10-K 1 mpg-10k_20161231.htm MPG-10K-20161231 mpg-10k_20161231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period from                      to                     

 

Commission File Number 1-36774

 

Metaldyne Performance Group Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

47-1420222

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

 

One Towne Square

Suite 550

Southfield, MI 48076

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on

which registered

Common Stock, par value $0.001 per share

 

New York Stock Exchange

Securities registered Pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

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

The aggregate market value of the voting common stock held by nonaffiliates of the registrant on July 1, 2016 (the last business day of the most recently completed second fiscal quarter) was approximately $202.0 million; computed by reference to the closing sale price as reported on the New York Stock Exchange on such date.

As of March 2, 2017, the registrant had 67,923,410 shares of voting common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

The information required to be included in Part III of this Annual Report on Form 10-K will be provided in accordance with Instruction G(3) to Form 10-K no later than May 1, 2017.

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I

 

 

ITEM 1.

 

BUSINESS

 

4

ITEM 1A.

 

RISK FACTORS

 

8

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

 

22

ITEM 2.

 

PROPERTIES

 

22

ITEM 3.

 

LEGAL PROCEEDINGS

 

24

ITEM 4.

 

MINE SAFETY DISCLOSURE

 

24

 

 

 

PART II

 

 

ITEM 5.

 

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

25

ITEM 6.

 

SELECTED FINANCIAL DATA

 

28

ITEM 7.

 

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

 

29

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

50

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

52

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

93

ITEM 9A.

 

CONTROLS AND PROCEDURES

 

93

ITEM 9B.

 

OTHER INFORMATION

 

95

 

 

 

PART III

 

 

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

96

ITEM 11.

 

EXECUTIVE COMPENSATION

 

96

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

96

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

96

ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

96

 

 

 

PART IV

 

 

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

97

ITEM 16.

 

FORM 10-K SUMMARY

 

97

EXHIBIT INDEX

 

99

 

 

 

 


 

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“10-K”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, contains forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We may also make forward-looking statements in other reports filed with the Securities and Exchange Commission (the “SEC”), including the documents incorporated herein by reference, in materials delivered to stockholders, and in press releases. In addition, our officers and representatives may from time to time make oral forward-looking statements.

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

 

Guidance relating to fiscal year 2017 (or beyond);

 

Expected operating results, such as revenue growth and earnings;

 

Anticipated levels of capital expenditures for fiscal year 2017 or beyond;

 

Current or future volatility in the credit markets and future market conditions;

 

Our belief that we have sufficient liquidity to fund our business operations during the next 12-15 months;

 

Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings;

 

Strategy for customer retention, growth, product development, market position, financial results and reserves; and

 

Strategy for risk management.

The forward-looking statements contained in this 10-K are based on assumptions that we have made.  As you read and consider this 10-K, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control), and assumptions and you should not rely on any of these forward-looking statements.  Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors are difficult to predict and could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements, including may factors that are outside of our control. We believe these factors include, but are not limited to, those described under or incorporated in “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” 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 10-K is based only on information currently available to us and speaks only as of the date on which we make it. Factors or events that could cause our actual operating and financial performance to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

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AVAILABLE INFORMATION

Through its website (www.mpgdriven.com), the Company will make available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, any amendments to those reports, and other filings with the SEC, as soon as reasonably practicable after they are filed or furnished. The Company also makes the following documents available on its website: the Audit Committee Charter; the Compensation Committee Charter; the Nominating and Corporate Governance Committee Charter; the Company’s Corporate Governance Guidelines; the Company’s Code of Business Conduct and Ethics; and the Company’s Related Party Transaction, Insider Trading, Whistleblower, Environmental, and Safety & Health policies. Copies of these posted materials are also available in print, free of charge, to any stockholder upon request from: MPG Investor Relations, One Towne Square, Suite 550, Southfield, MI, or via telephone in the U.S. at (248) 727-1829, or e-mail at investors@mpgdriven.com. The inclusion of our website address in this report is an inactive textual reference only and is not intended to include or incorporate by reference the information on our website into this 10-K. The public may also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE., Washington, DC 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains our reports, proxy and information statements, and other information about the Company on its website (www.sec.gov).

 

 

 

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PART I

ITEM 1.

BUSINESS

General

Metaldyne Performance Group Inc. (“MPG”) is a Delaware corporation incorporated on June 9, 2014. Our business was formed through the combination of three metal-forming technology manufacturing companies, ASP HHI Holdings, Inc. (together with its subsidiaries, “HHI”), ASP MD Holdings, Inc. (together with its subsidiaries, “Metaldyne”), and ASP Grede Intermediate Holdings LLC (together with its subsidiaries, “Grede”) on August 4, 2014 (the “Combination”). Each of the three operating groups was owned primarily by certain private equity funds affiliated with American Securities LLC (together with its affiliates, “American Securities”). American Securities acquired its interest in HHI in October 2012, Metaldyne in December 2012, and Grede in June 2014.

A brief summary of the history of HHI, Metaldyne, and Grede follows:

 

HHI was formed in 2005 and, from 2005 through 2009, completed the 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.

 

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.

 

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.

Effective December 12, 2014, MPG completed an initial public offering (the “IPO”) and began trading on the New York Stock Exchange under the ticker symbol “MPG.” Unless otherwise stated in this 10-K, references to “MPG,” the “Company,” “we,” “our,” “us,” and similar terms refer to Metaldyne Performance Group Inc. and all of its subsidiaries.

This 10-K presents HHI as the predecessor to MPG for financial reporting purposes. The period prior to October 6, 2012 is referred to as the Predecessor Period and the periods from October 6, 2012 to December 31, 2016 are referred to as the Successor Period. 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 consolidated financial statements reflect the retrospective application of MPG’s capital structure and consolidated presentation of the Combination for the Successor Period. Our historical capital structure has been retroactively adjusted to reflect our post-Combination capital structure for the Successor Period.

Merger Agreement

On November 3, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with American Axle & Manufacturing Holdings, Inc., a Delaware corporation (“AAM”) and Alpha SPV I, Inc., a Delaware corporation and wholly owned subsidiary of AAM (“Merger Sub”), pursuant to which Merger Sub will be merged with and into the Company (the “AAM Merger”) with the Company surviving the AAM Merger as a wholly owned subsidiary of AAM.  The Merger Agreement and the transactions contemplated thereby have been approved and adopted by the boards of directors of both AAM and the Company. The Merger Agreement will be presented to the Company’s stockholders for adoption and approval as well as to AAM’s stockholders to approve the issuance of shares of AAM common stock to the Company’s stockholders in the AAM Merger (the “AAM Share Issuance”), and such stockholder approvals are currently expected during the first half of 2017.  

