized sourcing to improve supply chain efficiency, reduce unit cost and increase profitability. As a result of our global manufacturing footprint, these trends have impacted and may continue to impact our net sales and gross profit.

 

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Pricing

Cost-cutting initiatives by vehicle OEMs as well as on-going value analysis/value engineering (“VA/VE”) activity results in changes to the pricing of our products. Many of our long-term contracts with our customers require us to reduce our prices in subsequent years and all of these contracts provide for pricing adjustments for engineering changes and other changes to specifications. We have historically mitigated the impact of pricing on our margins through working with our customers on VA/VE activities, which generally result in reduced prices in conjunction with reduced costs. We also focus on on-going cost reductions and increases in manufacturing efficiencies throughout our operations. Our profitability in future periods depends, in part, on our ability to generate sufficient production cost savings, as well as VA/VE projects and other efficiency improvements to offset any future price reductions.

Key Operating Metrics

We evaluate the performance of our business using a variety of operating and performance metrics. Set forth below is a description of our key operating metrics.

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) before interest expense, provision for (benefit from) income taxes and depreciation and amortization, with further adjustments to reflect the additions and eliminations of certain income statement items, including (i) gains and losses on foreign currency and fixed assets and debt transaction expenses, (ii) stock-based compensation and other non-cash charges, (iii) sponsor management fees and other income and expense items that we consider to be not indicative of our ongoing operations, (iv) specified non-recurring items and (v) other adjustments. For a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, see “Summary—Summary Historical Financial and Other Data.”

Incremental Business Backlog

Incremental business backlog, which we measure as anticipated net product sales from incremental business for the next three years at each year end, net of Programs being phased out and any foreign currency fluctuations, is approximately $435 million as of December 31, 2013 on a pro forma basis to give effect to the Grede Transaction. We are typically awarded Programs one to three years prior to the start of production on new and replacement business. Due to the timing of the OEM sourcing cycle, we measure our anticipated net product sales based on contracts to be executed in the next three years at each year end. Our estimate of anticipated net product sales includes formally awarded new Programs, Programs which we believe are highly probable of being awarded to us and expected volume changes on existing Programs. Our estimate may be impacted by various assumptions, including vehicle production levels on new and replacement Programs, customer price reductions, currency exchange rates and the timing of Program launches. We typically enter into agreements with our customers at the beginning of a vehicle’s life for the fulfillment of customers’ purchasing requirements for the entire production life of the vehicle. Historically, contract terminations have been infrequent. Therefore, this anticipated net product sales information could differ significantly from actual firm orders or firm commitments, and awards of business do not represent guarantees of production volumes or revenues.

Adjusted Free Cash Flow

We define Adjusted Free Cash Flow as Adjusted EBITDA less capital expenditures. Capital expenditures can be found in our consolidated statement of cash flows as a component of cash flows from investing activities. For a reconciliation of Adjusted Free Cash Flow to net income, the most directly comparable GAAP measure, see “Summary—Summary Historical Financial and Other Data.”

 

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Key Components of Results of Operations

Net Sales

We generate net sales primarily from the sale of Powertrain and Safety-Critical products for the global light, commercial and industrial vehicle markets. Our net sales reflect the impact of customer pricing allowances. Net sales are also impacted by volume, customer prices, product mix, material surcharges and foreign currency fluctuations. These factors all have an impact on future sales as fluctuations in volume, pricing, foreign currency and material prices directly impact our net sales.

Cost of Sales

Cost of sales consist of raw material costs, direct labor associated with the manufacture and assembly of our products and the overhead expense related to our manufacturing operations. For the year ended December 31, 2013, raw material costs, direct labor costs and overhead expenses and were approximately 52%, 6% and 42%, respectively, of our total cost of sales. On a pro forma basis for the year ended December 31, 2013, direct material costs, direct labor costs and overhead expenses and were approximately 46%, 7% and 47%, respectively, of our pro forma total cost of sales. For the six months ended June 29, 2014, direct material costs, direct labor costs and overhead expenses were approximately 51%, 7% and 42%, respectively, of our total cost of sales. On a pro forma basis for the six months ended June 29, 2014, direct material costs, direct labor costs and overhead expenses were approximately 47%, 7% and 46%, respectively, of our total pro forma cost of sales.

Our direct material costs are comprised primarily of raw materials and sub-component parts used in the production or our components. We maintain raw material price pass-through contracts with our customers on substantially all of our products whereby increases and decreases in the cost of our raw materials are adjusted in our selling prices either through a change in selling price or a surcharge mechanism. These costs have generally followed the related markets for the underlying commodities that we utilize, including special bar quality steel, scrap steel, powder metal, pig iron and molten aluminum. The cost changes and the related changes in prices or surcharges are reflected in our cost of sales and our net sales.

Our direct labor costs are comprised of the wages of our workforce that is directly associated with the production of our products. Where we have union agreements (see “Business—Employees”), wage increases follow the negotiated requirements of the related contract. Wages for non-union employees follow local market conditions for merit increases and employment. Benefit costs are subject to changes in healthcare cost trends, payroll and unemployment tax rates and changes in benefit plan structure.

Our overhead costs are comprised of variable and fixed costs related to the operation of our manufacturing facilities. These costs include depreciation, rent expense, maintenance, perishable tooling, indirect labor costs, including benefits, and utilities. Costs related to overhead are impacted by inflation, changes in production volumes and the requirements of products produced at each location.