At the effective time of the AAM Merger, each share of our common stock issued and outstanding (other than any shares of our common stock held by AAM, Merger Sub or any other wholly owned subsidiary of AAM, treasury shares held by us and shares owned by stockholders who have properly made and not withdrawn a demand for appraisal rights under Delaware law) will be converted into the right to receive $13.50 in cash, without interest and 0.5 share of AAM common stock (the “Merger Consideration”).  In addition, immediately prior to the effective time of the AAM Merger, all then-outstanding unvested Company restricted stock awards, restricted stock units and stock options will be accelerated in full and, upon completion of the AAM Merger (i) all then-outstanding Company restricted stock awards and restricted stock units will be converted into the right to receive the Merger Consideration, and (ii) all then-outstanding Company stock options will be converted into the right to receive an amount in cash equal to the Merger Consideration, less the exercise price of such options.  The consummation of the AAM Merger remains subject to the

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receipt of Mexican antitrust approval, stockholder approvals and the satisfaction of other customary closing conditions.  The transaction is expected to close in the first half of 2017.  If completed, the AAM Merger will result in the Company becoming a wholly owned subsidiary of AAM and our shares will no longer be listed on any public market.

Additional information about the AAM Merger and the Merger Agreement, including circumstances under which the Merger Agreement can be terminated and the ramifications of such termination, as well as other terms and conditions, is set forth in our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3, 2016 (the “Transaction 8-K”).  In addition, as described in the Transaction 8-K, in connection with the transactions contemplated by the Merger Agreement, an affiliate of American Securities entered into a voting agreement with AAM whereby it agreed to vote a portion of its shares of our common stock in favor of the adoption of the Merger Agreement at our stockholders’ meeting and the remainder of its shares proportionately with our other stockholders.

 

Certain Terms

We use the following industry terms in this 10-K describing our business, our products, and how they are organized and sourced in our industry:

 

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 oscillation, 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.

 

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

 

Program: Manufacturing and development of certain automobile components including engines, transmissions, and brake components (e.g. Toyota 051A, ZF’s 9HP transmission).

 

Vehicle Nameplate: A specific vehicle model built within a Platform for an OEM (e.g. Toyota Camry, Ford F-150).

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Business Overview

MPG provides 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.

Our metal-forming manufacturing technologies and processes include Aluminum Die Casting, Forging, Iron Casting, and Powder Metal Forming, as well as value-added manufacturing processes such 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.

Our business is comprised of three segments:

HHI: HHI manufactures highly-engineered metal-based components for the North American light vehicle market. These components include transmission components, driveline 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.

Metaldyne: Metaldyne manufactures highly-engineered metal-based Powertrain components for the global light vehicle markets. These components include connecting rods, VVT components, balance shaft systems, crankshaft dampers, differential gears, pinions and assemblies, valve bodies, hollow and solid shafts, clutch modules, and assembled end covers.

Grede: Grede manufactures cast, machined and assembled components for the light, commercial and industrial (agriculture, construction, mining, rail, wind energy and oil field) vehicle and equipment end-markets. These components include turbocharger housings, differential carriers and cases, scrolls and covers, brake calipers and housings, knuckles, control arms, and axle components.

See Note 22 of the notes to the consolidated financial statements contained within “Item 8. Financial Statements and Supplementary Data” for financial information reported by segment and geographic area.

We primarily serve the global light vehicle and North American commercial and industrial vehicle and equipment end-markets. 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.

Contribution to our net sales by vehicle application follows:

 

 

 

Year Ended

December 31, 2016

 

Year Ended

December 31, 2015

 

Year Ended

December 31, 2014

Driveline

 

 21%

 

21%

 

19%

Engine

 

27

 

25

 

28

Transmission

 

24

 

22

 

23

Safety-Critical

 

14

 

17

 

17

Other Specialty Products

 

14

 

15

 

13

 

 

100%

 

100%

 

100%

 

 

Seasonality

Our business is moderately seasonal because our largest North American customers typically halt operations for approximately two weeks in July and one week in December. Customers in Europe have historically shut down vehicle production during a portion of August and December as well. In addition, third quarter automotive production traditionally is lower as new models enter production.

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Customer Dependence

We depend on major vehicle OEMs for our sales. For the year ended December 31, 2016, Ford Motor Company (“Ford”), General Motors Company (“GM”), and Fiat Chrysler Automobiles (“FCA”) accounted for approximately 25%, 21%, and 14% of our end-customer sales, respectively. Other significant customers include Daimler AG (“Daimler”), Toyota Motor Corporation (“Toyota”), and Honda Motor Company (“Honda”), which together accounted for approximately 9% of our end-customer sales for the year ended December 31, 2016.

Suppliers and Raw Materials

We procure our raw materials from a variety of suppliers for use in our manufacturing processes. In 2016, our top ten suppliers constituted less than 35% of our purchases. Based on available quality and supply, we seek to obtain materials in the region in which our products are manufactured in order to minimize transportation and other costs. The primary raw materials used to produce the majority of our products are steel scrap, steel bar, pig iron, aluminum, copper, molybdenum, and other metallic materials. We believe our principal suppliers have steel making capabilities and capacity to support our customers’ specifications and volume expectations. We typically source raw materials or components from single suppliers. Although we are generally able to substitute suppliers for raw materials and components without material short-term costs, in some cases, it could be difficult and expensive for us to change suppliers and may require customer approval.

Generally, we apply raw material surcharges to our customers to mitigate volatility in our cost of scrap, steel bar, aluminum, and other inputs. Surcharge prices on our raw materials may vary based on industry indices or on actual prices paid to suppliers. We also sell certain manufacturing scrap which may be subject to fluctuations in commodity prices.

Design, Product Development, and Intellectual Property

We maintain technical and commercial engineering centers in major regions of the world to develop and provide advanced products, processes and manufacturing support for all of our manufacturing sites and to provide our customers with local engineering capabilities and design support. Our efforts related to research and development are focused on process improvement, higher performance materials, and increased product performance.

We believe that our engineering and technical expertise, together with our emphasis on continuing product and process development, allow us to use the latest technologies, processes, and sophisticated materials to provide cost-effective solutions to our customers. We believe that continued engineering activities are critical to support our pipeline of technologically advanced products and increasing the technical and performance capabilities of our products. We maintain our engineering activities around our core technologies and processes, allocating our capital and resources to those products with differentiated technologies and attractive returns on invested capital.

We pursue patents where specific technology or innovation is well positioned for protection under intellectual property laws. While no individual patent or group of patents, taken alone, is considered material to our business, taken in the aggregate, these patents provide meaningful protection for certain of our products and product innovations. We continually make determinations as to whether a product or process is best protected through a patent application or other means.

Backlog

Incremental business backlog, which we measure as anticipated net product sales from incremental business for the next four years, net of Programs being phased out and any contractual pricing changes, was approximately $443 million as of December 31, 2016. We are typically awarded Programs one to three years prior to the start of production on new and replacement business which ramp up over time. Due to the timing of the OEM sourcing cycle, our anticipated net product sales were measured based on contracts to be fulfilled during 2017 through 2020. 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 and pricing changes on existing Programs. Our estimate may be impacted by various assumptions including vehicle production levels on new and replacement Programs, customer price reductions, scrap prices, material price indices, currency exchange rates and the timing of Program launches. 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.

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Competition

Although the number of our competitors has decreased due to ongoing industry consolidation, the automotive components industry remains very competitive. OEMs and Tier I suppliers rigorously evaluate suppliers on the basis of product quality, price competitiveness, reliability and timeliness of delivery, product design capability, technical expertise and development capability, new product innovation, financial viability, application of lean principles, operational flexibility, customer service, and overall management. In addition, our customers generally require that suppliers demonstrate improved efficiencies, through cost reductions and/or price improvement, on a year-over-year basis.

The following table lists our primary competitors for components we produce using our manufacturing technologies and value-added processes:

 

Portfolio of Manufacturing Technologies and Value-Added Processes

 

Primary Competitors

Advanced Machining and Assembly

 

BorgWarner, GKN, Linamar, and Magna

Aluminum Die Casting

 

Aisin, Dongnam Precision, and Ryobi

Cold and Warm Forging

 

American Axle, Hirshvogel, Linamar, and Sona BLW

Hot Forging

 

American Axle, Amtek, Linamar, and Hirshvogel

Iron Casting

 

Metal Technologies, Inc., Neenah Enterprises, and Waupaca

Powder Metal Forming

 

GKN, Mahle, and Miba

Rubber and Viscous Dampening Assemblies

 

Knorr Bremse, Vibracoustic, and Winkelmann

 

Environmental Compliance

We are subject to a variety of federal, state, local, and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the remediation of contaminated sites. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution. These permits are subject to modification, renewal, and revocation by issuing authorities. We believe we are in substantial compliance with all applicable material laws and regulations. Historically, our costs of achieving and maintaining compliance with environmental, health, and safety requirements have not been material to our results.

Employees

As of December 31, 2016, we employed approximately 12,000 employees in 13 countries. As of December 31, 2016, approximately 45% of our employees were employed under the terms of collective bargaining agreements with industrial trade unions or employed under international workers’ councils.

ITEM 1A.

RISK FACTORS

Provided below is a cautionary discussion of what we believe to be the most important risk factors applicable to the Company, although they are not the only ones we face. Additional risks and uncertainties not presently known to us or that we do not currently deem material may also impact our business operations. If any of the following risks occur, our business, including its financial performance, financial condition, results of operations, and cash flows may be adversely affected. Discussion of these factors is incorporated by reference into and considered an integral part of Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risks Relating to the AAM Merger

The proposed AAM Merger may not be consummated or may not be consummated in the timeframe or manner currently anticipated, which could have a material adverse effect on our business, results of operations and/or our stock price.

The proposed AAM Merger remains subject to various closing conditions, including adoption of the Merger Agreement by the stockholders of the Company, approval of the AAM Share Issuance by the stockholders of AAM and the receipt of Mexican antitrust approval, among other customary closing conditions.  It is possible that the stockholders of either the Company or AAM do not approve the relevant proposals at their respective stockholder meetings, or that a government entity may prohibit, delay or refuse to grant approval for the consummation of the AAM Merger.  If any condition to the closing of the AAM Merger is not satisfied or, if permissible, waived, the AAM Merger will not be completed.  In addition, satisfying the conditions to the closing of the AAM Merger may take longer than we expect.  There can be no assurance that any of the remaining conditions to closing will be satisfied or, if permissible, waived or that other events will not intervene to delay or result in the failure to consummate the AAM Merger.  

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Any delay in completing the AAM Merger or the failure to complete the AAM Merger may adversely affect our business or results of operations, may adversely affect the benefits the Company’s stockholders expect to receive from the AAM Merger, or may negatively affect the price of our common stock or the price of the AAM common stock our stockholders may receive in the AAM Merger.  Investor confidence could also decline.  

Further, any delay in closing or a failure to close the AAM Merger could exacerbate any negative impact on our business and our relationships with our customers, suppliers, joint venture partners, other parties with which we maintain business relationships, or employees as described in the risk factors below, as well as negatively impact our ability to implement alternative business plans or pursue other strategic alternatives.

The occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement could have a material adverse effect on us and our stock price.

As described in the above risk factor, we could experience certain adverse consequences related to the termination of the Merger Agreement and failure to consummate the AAM Merger.  Pursuant to the terms of the Merger Agreement, if the Merger Agreement is terminated under certain circumstances, a termination fee of approximately $50.9 million will be payable by us to AAM.  We may also be required to reimburse AAM for certain fees and expenses relating to the proposed AAM Merger up to $15.0 million under certain circumstances. If triggered, payment of the termination fee and reimbursement of expenses may negatively impact our results of operations, financial condition and cash flows, and such impact will be in addition to the potential risks and consequences described above related to the failure to consummate the AAM Merger.

A lawsuit has been filed against MPG and members of the MPG board of directors challenging the disclosures concerning the AAM Merger, and additional lawsuits may be filed; an adverse ruling in any of such lawsuits may prevent the AAM Merger from becoming effective within the expected timeframe.

MPG and members of the MPG board of directors are named as defendants in a purported class action lawsuit brought by and on behalf of MPG stockholders challenging the disclosures concerning the AAM Merger, seeking, among other things, to enjoin the stockholder vote on the AAM Merger at the special meeting of our stockholders to be held to, among other things, consider and vote on the adoption of the Merger Agreement and approval of the transactions contemplated thereby. If the plaintiffs are successful in obtaining an injunction, then such injunction may prevent the AAM Merger from becoming effective within the expected timeframe. If the completion of the AAM Merger is delayed, it could result in substantial costs to AAM and MPG. In addition, AAM and MPG could incur significant costs in connection with the lawsuit, including costs associated with the indemnification of MPG’s directors and officers. MPG and the members of the MPG board of directors believe that the claims asserted in this lawsuit are without merit.

Disruption of management’s attention from our ongoing business operations due to the proposed AAM Merger may adversely affect business and results of operations.

We have expended, and continue to expend, significant management resources in an effort to complete the AAM Merger.  Management’s attention may be diverted away from the day-to-day operations of our business and execution of our existing business plan in our efforts to complete the AAM Merger.  This diversion of management resources could disrupt operations and have an adverse effect on our operating results and business.

While the AAM Merger is pending, we will be subject to business uncertainties that could adversely affect our operating results and business generally.

Whether or not the AAM Merger is ultimately consummated, our business may be adversely affected as a result of the announcement of the AAM Merger and uncertainty relating to the proposed transaction, including the following:

 

Our employees may experience uncertainty about their future roles, which might adversely affect our ability to retain, hire and motivate key personnel and other employees; and

 

Customers, suppliers, joint venture partners and other parties with which we maintain business relationships may experience uncertainty about our future and seek alternative relationships with third parties, seek to alter their business relationships with us or fail to extend an existing relationship with us.