Gross Profit

Gross profit (net sales less cost of sales) and gross margin (gross profit as a percentage of net sales) are impacted by a number of factors including, product mix, percentage of net sales from raw material price fluctuations, foreign currency fluctuations, overhead cost fluctuations and depreciation and amortization cost fluctuations due to changes in capital expenditures and purchase accounting adjustments. Gross margins on our products vary based on their composition, the complexity of the production process, the length of time that the products have been in production and other factors.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist of salaries and benefits for our sales, marketing, management and administrative personnel, professional fees, expenses relating to certain IT systems

 

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and amortization of certain of our intangibles. After the consummation of this offering we expect to incur significant additional legal, accounting and other expenses in connection with being a public company including compliance with the Sarbanes-Oxley Act. We also expect to see an increase in our stock-based compensation expense with the establishment of a new equity plan associated with the Combination and related grants of equity either in the form of restricted stock or options.

Acquisition Costs

Acquisition costs consist of direct expenses related to the HHI Transaction, the Metaldyne Transaction and the Grede Transaction.

Interest Expense, Net

Interest expense, net consists primarily of interest on borrowings, and the amortization of costs incurred to obtain long-term financing, partially offset by interest income on short-term cash and cash equivalents.

Other, Net

Other, net primarily consists of foreign currency gains and losses, debt transaction expenses and, in 2013, a $10.1 million purchase price adjustment related to the Metaldyne Transaction.

Income Tax Expense (Benefit)

Income tax expense (benefit) consists of federal, state and local taxes based on income in multiple jurisdictions. Our income tax expense is impacted by the pre-tax earnings in jurisdictions with varying tax rates and any related foreign tax credits that may be available to us. Our current and future provision for income taxes will vary from statutory rates due to the impact of valuation allowances in certain countries, income tax incentives and holidays, certain non-deductible expenses, withholding taxes and other discrete items. Furthermore, as a result of the Transactions, we have significant book and tax accounting differences which impact the amount of deferred taxes.

 

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Results of Operations

Six Months ended June 29, 2014 compared with Six Months ended June 30, 2013

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

 

    

Six Months

Ended
June 29, 2014

     Six Months
Ended

June 30, 2013
 
     (In millions)  

Net sales

   $ 1,181.8       $ 1,011.0   

Cost of sales

     994.4         857.9   
  

 

 

    

 

 

 

Gross profit

     187.4         153.1   

Selling, general and administrative expenses

     69.6         58.6   

Acquisition costs

     13.0         —     
  

 

 

    

 

 

 

Operating income

     104.8         94.5   

Interest expense, net

     42.3         36.2   

Other, net

     4.4         (3.9
  

 

 

    

 

 

 

Income before taxes

     58.1         62.2   

Income tax provision

     19.9         20.6   
  

 

 

    

 

 

 

Net income

     38.2         41.6   

Income attributable to noncontrolling interests

     0.2         0.1   
  

 

 

    

 

 

 

Net income attributable to stockholders

   $ 38.0       $ 41.5   
  

 

 

    

 

 

 

Net Sales

Net sales were $1,181.8 million for the six months ended June 29, 2014 as compared to $1,011.0 million for the six months ended June 30, 2013, an increase of $170.8 million. This increase was primarily driven by higher vehicle production levels, new program launches and the inclusion of Grede segment results subsequent to the Grede Transaction in June 2014.

The following table sets forth our net sales by segment for the six months ended June 29, 2014 and June 30, 2013:

 

    

Six Months
Ended

June 29, 2014

   

Six Months
Ended
June 30, 2013

   

Percent

Change

 
     (In millions)        

HHI segment

   $ 497.7      $ 452.0        10.1

Metaldyne segment

     608.1        564.1        7.8

Grede segment

     81.0        —          —   (1) 

Less: intersegment sales

     (5.0     (5.1     —   (1) 
  

 

 

   

 

 

   

Total

   $ 1,181.8      $ 1,011.0        —   (1) 
  

 

 

   

 

 

   

 

(1) Percent change omitted as Grede segment only includes the 28-day period ended June 29, 2014 during the six months ended June 29, 2014 and no results for the six months ended June 30, 2013.

HHI segment net sales were $497.7 million for the six months ended June 29, 2014 as compared to $452.0 million for the six months ended June 30, 2013, an increase of $45.7 million, or 10.1%. This increase was primarily attributable to increased volumes due to higher North American light vehicle production levels and the benefit from net new Programs launched in 2013. The increase in HHI segment net sales was also attributable to net increases in customer prices and higher raw material surcharge pass-through due to increased steel prices.

 

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Metaldyne segment net sales for the six months ended June 29, 2014 were $608.1 million as compared to $564.1 million for the six months ended June 30, 2013, an increase of $44.0 million, or 7.8%. This increase was primarily attributable to increased volumes due to higher North American light vehicle production levels, coupled with the on-going recovery of European light vehicle production and the impact of net new Programs launched in 2013. The increase in Metaldyne segment net sales was also attributable to favorable currency movements, partially offset by lower raw material surcharge pass-through and net decreases in customer prices.