In addition, we may incur significant additional costs in order to maintain employee morale, retain key employees or continue business relationships. If, despite our efforts, key employees depart because of uncertainty or our business partners adversely alter their relationships with us, our business could be seriously harmed. Any delay in completing the AAM Merger may further increase such uncertainties and the adverse effects related thereto.

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We have incurred and will continue to incur significant costs, fees and expenses in connection with the AAM Merger.

We have expended and will continue to expend significant costs, fees and expenses for professional services as well as transaction and integration costs in connection with the proposed AAM Merger.  These costs will impact our results of operations regardless of whether or not the AAM Merger is consummated.

The Merger Agreement restricts our conduct of business prior to completion of the AAM Merger and limits our ability to pursue alternative strategic options.

The Merger Agreement restricts us from taking certain actions without AAM’s consent while the AAM Merger is pending.  These restrictions may, among other matters, prevent us from pursuing otherwise attractive business opportunities or exercising our business strategy, making certain investments or acquisitions, selling assets, engaging in capital expenditures in excess of certain agreed limits, incurring certain indebtedness or making certain other changes to our business pending the closing of the AAM Merger.  These restrictions could have an adverse effect on our business, financial condition or results of operations.

In addition, subject to certain exceptions, the Merger Agreement prohibits us from soliciting or engaging in discussions with respect to certain alternative business combination transactions and, in certain circumstances, we will be required to pay a termination fee of approximately $50.9 million to AAM and to reimburse AAM’s transaction-related expenses in order to terminate the Merger Agreement and pursue such an alternative transaction. These provisions may discourage third parties from pursuing business opportunities with us and limit our ability to pursue opportunities that could result in greater value to our stockholders.

Because the exchange ratio in the AAM Merger is fixed and the market value of shares of AAM common stock may fluctuate, there can be no guarantee of the market value of the stock consideration the Company’s stockholders will receive in the AAM Merger.

The per share portion of Merger Consideration pursuant to the Merger Agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations, changes in the business, assets, liabilities, prospects, outlook, financial condition or results of operations of AAM or any change in the market price of, analyst estimates of, or projections relating to, our common stock or AAM common stock.  The market value of our common stock may vary significantly from the value of the per share portion of the Merger Consideration on the date the Merger Agreement was executed or at other later dates.  In addition, because the exchange ratio will not be adjusted, the market value of the shares of AAM common stock issued to the Company’s stockholders in the AAM Merger may be higher or lower than the values of those shares on the date of the Merger Agreement or at other later dates.

Neither the Company nor AAM is permitted to terminate the Merger Agreement solely because of changes in the market price of either party’s respective common stock.

Risks Relating to Our Industry and Our Business

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 that are beyond our control, such as a worsening of global economic and political conditions as a result of rising interest rates or inflation, high unemployment, increased energy and fuel prices, increased volatility in global capital markets, terrorism and international conflicts, climate change, severe weather, regulatory changes, and many other factors. Demand for our products correlates to consumer demand for new vehicles containing our products. Adverse changes in global economic and political conditions, or sluggish or uneven recovery in specific countries or regions, may result in lower consumer confidence, which has a significant impact on consumer demand for vehicles. An economic downturn 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 business, financial condition, and results of operations.

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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.

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, recalls and other safety issues, 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 OEMs, our customers or suppliers, and many 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 that customer.

Cyclicality and seasonality in the light, industrial, and commercial vehicle markets could have a material adverse effect on our business.

The light, industrial, and commercial vehicle markets in which we operate are cyclical and 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 North America and Europe typically shut down operations during portions of July and August and one week in December. During these manufacturing shutdown periods, our customers will generally reduce the number of production days because of lower demands and to reduce excess vehicle inventory. In addition, the sale of light, industrial, and commercial vehicles are cyclical and depend on general economic conditions and credit availability.  Such cyclicality and seasonality could have a material adverse effect on our business, financial condition, and results of operations.

We face significant competition.

The automotive supply industry is highly competitive. We compete worldwide with other automotive suppliers on the basis of price, technological innovation, quality, delivery, Program launch support, and overall customer service, among other factors. 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. 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. The inability to compete successfully could have a material adverse effect on our business, financial condition, and results of operations.

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.

We depend on major vehicle OEMs for our sales. Our financial results are closely correlated to production by Ford, GM, FCA, Daimler, Toyota, and Honda, given our higher sales to these customers. For the year ended December 31, 2016, end-customer sales attributed to these OEMs accounted for approximately 69% of our net sales. We may make fewer sales to these customers for a variety of reasons. The loss of any one of these customers or a significant decrease in business from one or more of these customers could harm our business, 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.

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.

We depend on the outsourcing of components, modules, and assemblies by vehicle OEMs. 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 number of our major OEM customers manufacture products for their own uses that directly compete with our products. These OEMs could elect to manufacture such products for their own uses in place of the products we currently supply. 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.

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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 which require price reductions 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 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.

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. Anticipated product sales could differ significantly from actual firm orders or firm commitments, and awards of business do not represent guarantees of production volumes or revenues. While we typically enter into long-term agreements for the customers’ purchasing requirements, ranging from one to six years with automatic renewal provisions that generally result in our contracts running for the life of the Program, many customer purchase orders contain provisions that purport to 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 it is launched and we begin production. In many cases, we must commit substantial resources in preparation for production under awarded Programs well in advance of the customer’s production start date. We may not realize substantially all of the revenue from our incremental business backlog. 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.

Our failure to increase production capacity, or overexpansion of production, could harm our business and damage our customer relationships.

We may be unable to expand our business, satisfy customer requirements, maintain our competitive position, or 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 necessary 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 processes, 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. 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;

 

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.

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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, any of which 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 that we or our service providers are unable to repair in a timely fashion, or equipment manufacturers fail to timely deliver new equipment, 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 are 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.

If we experience Program launch difficulties, it could have a material adverse effect on our business.

The launch of a new Program is complex, and its success depends on a wide range of factors, including the production readiness of our and our suppliers’ manufacturing facilities and processes, tooling, equipment, employees, initial product quality, and other factors. Our failure to successfully launch new business or to contain launch costs could result in a loss of business or the incurrence of substantial unexpected costs, such as increased scrap or premium freight charges, which could have a material adverse effect on our business, financial condition, and results of operations.

A disruption in our supply or delivery chain could cause one or more of our customers to halt production.

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 labor disruptions, 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 contain nonconforming products or validate our process. 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 relationships with key third-party suppliers could be damaged or terminated.

We obtain raw materials and components from third-party suppliers. We typically source raw materials or components from single suppliers. Although we are generally able to substitute suppliers for raw materials and components without material short-term costs, 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.

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Work stoppages or production limitations at one or more of our customers’ facilities could disrupt our production volumes.