Our net sales do not reflect the net sales of Grede prior to the Grede Transaction in June 2014. We compare (i) the 28-day period ended June 29, 2014 and the 154-day period ended June 1, 2014 on a combined non-GAAP basis and (ii) the six months ended June 30, 2013 for purposes of the following discussion and analysis of the related net sales. Any references below to the six months ended June 29, 2014 refer to such combined periods. GAAP does not allow for such combination of financial results. We believe that the combined results provide the most meaningful way to comment on such net sales for the six months ended June 29, 2014, as compared to the six months ended June 30, 2013, because the discussion of any partial period comparisons is not meaningful. The combined information is the result of adding the two columns, is not consistent with GAAP and does not include any pro forma assumptions or adjustments. The following table sets forth net sales of the Grede segment and Grede Holdings LLC for the periods presented:

 

    

28-Day Period

Ended

June 29, 2014

    

154-Day Period

Ended

June 1, 2014

    

Six Months
Ended

June 29, 2014

(Combined)

(Non-GAAP)

    

Six Months
Ended

June 30, 2013

    

Percent
Change

 
    

(In millions)

        

Supplemental data:

              

Grede segment

   $ 81.0       $ —         $ 81.0       $ —           —     

Grede Holdings LLC

     —           427.0         427.0         541.5         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 81.0       $ 427.0       $ 508.0       $ 541.5         (6.2)% (1) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(1) Combined net sales for the Grede segment and Grede Holdings LLC for the six months ended June 29, 2014 decreased 6.2% over the net sales for Grede Holdings LLC for the six months ended June 30, 2013.

Grede’s combined net sales decreased $33.5 million, or 6.2%, to $508.0 million for the six months ended June 29, 2014 as compared to the six months ended June 30, 2013. This decrease in net sales was primarily attributable to lower volumes due to plant closures (Radford, Virginia; Marion, Alabama; and Omaha, Nebraska) offset by higher raw material surcharge pass-through. For the six months ended June 30, 2013, combined net sales for the three locations totaled approximately $42.6 million. The reduction in net sales was partially offset by higher volumes in the medium and heavy truck markets.

Cost of Sales

Cost of sales was $994.4 million for the six months ended June 29, 2014 as compared to $857.9 million for the six months ended June 30, 2013, an increase of $136.5 million. This increase was primarily driven by the inclusion of Grede segment results subsequent to the Grede Transaction in June 2014, higher vehicle production levels and the impact of new Program launches.

 

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The following table sets forth our cost of sales by segment for the six months ended June 29, 2014 and June 30, 2013:

 

    

Six Months
Ended

June 29, 2014

   

Six Months
Ended
June 30, 2013

   

Percent

Change

 
     (In millions)        

HHI segment

   $ 412.0      $ 380.9        8.2

Metaldyne segment

     516.2        482.1        7.1

Grede segment

     71.2        —          —   (1) 

Eliminations

     (5.0     (5.1  
  

 

 

   

 

 

   

Total

   $ 994.4      $ 857.9        —   (1) 
  

 

 

   

 

 

   

 

(1) Percent change omitted as the Grede segment results only reflect results for the 28-day period ended June 29, 2014 and do not reflect any results for the six months ended June 30, 2013.

HHI segment cost of sales was $412.0 million for the six months ended June 29, 2014, or 82.8% of HHI segment net sales for the same period, as compared to $380.9 million for the six months ended June 30, 2013, or 84.3% of HHI segment net sales for the same period, an increase of $31.1 million, or 8.2%. This increase was primarily driven by higher volumes and raw material surcharge pass-through as well as cost increases in labor, benefits and utilities along with higher depreciation expense due to capital expenditures. These increases were partially offset by manufacturing cost improvements and more favorable product mix.

Metaldyne segment cost of sales was $516.2 million for the six months ended June 29, 2014, or 84.9% of Metaldyne segment net sales for the same period, as compared to $482.1 million for the six months ended June 30, 2013, or 85.5% of Metaldyne segment net sales for the same period, an increase of $34.1 million, or 7.1%. The increase in absolute cost of sales was primarily attributable to higher volumes, depreciation expense due to capital investments, lower net prices and cost increases in labor, benefits and utilities. The decrease in cost of sales as a percentage of net sales was the result of net manufacturing cost reductions and favorable currency movements.

Our cost of sales do not reflect the cost of sales of Grede prior to the Grede Transaction in June 2014. We compare (i) the 28 day period ended June 29, 2014 and the 154 day period ended June 1, 2014 on a combined non-GAAP basis and (ii) the six months ended June 30, 2013 for purposes of this discussion and analysis of the related cost of sales. Any references below to the six months ended June 29, 2014 refer to the combined periods. GAAP does not allow for such combination of financial results. We believe the combined results provide the most meaningful way to comment on such cost of sales for the six months ended June 29, 2014, as compared to the six months ended June 30, 2013, because the discussion of any partial period comparisons is not meaningful. The combined information is the result of adding the two columns, is not consistent with GAAP and does not include any pro forma assumptions or adjustments. The following table sets forth the cost of sales of the Grede segment and Grede Holdings LLC for the periods presented:

 

    

28-Day Period
Ended

June 29, 2014

    

154-Day Period

Ended

June 1, 2014

    

Six Months
Ended

June 29, 2014

(Combined)

(Non-GAAP)

    

Six Months
Ended

June 30, 2013

    

Percent
Change

 
     (In millions)         

Supplemental data:

              

Grede segment

   $ 71.2       $ —         $ 71.2       $ —           —     

Grede Holdings LLC

     —           352.2         352.2         450.7         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 71.2       $ 352.2       $ 423.4       $ 450.7         (6.1 %)(1) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(1) Combined cost of sales for the Grede segment and Grede Holdings LLC for the six months ended June 29, 2014 decreased 6.1% over the cost of sales for Grede Holdings LLC for the six months ended June 30, 2013.

 

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Grede’s combined cost of sales was $423.4 million for the six months ended June 29, 2014, or 83.3% of Grede’s combined net sales for the same period, as compared to $450.7 million for the six months ended on June 30, 2013, or 83.2% of Grede’s net sales for the same period, or a decrease of $27.3 million or 6.1%. The decrease was primarily attributable to lower volumes due to plant closures which was partially offset by increased utility costs and lower productivity as a result of a temporary gas supply disruption caused by severe cold weather in 2014.

Gross Profit

Gross profit was $187.4 million for the six months ended June 29, 2014 as compared to $153.1 million for the six months ended June 30, 2013, an increase of $34.3 million, or 22.4%. This increase was primarily driven by higher vehicle production levels and the inclusion of Grede segment results subsequent to the Grede Transaction in June 2014.

The following table sets forth our gross profit by segment for the six months ended June 29, 2014 and June 30, 2013:

 

    

Six Months

Ended

June 29, 2014

    

Six Months

Ended

June 30, 2013

    

Percent

Change

 
     (In millions)         

HHI segment

   $ 85.7       $ 71.1         20.5

Metaldyne segment

     91.9         82.0         12.1

Grede segment

     9.8         —           —   (1) 
  

 

 

    

 

 

    

Total

   $ 187.4       $ 153.1         —   (1) 
  

 

 

    

 

 

    

 

(1) Percent change omitted as the Grede segment results only reflect results for the 28-day period ended June 29, 2014 and do not reflect any results for the six months ended June 30, 2013.

HHI segment gross profit was $85.7 million for the six months ended June 29, 2014, or 17.2% of HHI segment net sales for the same period, as compared to $71.1 million for the six months ended June 30, 2013, or 15.7% of HHI segment net sales for the same period, an increase of $14.6 million, or 20.5%. This increase was primarily attributable to higher volumes combined with net price increases and manufacturing cost reductions. These increases to HHI segment gross profit were partially offset by cost increases in labor, benefits and utilities along with higher depreciation expense due to capital investments.

Metaldyne segment gross profit was $91.9 million for the six months ended June 29, 2014, or 15.1% of Metaldyne segment net sales for the same period, as compared to $82.0 million for the six months ended June 30, 2013, or 14.5% of Metaldyne segment net sales for the same period, an increase of $9.9 million, or 12.1%. This increase was primarily attributable to higher volumes, net manufacturing cost reductions and favorable currency movements. The increase in Metaldyne segment gross profit was partially offset by higher depreciation expense due to capital investments, lower net prices and cost increases in labor, benefits and utilities.

Our gross profit does not reflect the gross profit of Grede prior to the Grede Transaction in June 2014. We compare (i) the 28 day period ended June 29, 2014 and the 154 day period ended June 1, 2014 on a combined non-GAAP basis and (ii) the six months ended June 30, 2013 for purposes of this discussion and analysis of the related gross profit. Any references below to the six months ended June 29, 2014 refer to the combined periods. GAAP does not allow for such combination of financial results. We believe the combined results provide the most meaningful way to comment on such gross profit for the six months ended June 29, 2014, as compared to the six months ended June 30, 2013, because the discussion of any partial period comparisons is not meaningful. The combined information is the result of adding the two columns, is not consistent with GAAP and does not

 

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include any pro forma assumptions or adjustments. The following table sets forth the gross profit of the Grede segment and Grede Holdings LLC for the periods presented:

 

    

28-Day Period

Ended

June 29, 2014

    

154-Day Period

Ended

June 1, 2014

    

Six Months

Ended

June 29, 2014

(Combined)

(Non-GAAP)

    

Six Months
Ended
June 30, 2013

    

Percent

Change

 

Supplemental data:

     (In millions)      

Grede segment

   $ 9.8       $ —         $ 9.8       $ —           —     

Grede Holdings LLC

     —           74.8         74.8         90.8         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 9.8       $ 74.8       $ 84.6       $ 90.8         (6.8)% (1) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(1) Combined gross profit for the Grede segment and Grede Holdings LLC for the six months ended June 29, 2014 decreased 6.8% over the gross profit for Grede Holdings LLC for the six months ended June 30, 2013.

Grede’s combined gross profit was $84.6 million for the six months ending June 29, 2014 or 16.7% of Grede’s combined net sales for the same period, as compared to $90.8 million for the six months ended June 30, 2013, or 16.8% of Grede’s net sales for the same period, a decrease of $6.2 million or 6.8%. The decrease was primarily attributable to lower volumes due to plant closures offset by increased utility costs and lower productivity as a result of a temporary gas supply disruption caused by severe cold weather in 2014.

Operating Income

Operating income was $104.8 million for the six months ended June 29, 2014 as compared to $94.5 million for the six months ended June 30, 2013, an increase of $10.3 million, or 10.9%. This increase was primarily driven by higher gross profit and was partially offset by the inclusion of Grede segment results subsequent to the Grede Transaction in June 2014.

The following table sets forth our operating income (loss) by segment for the six months ended June 29, 2014 and June 30, 2013:

 

    

Six Months
Ended

June 29, 2014

   

Six Months

Ended
June 30, 2013

    

Percent

Change

 
     (In millions)         

HHI segment

   $ 56.6      $ 44.6         26.9%   

Metaldyne segment

     59.0        49.9         18.2%   

Grede segment

     (10.8     —           —   (1) 
  

 

 

   

 

 

    

Total

   $ 104.8      $ 94.5         —   (1) 
  

 

 

   

 

 

    

 

(1) Percent change omitted as the Grede segment results only reflect results for the 28-day period ended June 29, 2014 and do not reflect any results for the six months ended June 30, 2013.