A work stoppage or other limitation on production could occur at customer facilities for any number of reasons, including as a result of disputes under existing collective bargaining agreements with labor unions, or in connection with negotiation of new collective bargaining agreements, or as a result of supplier financial distress or other production constraints or difficulties, or due to disruptions in shipping, or for other factors. A disruption in production at the facilities of our large-volume customers could 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.

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.

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.

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 intellectual property rights, but these measures 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. 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. 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.

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;

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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 or other 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.

The prices of raw materials and commodities we use are volatile.

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. Although agreements with our suppliers generally contain pass-through price adjustments, we may experience increasing costs or reduced scrap sales due to changing material prices and timing. Furthermore, 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 and, accordingly, could have a material adverse effect on our business, financial condition, and results of operations.

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 or 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 absorb raw material cost increases may lead to delivery delays, additional costs, production issues, or quality issues with 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, such price fluctuations or delays 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 a competitive cost structure.

We believe that our strong operating margins and cash flow generation are the result of our strong customer relationships, innovative metal forming process 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 customers. As a result, we may be unable to manage our operations to profitably meet current and expected market demand. Additionally, we have substantial indebtedness of approximately $1,846.1 million as of December 31, 2016. Our inability to maintain our cost structure could adversely impact our operating margins and our results of operations.

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

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 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.

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

During 2016, the Company announced the exit of its wheel bearing business in Sandusky, Ohio and the planned closure of the Sandusky facility by early 2017. The lease term of the Sandusky facility continues to 2033 at approximately $4 million per year in lease payments. 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.

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We are subject to environmental and safety requirements and risks as a result of which we may incur significant costs, liabilities, and obligations.

We are subject to a variety of environmental and safety 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 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 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 began operating at those locations. We may be subject to claims under foreign, federal, state, and local statutes, and/or common law doctrines for personal injury, property damages, natural resource damages, and other damages, as well as the investigation and cleanup of soil, surface water, groundwater, and other media. Such claims may arise 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.

We are subject to governmental regulations that are already extensive and are growing, which will increase our costs.

We and the automotive industry as a whole are subject to a variety of federal, state, local, and foreign laws and regulations, including those relating to the reporting of certain claims, and those affecting taxes and levies, healthcare costs, and safety, 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 foreign 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 antitrust) laws, anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (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 current or former 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 our business, financial condition, and results of operations.

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. Additionally, our OEM customers are subject to significant environmentally focused state, federal, 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 impact automotive vehicle production, they could have a material adverse effect on our business, financial condition, and results of operations.

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We may incur material costs related to legal proceedings.

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 claims allege damages against us relating to product warranties, environmental liabilities, regulatory violations, taxes, employment matters, or commercial or contractual disputes. Estimated warranty costs related to product warranties are accrued once the liability has become both probable and reasonably estimable, and we do not maintain insurance for nonconforming product recalls 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 are resolved unfavorably to us.

We are currently, and may in the future become, subject to legal proceedings and commercial or contractual disputes. These claims typically arise in the normal course of business and may include commercial or contractual disputes with our customers and suppliers, intellectual property matters, personal injury, product liability, environmental, safety, and employment claims. These proceedings and claims could have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to Our Workforce

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 and our ability to recruit, retain, and motivate highly-skilled sales, manufacturing, and engineering personnel. Competition for skilled employees 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 subject us to work stoppages.

Approximately 45% of our employees are members of U.S. industrial trade unions working under the terms of collective bargaining agreements or 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 other labor disruptions. 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 future negotiations will not result in labor cost increases or other terms and conditions. Any of these occurrences could have a material adverse effect on our business, financial condition, and results of operations.

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”) with respect to the underfunded United Kingdom 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. We also have unfunded or underfunded pension obligations in the U.S., Germany, France, Korea and Spain where similar changes in regulations or governmental actions could cause additional funding requirements.

17


 

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, 2016, the funded status of our pension plans was an obligation totaling $38.3 million.

Risks Related to the Global Nature of Our Company

We are subject to risks related to our global operations.

For the year ended December 31, 2016, 36% of our net sales were derived from sales to customers outside the United States. We have manufacturing facilities in Brazil, China, the Czech Republic, France, Germany, Mexico, South Korea, Spain, and the United Kingdom, and a joint venture in India, all of which accounted for 25% of our 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:

 

currency exchange rate and interest rate fluctuations;

 

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;

 

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;

 

unexpected changes in regulatory requirements;

 

increased risk of corruption and exposure to liabilities under 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;

 

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 workers’ councils;

 

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

 

adverse weather and natural disasters;

 

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.

18


 

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.

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 affect the Company’s ability to realize projected growth rates in sales and earnings.

As a result of our global operations, we generate a significant portion of our net 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 and generally hold most of our foreign cash in U.S. dollars. This strategy and these instruments may be ineffective or may not offset more than a portion of the adverse financial impact resulting from foreign currency variations. Additionally, 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 business, financial condition, and results of operations.

Risks Related to Our Capital Structure and Our Organizational Structure

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. Shares held by our directors, executive officers, and American Securities are eligible to be sold in the public market, subject to general trading restrictions and the requirements of Rule 144. 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.

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, the majority of our directors are not independent, and our compensation committee and nominating and corporate governance committee are not 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.

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 our interests and from those of our other stockholders.

As of December 31, 2016, American Securities directly or indirectly held approximately 76% of the voting power of our outstanding common stock. As a result, American Securities is 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.

19


 

The interests of American Securities may not coincide with the Company’s 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 other holders of our common stock.

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.

As of December 31, 2016, we had total indebtedness, net of unamortized discount and debt issuance costs, of $1,846.1 million, including $1,011.5 million and $233.3 million in aggregate principal amount of indebtedness under the USD Term Loan and Euro Term Loan, respectively, and $600.0 million aggregate principal amount of the Senior Notes.  As of December 31, 2016, we had an additional $236.8 million of borrowing capacity available under the Revolving Credit Facility after giving effect to $13.2 million of outstanding letters of credit. This 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 funds available for working capital, capital expenditures, acquisitions, selling and marketing efforts, product development, future business opportunities, and the ability 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 the Senior Credit Facilities, 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;

 

limiting our ability to borrow additional funds or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, product development, and other corporate purposes;

 

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.

The occurrence of any one or more of these events could have a material adverse effect on our business, financial condition, and results of operations. If we add new debt to our outstanding debt levels, the risks related to our indebtedness would increase.

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.

20


 

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 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.

Our ability to pay cash dividends on our common stock is subject to our compliance with applicable law and depends 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. 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 or agreements of our subsidiaries, including agreements governing the Senior Credit Facilities and the Registered Notes. Future agreements may also limit our ability to pay dividends. There can be no assurance that we will continue to pay dividends.

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 any 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;

 

a classified board of directors;

 

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

 

advance notice requirements for stockholder proposals and nominations.