HHI segment operating income was $56.6 million, or 11.4% of HHI segment net sales for the six months ended June 29, 2014, as compared to $44.6 million, or 9.9% of HHI segment net sales for the six months ended June 30, 2013, an increase of $12.0 million, or 26.9%. The increase in HHI segment operating income was primarily attributable to the increase in HHI segment gross profit partially offset by higher wages, benefits and stock compensation expense in SG&A.

Metaldyne segment operating income was $59.0 million, or 9.7% of Metaldyne segment net sales for the six months ended June 29, 2014, as compared to $49.9 million, or 8.8% of Metaldyne segment net sales for the six months ended June 30, 2013, an increase of $9.1 million, or 18.2%. The increase was primarily due to the increase in gross profit in addition to a lower year over year employee benefits costs.

 

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Our operating income does not reflect the operating income of Grede prior to the Grede Transaction in June 2014. Our operating income in the six months ended June 29, 2014 was impacted by an operating loss in our Grede segment which resulted from transaction related costs and accounting related adjustments resulting from the Grede Transaction.

Other, Net

Other, net was $4.4 million of expense for the six months ended June 29, 2014 as compared to income of $3.9 million for the six months ended June 30, 2013, a change of $(8.3) million. This change in other, net was primarily due to the impact foreign currency fluctuations.

Interest Expense, Net

Interest expense, net was $42.3 million for the six months ended June 29, 2014 as compared to $36.2 million for the six months ended June 30, 2013, an increase of $6.1 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 increased indebtedness used to fund the return of capital to our stockholders, partially offset by lower overall interest rates due to refinancing activities.

Income Taxes

The income tax provision for the six months ended June 29, 2014 and June 30, 2013 was $19.9 million and $20.6 million, respectively. This increase was primarily due to the higher pre-tax income. Our effective tax rates for the six months ended June 29, 2014 and June 30, 2013 were 34.3% and 33.1%, respectively. This increase in effective tax rates was primarily due to the mix of domestic and foreign earnings with varying tax rates and the impact of deferred taxes.

Net Income Attributable to Stockholders

Net income attributable to stockholders was $38.0 million, or 3.2% of net sales for the six months ended June 29, 2014, as compared to $41.5 million, or 4.1% of net sales for the six months ended June 30, 2013, a decrease of $3.5 million, or 8.4%. The decrease was primarily attributable to the factors discussed above.

Year Ended December 31, 2013 compared with Year Ended December 31, 2012

We compare (i) the year ended December 31, 2013 and (ii) the Successor 2012 and Predecessor 2012 periods on a combined non-GAAP basis for purposes of this discussion and analysis of the results of operations. Any references below to the year ended December 31, 2012 refer to the combined periods. Material fluctuations in results of operations resulting from the effect of purchase accounting relate to the HHI Transaction and the Metaldyne Transaction. GAAP does not allow for such combination of Predecessor and Successor financial results. We believe the combined results provide the most meaningful way to comment on our results of operations for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because the discussion of any partial period comparisons is not meaningful. The combined information is the result of adding the Predecessor 2012 and Successor 2012 columns, which is not consistent with GAAP and does not include any pro forma assumptions or adjustments.

 

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

 

          Successor          Predecessor  
   

Year Ended
December 31,
2012
(Combined)

(Non-GAAP)

                  
     

Year Ended

December 31,

2013

   

Successor
Period 2012

        

Predecessor

Period

2012

   

Year Ended

December 31,

2011

 
   

(In millions)

 

Net sales

  $ 885.8      $ 2,017.3      $ 205.3          $ 680.5      $ 787.3   

Cost of sales

    758.5        1,708.7        199.5            559.0        643.4   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Gross profit

    127.3        308.6        5.8            121.5        143.9   

Selling, general and administrative expenses

    131.0        123.2        14.4            116.6        34.7   

Acquisition costs

    39.3        —          25.9            13.4        —     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Operating income (loss)

    (43.0     185.4        (34.5         (8.5     109.2   

Interest expense, net

    36.9        74.7        11.1            25.8        31.6   

Other, net

    3.9        17.8        1.5            2.4        6.3   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Income (loss) before taxes

    (83.8     92.9        (47.1         (36.7     71.3   

Income tax provision (benefit)

    (26.3     35.0        (15.2         (11.1     24.6   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss)

    (57.5     57.9        (31.9         (25.6     46.7   

Income (loss) attributable to noncontrolling interests

    0.2        0.3        —              0.2        0.1   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net income (loss) attributable to stockholders

  $ (57.7   $ 57.6      $ (31.9       $ (25.8   $ 46.6   
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Net Sales

Net sales were $2,017.3 million, $885.8 million, $205.3 million and $680.5 million for the year ended December 31, 2013, the year ended December 31, 2012, Successor Period 2012 and Predecessor Period 2012, respectively. Net sales for the year ended December 31, 2013 increased $1,131.5 million over the combined Successor Period 2012 and Predecessor Period 2012 net sales primarily due to the Metaldyne Transaction in December 2012.