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.

21


 

Our amended and restated certificate of incorporation provides that, subject to certain exceptions, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our amended and restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by, or any wrongdoing by, any of our directors, officers, or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation (including as it may be amended from time to time) or our bylaws, (iv) any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or our bylaws, or (v) any other action asserting a claim against us that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which 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 file. Corporate tax reform continues to be a priority in the U.S. and other jurisdictions. 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. 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 business, financial condition, and results of operations.

The mix of profits and losses in the various jurisdictions in which we conduct our business may adversely impact our overall tax rate.

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 business, financial condition, and results of operations.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

We are headquartered in Southfield, Michigan in 25,000 square feet of leased offices. These offices are utilized for management offices as well as certain sales, human resources, legal, finance, and audit functions. Our manufacturing is conducted in 55 production facilities strategically located close to our customers’ operations in 11 countries throughout North and South America, Europe, and Asia. Our 61 worldwide locations also support sales, engineering, administrative, and distribution functions. Approximately 39 of our facilities are leased or subject to land leases. We believe that our facilities are suitable and adequate to meet our current and reasonably anticipated needs.

22


 

The table below highlights our principal locations across the world.

 

Region

 

Segment

 

Location

 

Primary Process Description

North America

 

Corporate

 

Southfield, MI

 

Headquarters / Administrative / Sales / Finance

 

 

Grede

 

Bessemer, AL

 

Foam Pattern Molding

 

 

Grede

 

Brewton, AL

 

Iron Casting

 

 

Grede

 

Columbiana, AL

 

Iron Casting

 

 

Grede

 

New Castle, IN

 

Iron Casting

 

 

Grede

 

Kingsford, MI

 

Iron Casting

 

 

Grede

 

St. Cloud, MN

 

Iron Casting

 

 

Grede

 

Biscoe, NC

 

Iron Casting & Machining

 

 

Grede

 

Browntown, WI

 

Iron Casting

 

 

Grede

 

Menomonee Falls, WI

 

Machining

 

 

Grede

 

Reedsburg, WI

 

Iron Casting

 

 

Grede

 

Wauwatosa, WI

 

Iron Casting

 

 

Grede

 

El Carmen, Mexico

 

Iron Casting

 

 

HHI

 

Fort Smith, AR

 

Assembly & Distribution

 

 

HHI

 

Fort Smith, AR

 

Assembly & Distribution

 

 

HHI

 

Paris, AR

 

Machining & Assembly

 

 

HHI

 

Subiaco, AR

 

Powder Metal & Machining

 

 

HHI

 

Bolingbrook, IL

 

Machining & Assembly

 

 

HHI

 

Chicago, IL

 

Forging

 

 

HHI

 

Chicago, IL

 

Forging

 

 

HHI

 

Naperville, IL

 

Assembly

 

 

HHI

 

Columbus, IN

 

Forging

 

 

HHI

 

Columbus, IN

 

Forging

 

 

HHI

 

Remington, IN

 

Forging

 

 

HHI

 

Coldwater, MI

 

Forging

 

 

HHI

 

Fraser, MI

 

Forging & Machining

 

 

HHI

 

Royal Oak, MI

 

Forging / Administrative / Finance

 

 

HHI

 

Troy, MI

 

Forging

 

 

HHI

 

Sandusky, OH

 

Machining & Assembly

 

 

HHI

 

Aguascalientes, Mexico

 

Warehouse

 

 

Metaldyne

 

Bluffton, IN

 

Machining & Assembly

 

 

Metaldyne

 

Fremont, IN

 

Machining & Assembly

 

 

Metaldyne

 

North Vernon, IN

 

Powder Metal & Machining

 

 

Metaldyne

 

Litchfield, MI

 

Machining & Assembly

 

 

Metaldyne

 

Plymouth, MI

 

Administrative / Sales / Finance / Engineering

 

 

Metaldyne

 

Warren, MI

 

Tooling

 

 

Metaldyne

 

Twinsburg, OH

 

Aluminum Die Casting

 

 

Metaldyne

 

Ridgway, PA

 

Powder Metal & Machining

 

 

Metaldyne

 

St. Marys, PA

 

Powder Metal & Machining

 

 

Metaldyne

 

Ramos Arizpe, Mexico

 

Powder Metal & Machining

 

 

Metaldyne

 

Ramos Arizpe, Mexico

 

Machining & Assembly

 

 

 

 

 

 

 

South America

 

Metaldyne

 

Indaiatuba, Brazil

 

Powder Metal & Machining

 

 

 

 

 

 

 

Europe

 

Metaldyne

 

Oslavany, Czech Republic

 

Machining & Assembly

 

 

Metaldyne

 

Zbysov, Czech Republic

 

Machining & Assembly

 

 

Metaldyne

 

Halifax, England

 

Machining & Assembly

 

 

Metaldyne

 

Decines, France (Lyon #2)

 

Machining & Assembly

 

 

Metaldyne

 

Lyon, France

 

Machining & Assembly

 

 

Metaldyne

 

Dieburg, Germany

 

Sales / Engineering

 

 

Metaldyne

 

Nurnberg, Germany

 

Machining & Assembly

 

 

Metaldyne

 

Zell, Germany

 

Forging & Machining

 

 

Metaldyne

 

Kopstal, Luxembourg

 

Administrative / Finance

23


 

Region

 

Segment

 

Location

 

Primary Process Description

 

 

Metaldyne

 

Barcelona, Spain

 

Machining & Assembly

 

 

Metaldyne

 

Barcelona, Spain

 

Machining & Assembly

 

 

Metaldyne

 

Valencia, Spain

 

Powder Metal

 

 

 

 

 

 

 

Asia

 

HHI

 

Huzhou City, China (JV)

 

Forging

 

 

Metaldyne

 

Suzhou, China

 

Powder Metal, Aluminum Die Casting, Machining & Assembly

 

 

Metaldyne

 

Suzhou, China

 

Powder Metal, Aluminum Die Casting, Machining & Assembly

 

 

Metaldyne

 

Jamshedpur, India (JV)

 

Machining & Assembly

 

 

Metaldyne

 

Yokohama, Japan

 

Sales / Engineering

 

 

Metaldyne

 

Pyeongtaek, South Korea

 

Machining & Assembly

 

 

 

 

 

 

 

 

ITEM 3.

LEGAL PROCEEDINGS

The Company’s subsidiary, Grede Wisconsin Subsidiaries LLC (“Grede Wisconsin”), is currently under investigation by the U.S. Department of Justice and the Environmental Protection Agency for alleged Clean Air Act violations and alleged obstruction of justice relating to the January 2012 removal of debris from the roof of a heat treat oven that was purported to contain asbestos at Grede Wisconsin’s now closed facility in Berlin, Wisconsin.  The United States Attorney, Eastern District of Wisconsin, indicated to our attorneys handling this matter that the government intends to imminently seek an indictment relating to this matter.   If an indictment is brought, the Company intends to defend against this matter.