The following table sets forth our net sales by segment for the periods presented:

 

            Successor          Predecessor  
    

Year Ended
December 31,
2012

(Combined)

(Non-GAAP)

                   
       

Year Ended
December 31,
2013

   

Successor

Period

2012

        

Predecessor

Period

2012

    

Percent
Change

 
    

(In millions)

 

HHI segment

   $ 866.9       $ 916.5      $ 186.4          $ 680.5         5.7%  (1) 

Metaldyne segment

     18.9         1,112.0        18.9            —           —   (2) 

Grede segment

     —           —          —              —           —   (3) 

Less: intersegment sales

     —           (11.2     —              —           —     
  

 

 

    

 

 

   

 

 

       

 

 

    

Total

   $ 885.8       $ 2,017.3      $ 205.3          $ 680.5         —     
  

 

 

    

 

 

   

 

 

       

 

 

    

 

(1) Denominator is the combined results for the HHI segment for the Successor Period 2012 and Predecessor Period 2012.
(2) Percent change omitted as 2012 was not a full year for the Metaldyne segment.
(3) Percent change omitted as Grede was acquired in June 2014.

 

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HHI segment net sales were $916.5 million, $866.9 million, $186.4 million and $680.5 million for the year ended December 31, 2013, the year ended December 31, 2012, Successor Period 2012 and Predecessor Period 2012, respectively. HHI segment net sales for the year ended December 31, 2013 increased $49.6 million, or 5.7%, over the combined Successor Period 2012 and Predecessor Period 2012 net sales. The increase was primarily attributable due to higher volumes from positive trends in North American light vehicle production as well the impact of net new Program launches in 2013. HHI segment net sales also increased as result of net increases in customer prices, partially offset by lower steel surcharge pass-through.

The increase in Metaldyne segment net sales reflected the exclusion of MD Investors Corporation net sales prior the Metaldyne Transaction in December 2012. We compare (i) the year ended December 31, 2013 and (ii) the 14-day period ended December 31, 2012 and the 352-day period ended December 17, 2012 on a combined non-GAAP basis for purposes of this discussion and analysis of Metaldyne’s net sales. Any references below to the year ended December 31, 2012 refer to such combined periods. GAAP does not allow for such combination of financial results. We believe the combined results provide the most meaningful way to comment on Metaldyne’s net sales for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because the discussion of any partial period comparisons is not meaningful. The combined information is the result of adding the two columns, which is not consistent with GAAP and does not include any pro forma assumptions or adjustments. The following table sets forth the net sales of the Metaldyne segment and MD Investors Corporation for the periods presented:

 

    

Year Ended

December 31,

2013

    

Year Ended

December 31,

2012

(Combined)

(Non-GAAP)

    

14-Day
Period Ended
December 31,
2012

    

352-Day
Period Ended
December 17,
2012

    

Percent

Change

 
    

(In millions)

        

Supplemental data:

              

Metaldyne segment

   $ 1,112.0       $ 18.9       $ 18.9       $ —           —     

MD Investors Corporation

     —           1,041.5         —           1,041.5         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 1,112.0       $ 1,060.4       $ 18.9       $ 1,041.5         4.9 %(1) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(1) Net sales of the Metaldyne segment for the year ended December 31, 2013 increased by 4.9% for the year ended December 31, 2013 over the combined net sales of the Metaldyne segment and MD Investors Corporation for the year ended December 31, 2012.

Net sales for the year ended December 31, 2013 of $1,112.0 million increased $51.6 million over the combined net sales of $1,060.4 million for the Metaldyne segment in the 14 day period ended December 31, 2012 and the 352 day period ended December 17, 2012 for MD Investors Corporation. This increase was attributable to higher volumes resulting from overall market increases in North America, stabilizing European volume and new Program launches as well as the favorable impact of foreign currency fluctuations, partially offset by lower raw material surcharge pass-through.

Our net sales do not reflect the net sales of Grede prior to the Grede Transaction in June 2014. The following table sets forth Grede’s net sales for the periods presented:

 

    

Year Ended

December 29,
2013

    

Year Ended
December 30,
2012

    

Percent

Change

 
     (In millions)         

Supplemental data:

        

Grede Holdings LLC

   $ 1,035.6       $ 1,130.0         (8.4 %) 

Grede’s net sales decreased $94.4 million, or 8.4%, to $1,035.6 million for the year ended December 29, 2013 from $1,130.0 million for the year ended December 30, 2012. The reduction in Grede’s net sales was due

 

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primarily to lower volumes in the North American industrial and heavy truck markets, the planned exit of lower margin Programs and the impact of the closures of its Marion, Alabama and Omaha, Nebraska plants. Net sales attributable to these facilities decreased by $22.1 million from 2012 to 2013. Furthermore, Grede’s net sales were lower due to a decrease in raw material surcharge pass-through as a result of declining material prices and lower mix of net sales with outside processing. Partially offsetting these decreases was the impact of the acquisition of certain assets from Virginia Castings, Inc. operation in Radford, Virginia in March 2012 and net customer price increases. Radford facility net sales increased $24.3 million from 2012 to 2013.

Cost of Sales

Cost of sales was $1,708.7 million, $758.5 million, $199.5 million and $559.0 million for the year ended December 31, 2013, the year ended December 31, 2012, Successor Period 2012 and Predecessor Period 2012, respectively. Cost of sales for the year ended December 31, 2013 increased $950.2 million over the combined Successor Period 2012 and Predecessor Period 2012 primarily due to the Metaldyne Transaction in December 2012. The following table sets forth our cost of sales by segment for the periods presented:

 

            Successor          Predecessor         
    

Year Ended
December 31,
2012

(Combined)

(Non-GAAP)

                          
       

Year Ended

December 31,

2013

   

Successor

Period

2012

        

Predecessor

Period

2012

    

Percent

Change

 
    

(In millions)

        

HHI segment

   $ 732.3       $ 765.5      $ 173.3          $ 559.0         4.5 %(1) 

Metaldyne segment

     26.2         954.4        26.2            —           —       (2) 

Grede segment

     —           —          —              —           —       (3) 

Less: intersegment sales

     —           (11.2     —              —           —     
  

 

 

    

 

 

   

 

 

       

 

 

    

Total

   $ 758.5       $ 1,708.7      $ 199.5          $ 559.0         —     
  

 

 

    

 

 

   

 

 

       

 

 

    

 

(1) Denominator is cost of sales for the HHI segment for the Successor Period 2012 and Predecessor Period 2012 on a combined basis.
(2) Percent change omitted as 2012 was not a full year for the Metaldyne segment.
(3) Percent change omitted as Grede was acquired in June 2014.

HHI segment cost of sales was $765.5 million for the year ended December 31, 2013 as compared to $732.3 million for the year ended December 31, 2012, $173.3 million for Successor Period 2012 and $559.0 million for Predecessor Period 2012. HHI segment cost of sales for the year ended December 31, 2013 increased $33.2 million or 4.5%, over the combined Successor Period 2012 and Predecessor Period 2012. This increase was primarily driven by the higher volumes mentioned above as well as the impact of purchase accounting adjustments and cost increases primarily related to salaries, wages and benefits. The impact of purchase accounting adjustments was the result of HHI Transaction in October 2012 and was $13.8 million and primarily reflected higher depreciation from the revaluation of fixed assets, partially offset by the step-up to fair market value and consequent charge for inventory in Successor Period 2012. These increases were partially offset by manufacturing cost improvements and positive product mix.

The increase in cost of sales for the Metaldyne segment principally reflected the exclusion of MD Investors Corporation cost of sales prior to the Metaldyne Transaction in December 2012. We compare (i) the year ended December 31, 2013 and (ii) the 14-day period ended December 31, 2012 and the 352-day period ended December 17, 2012 on a combined non-GAAP basis for purposes of this discussion and analysis of Metaldyne’s cost of sales. Any references below to the year ended December 31, 2012 refer to such combined periods. GAAP does not allow for such combination of financial results. We believe the combined results provide the most meaningful way to comment on Metaldyne’s cost of sales for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because the discussion of any partial period comparisons is not meaningful. The combined information is the result of adding the two columns, which is not

 

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consistent with GAAP and does not include any pro forma assumptions or adjustments. The following table sets forth the cost of sales of the Metaldyne segment and MD Investors Corporation for the periods presented:

 

    

Year Ended
December 31,
2013

    

Year Ended
December 31,
2012

(Combined)

(Non-GAAP)

    

14-Day
Period Ended

December 31,

2012

    

352-Day
Period Ended

December 17,

2012

    

Percent

Change

 
    

(In millions)

        

Supplemental data:

              

Metaldyne segment

   $ 954.4       $ 26.2       $ 26.2       $ —           —     

MD Investors Corporation

     —           862.3         —           862.3         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 954.4       $ 888.5       $ 26.2       $ 862.3         7.4 %(1) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

(1) Combined costs of sales of the Metaldyne Segment and MD Investors Corporation increased by 7.4% for the year ended December 31, 2013 over the combined periods of 2012.

Cost of sales for the year ended December 31, 2013 of $954.4 million increased $65.9 million over the combined cost of sales of $888.5 million for the Metaldyne segment in the 14-day period ended December 31, 2012 and the 352-day period ended December 17, 2012 for MD Investors Corporation. This increase was attributable to higher volumes, higher depreciation and amortization resulting from the Metaldyne Transaction purchase accounting and increased labor and overhead costs.

Our cost of sales does not reflect the cost of sales of Grede prior to the Grede Transaction in June 2014. The following table sets forth Grede’s cost of sales for the periods presented:

 

     Year Ended
December 29,
2013
     Year Ended
December 30,
2012
     Percent
Change
 
     (In millions)         

Supplemental data:

        

Grede Holdings LLC

   $ 858.2       $ 947.7         (9.4 %) 

Grede’s cost of sales was $858.2 million, or 82.9% of Grede’s net sales ended December 29, 2013 as compared to $947.7 million, or 83.9%, for year ended December 30, 2012, a decrease of $89.5 million or 9.4%. The decrease was primarily attributable to lower net sales in the North American industrial and heavy truck markets along with the Marion, Alabama and Omaha, Nebraska plant closures.