On February 16, 2017, a purported class action complaint was filed in the United States District Court for the Eastern District of Michigan, captioned Stephen Bushansky v. Metaldyne Performance Group Inc., et al., Case No. 2:17-cv-10508-MAG-DRG. The complaint asserts claims for alleged violations of Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and names the Company and the members of the Company’s board of directors as defendants.  The complaint alleges, among other things, that the defendants issued materially incomplete and misleading disclosures in the preliminary registration statement on Form S-4 relating to the AAM Merger.  The complaint seeks, among other things, injunctive relief and an award of attorneys’ fees. The Company and the members of the Company’s board of directors believe that the claims asserted in this lawsuit are without merit.

In addition, from time to time we are subject to various legal actions and claims incidental to our business, including those arising out of breach of contracts, product warranties, regulatory matters, and employment-related matters. It is our opinion that the outcome of such matters will not have a material adverse impact on our consolidated financial position, results of operations, or cash flows. However, the final amounts required to resolve these matters could differ materially from our recorded estimates. See Note 20 of the notes to the consolidated financial statements contained within “Item 8. Financial Statements and Supplementary Data.”

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

24


 

PART II

ITEM 5.

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Equity

The Company’s common stock is listed on the NYSE and trades under the symbol MPG.  As of March 2, 2017, there were 22 holders of record of our common stock.

For the period from December 12, 2014 (the date the Company’s common stock began trading on the NYSE) to December 31, 2014, the high and low prices per share of our common stock were $17.59 and $14.57, respectively.  The high and low sale prices per share of the Company’s common stock for each quarter of fiscal years 2016 and 2015 were as follows:

 

Quarter Ended

 

High

 

 

Low

 

December 31, 2016

 

$

23.00

 

 

 

13.90

 

October 2, 2016

 

 

16.52

 

 

 

13.12

 

July 3, 2016

 

 

16.91

 

 

 

12.55

 

April 3, 2016

 

 

18.49

 

 

 

10.87

 

December 31, 2015

 

 

24.62

 

 

 

17.64

 

September 27, 2015

 

 

22.50

 

 

 

17.51

 

June 28, 2015

 

 

20.06

 

 

 

17.27

 

March 29, 2015

 

 

20.72

 

 

 

16.02

 

 

Dividends

The following sets forth all dividends declared and paid by us since our formation on June 9, 2014:

 

Date Declared

 

Date Paid

 

Dividend

Per Share

 

November 2, 2016

 

December 9, 2016

 

$

0.0925

 

August 3, 2016

 

September 20, 2016

 

 

0.0925

 

May 4, 2016

 

June 21, 2016

 

 

0.0925

 

February 24, 2016

 

April 26, 2016

 

 

0.0900

 

October 28, 2015

 

December 3, 2015

 

 

0.0900

 

July 29, 2015

 

August 31, 2015

 

 

0.0900

 

March 10, 2015

 

May 26, 2015

 

 

0.0900

 

 

On February 24, 2017, our board of directors declared a dividend of $0.0925 per share, payable March 24, 2017 to stockholders of record as of March 10, 2017.

Our ability to pay dividends is restricted under our indenture agreements. The indenture agreements restrict the payment of dividends except (i) to pay reasonable estimated amount of taxes as long as not prohibited by applicable laws, (ii) to pay legal, accounting, and reporting expenses, (iii) to pay general and administrative costs and expenses, and reasonable directors fees, and expenses, (iv) to repurchase stock owned by employees, (v) for management or similar fees, (vi) to pay franchise or similar taxes to maintain corporate existence, and (vii) to pay dividends up to $30.0 million or 6% of the net cash proceeds from an underwritten public offering of our common stock. For additional information regarding the indenture agreements, see Note 11 of the notes to the consolidated financial statements contained within “Item 8. Financial Statements and Supplementary Data.”

Issuer Purchases of Equity Securities

 

On February 24, 2016, our board of directors authorized a share repurchase program (the “Share Repurchase Program”). The Share Repurchase Program, as amended on August 3, 2016, authorized the Company to purchase shares of its common stock for an aggregate repurchase price not to exceed $35.0 million. Subject to applicable rules and regulations, shares could be repurchased through open market purchases, privately negotiated transactions, or otherwise. On November 3, 2016, the Company suspended the Share Repurchase Program due to the pending AAM Merger.  During the fourth quarter ended December 31, 2016, and prior to suspending the Share Repurchase Program, the Company repurchased 238,457 shares of common stock at an average price per share of $15.67. As of December 31, 2016, cumulative shares repurchased totaled 1,898,261 at an average purchase price per share of $15.56. The repurchased shares are presented as common stock held in treasury, at cost, on the consolidated balance sheets.

 

25


 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

 

 

As of December 31, 2016

 

 

 

 

Number of

securities to be

issued upon exercise

of outstanding

options, warrants

and rights

 

 

Weighted-

average

exercise price of

outstanding

options, warrants

and rights

 

 

Number of

securities remaining

available for future

issuance under

equity compensation

plans

 

 

 

 

(In millions)

 

 

 

 

 

 

(In millions)

 

 

Equity compensation plans approved by

   stockholders

 

 

7.1

 

(1)

$

13.15

 

(2)

 

0.7

 

(3)

Equity compensation plans not approved by

   stockholders

 

N/A

 

 

N/A

 

 

N/A

 

 

 

(1)

Amount includes equity awards issued by HHI, Metaldyne, and Grede prior to the Combination.  In conjunction with the Combination on August 4, 2014, these awards were converted into options to purchase shares of MPG common stock (the “Converted Options”).  As of December 31, 2016, there were 3.0 million Converted Options outstanding.      

(2)

The calculation of weighted-average exercise price excludes 0.5 million of outstanding restricted share awards and 1.0 million of outstanding restricted stock unit awards.

(3)

All of the securities remaining for future issuance are available under our 2014 Equity Incentive Plan, which authorized the grant of equity awards to purchase up to 5.9 million shares of MPG common stock.  All equity awards granted on or after August 4, 2014 were issued under the 2014 Equity Incentive Plan.

26


 

Performance Graph

The line graph below compares the cumulative total stockholder return on the S&P Mid Cap 400 Index, Metaldyne Performance Group Inc., and a peer group of companies for the period from December 12, 2014 (the date the Company’s common stock began trading on the NYSE) to December 31, 2016, assuming a fixed investment of $100 made at the respective closing prices on December 12, 2014 and the reinvestment of cash dividends.

 

 

 

 

December 12, 2014

 

 

December 31, 2014

 

 

December 31, 2015

 

 

December 31, 2016

 

MPG

 

$

100.00

 

 

 

114.89

 

 

 

121.63

 

 

 

152.71

 

S&P MID CAP 400 Index

 

 

100.00

 

 

 

103.57

 

 

 

99.73

 

 

 

118.41

 

Peer Group (1)

 

 

100.00

 

 

 

105.54

 

 

 

96.13

 

 

 

89.10

 

 

(1)

The peer group consisted of BorgWarner Inc., Delphi Automotive PLC, American Axle and Manufacturing Holdings Inc., Linamar Corp, Dana Holding Corporation, and Magna International.

 

 

Recent Sales of Unregistered Securities

None.

27


 

ITEM 6.

SELECTED FINANCIAL DATA

Our historical results are not necessarily indicative of future operating results. You should read the information set forth below in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and included “Item 8. Financial Statements and Supplemental Data.”

 

 

 

Year Ended December 31,

 

 

Successor Period (a)

 

 

 

Predecessor Period (a)

 

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

2012

 

 

 

 

(In millions, except per share data)

 

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

2,790.7

 

 

 

3,047.3

 

 

 

2,717.0

 

 

 

2,017.3

 

 

 

205.3

 

 

 

 

680.5

 

 

Cost of sales

 

 

2,321.5

 

 

 

2,531.3

 

 

 

2,294.1

 

 

 

1,708.7

 

 

 

199.5

 

 

 

 

559.0

 

 

Gross profit

 

 

469.2

 

 

 

516.0

 

 

 

422.9

 

 

 

308.6

 

 

 

5.8

 

 

 

 

121.5

 

 

Selling, general and administrative expenses

 

 

242.3

 

 

 

249.6

 

(c)

 

194.6

 

 

 

123.2

 

 

 

14.4

 

 

 

 

116.6

 

 

Acquisition costs

 

 

 

 

 

 

 

 

13.0

 

 

 

 

 

 

25.9

 

 

 

 

13.4

 

 

Goodwill impairment

 

 

 

 

 

 

 

 

11.8

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

 

226.9

 

 

 

266.4

 

 

 

203.5

 

 

 

185.4

 

 

 

(34.5

)

 

 

 

(8.5

)

 

Interest expense, net

 

 

103.5

 

 

 

107.5

 

 

 

99.9

 

 

 

74.7

 

 

 

11.1

 

 

 

 

25.8

 

 

Loss on debt extinguishment

 

 

 

 

 

0.4

 

 

 

60.7

 

 

 

 

 

 

 

 

 

 

 

 

Other, net

 

 

(11.9

)

 

 

(15.4

)

 

 

(11.3

)

 

 

17.8

 

 

 

1.5

 

 

 

 

2.4

 

 

Other expense. net

 

 

91.6

 

 

 

92.5

 

 

 

149.3

 

 

 

92.5

 

 

 

12.6

 

 

 

 

28.2

 

 

Income (loss) before tax

 

 

135.3

 

 

 

173.9

 

 

 

54.2

 

 

 

92.9

 

 

 

(47.1

)

 

 

 

(36.7

)

 

Income tax expense (benefit)

 

 

38.4

 

 

 

48.1

 

 

 

(19.1

)

(b)

 

35.0

 

 

 

(15.2

)

 

 

 

(11.1

)

 

Net income (loss)

 

 

96.9

 

 

 

125.8

 

 

 

73.3

 

 

 

57.9

 

 

 

(31.9

)

 

 

 

(25.6

)

 

Income attributable to noncontrolling interest

 

 

0.6

 

 

 

0.4

 

 

 

0.4

 

 

 

0.3

 

 

 

 

 

 

 

0.2

 

 

Net income (loss) attributable to stockholders

 

$

96.3

 

 

 

125.4

 

 

 

72.9

 

 

 

57.6

 

 

 

(31.9

)

 

 

 

(25.8

)

 

Net income (loss) per share attributable to stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.43

 

 

 

1.86

 

 

 

1.09

 

 

 

0.86

 

 

 

(0.48

)

 

 

 

(1.46

)

 

Diluted

 

 

1.39

 

 

 

1.80

 

 

 

1.06

 

 

 

0.86

 

 

 

(0.48

)

 

 

 

(1.46

)

 

Basic weighted average shares outstanding

 

 

67.5

 

 

 

67.3

 

 

 

67.1

 

 

 

67.1

 

 

 

67.1

 

 

 

 

17.7

 

 

Diluted weighted average shares outstanding

 

 

69.3

 

 

 

69.7

 

 

 

68.5

 

 

 

67.1

 

 

 

67.1

 

 

 

 

17.7

 

 

Statement of Cash Flows Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

$

318.6

 

 

 

330.0

 

 

 

305.4

 

 

 

234.3

 

 

 

(1.8

)

 

 

 

64.7

 

 

Cash flows from investing activities

 

 

(208.2

)

 

 

(222.7

)

 

 

(984.9

)

 

 

(116.7

)

 

 

(1,515.0

)

 

 

 

(31.3

)

 

Cash flows from financing activities

 

 

(62.2

)

 

 

(86.2

)

 

 

776.7

 

 

 

(91.1

)

 

 

1,557.1

 

 

 

 

(27.3

)

 

Effect of exchange rates

 

 

(6.7

)

 

 

(9.4

)

 

 

(8.9

)

 

 

1.4

 

 

 

 

 

 

 

0.3

 

 

Net increase in cash and cash equivalents

 

$

41.5

 

 

 

11.7

 

 

 

88.3

 

 

 

27.9

 

 

 

40.3

 

 

 

 

6.4

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

209.7

 

 

 

168.2

 

 

 

156.5

 

 

 

68.2

 

 

 

40.3

 

 

 

Not applicable

 

 

Property and equipment, net

 

 

831.6

 

 

 

786.0

 

 

 

750.2

 

 

 

539.5

 

 

 

546.2

 

 

 

Not applicable

 

 

Total assets (d)

 

 

3,190.5

 

 

 

3,157.6

 

 

 

3,203.4

 

 

 

2,178.5

 

 

 

2,217.0

 

 

 

Not applicable

 

 

Long-term debt, including capital lease obligations (d)

 

 

1,845.1

 

 

 

1,864.1

 

 

 

1,939.0

 

 

 

1,221.4

 

 

 

1,042.5

 

 

 

Not applicable

 

 

Total debt (d)

 

 

1,846.1

 

 

 

1,864.8

 

 

 

1,940.6

 

 

 

1,241.7

 

 

 

1,049.8

 

 

 

Not applicable

 

 

Total liabilities (d)

 

 

2,511.3

 

 

 

2,518.6

 

 

 

2,678.5

 

 

 

1,853.3

 

 

 

1,696.5

 

 

 

Not applicable

 

 

Total stockholders’ equity

 

 

679.2

 

 

 

639.0

 

 

 

524.9

 

 

 

325.0

 

 

 

520.5

 

 

 

Not applicable

 

 

 

(a)

The period from January 1, 2012 to October 5, 2012 is referred to as the “Predecessor Period.” The period from October 6, 