 

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Gross Profit

Gross profit was $308.6 million, $127.3 million, $5.8 million and $121.5 million for the year ended December 31, 2013, the year ended December 31, 2012, Successor Period 2012 and Predecessor Period 2012, respectively. Gross profit for the year ended December 31, 2013 increased $181.3 million over the combination of Successor Period 2012 and Predecessor Period 2012 primarily due to the Metaldyne Transaction in December 2012. The following table sets forth our gross profit by segment for the periods presented:

 

           Successor          Predecessor         
    

Year Ended

December 31,

2012

(Combined)

(Non-GAAP)

                  
      

Year Ended

December 31,
2013

    

Successor

Period

2012

        

Predecessor

Period

2012

    

Percent

Change

 
    

(In millions)

        

HHI segment

   $ 134.6      $ 151.0       $ 13.1          $ 121.5         12.2 %(1) 

Metaldyne segment

     (7.3     157.6         (7.3         —           —       (2) 

Grede segment

     —          —           —              —           —       (3) 
  

 

 

   

 

 

    

 

 

       

 

 

    

Total

   $ 127.3      $ 308.6       $ 5.8          $ 121.5         —     
  

 

 

   

 

 

    

 

 

       

 

 

    

 

(1) Denominator is the combined results for the HHI segment for the Successor Period 2012 and Predecessor Period 2012.
(2) Percent change omitted as 2012 was not a full year for the Metaldyne segment.
(3) Percent change omitted as Grede was acquired in June 2014.

HHI segment gross profit was $151.0 million, or 16.5% of HHI segment net sales for the year ended December 31, 2013 as compared to $134.6 million, or 15.5% of HHI segment net sales for the year ended December 31, 2012, or $13.1 million, or 7.0% of HHI segment net sales for Successor Period 2012 and $121.5 million, or 17.9% of HHI segment net sales for Predecessor Period 2012. HHI segment gross profit for the year ended December 31, 2013 increased $16.4 million, or 12.2%, over the combination of Successor Period 2012 and Predecessor Period 2012. This increase was primarily driven by the higher volumes and net customer price increases as well as by manufacturing cost improvements and positive product mix. The increase was partially offset by the impact of purchase accounting adjustments and increased salaries, wages and benefits costs. The impact of purchase accounting adjustments is the result of the HHI Transaction in October 2012 and was $13.8 million, which primarily reflected higher depreciation from the revaluation of fixed assets, partially offset by the step-up to fair market value and consequent charge for inventory within Successor Period 2012.

The increase in gross profit for the Metaldyne segment principally reflected the exclusion of MD Investors Corporation gross profit prior to the Metaldyne Transaction in December 2012. We compare (i) the year ended December 31, 2013 and (ii) the 14-day period ended December 31, 2012 and the 352-day period ended December 17, 2012 on a combined non-GAAP basis for purposes of this discussion and analysis of Metaldyne’s gross profit. Any references below to the year ended December 31, 2012 refer to such combined periods. GAAP does not allow for such combination of financial results. We believe the combined results provide the most meaningful way to comment on Metaldyne’s gross profit for the year ended December 31, 2013, as compared to the year ended December 31, 2012, because the discussion of any partial period comparisons is not meaningful. The combined information is the result of adding the two columns, which is not

 

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consistent with GAAP and does not include any pro forma assumptions or adjustments. The following table sets forth the gross profit of the Metaldyne segment and MD Investors Corporation for the periods presented:

 

    

Year Ended
December 31,
2013

    

Year Ended
December 31,
2012

(Combined)

(Non-GAAP)

   

14-Day Period
Ended
December 31,
2012

   

352-Day Period
Ended
December 17,
2012

    

Percent
Change

 
    

(In millions)

        

Supplemental data:

            

Metaldyne segment

   $ 157.6       $ (7.3   $ (7.3   $ —           —     

MD Investors Corporation

     —           179.2        —          179.2         —     
  

 

 

    

 

 

   

 

 

   

 

 

    

Total

   $ 157.6       $ 171.9      $ (7.3   $ 179.2         (8.3 )%(1) 
  

 

 

    

 

 

   

 

 

   

 

 

    

 

(1) Gross profit of the Metaldyne segment decreased by 8.3% for the year ended December 31, 2013 over the combined results of the Metaldyne segment and the MD Investors Corporation in 2012.

Gross profit for the year ended December 31, 2013 of $157.6 million decreased $14.3 million over the combined gross profit of $171.9 million for the Metaldyne segment in the 14 day period ended December 31, 2012 and the 352 day period ended December 17, 2012 for MD Investors Corporation. The decrease was primarily attributable to the higher depreciation and amortization resulting from the Metaldyne Transaction purchase accounting, partially offset by additional net sales and related margin.

Our gross profit does not reflect the gross profit of Grede prior to the Grede Transaction in June 2014. The following table sets forth Grede’s gross profit for the periods presented:

 

    

Year Ended
December 29,
2013

    

Year Ended
December 30,
2012

    

Percent
Change

 
     (In millions)         

Supplemental data:

        

Grede Holdings LLC

   $ 177.4       $ 182.3         (2.7 %) 

Grede’s gross profit for the year ended December 29, 2013 was $177.4 million, or 17.1% of Grede’s net sales, as compared to $182.3 million, or 16.1% of Grede’s net sales, for the year ended December 30, 2012, a decrease of $4.9 million or 2.7%. The decrease in the Grede’s gross profit was due to lower volumes and related margins, partially offset by net cost reductions and net customer price increases.

Operating Income

Operating income (loss) was $185.4 million, $(43.0) million, $(34.5) million and $(8.5) million for the year ended December 31, 2013, the year ended December 31, 2012, Successor Period 2012 and Predecessor Period 2012, respectively. Operating income for the year ended December 31, 2013 increased $228.4 million over the combined Successor Period 2012 and Predecessor Period 2012 primarily due to the Metaldyne Transaction in December 2012, the non-recurrence of expenses related to the HHI Transaction in October 2012, including stock-based compensation and acquisition costs.

 

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The following table sets forth our operating income (loss) by segment for the periods presented: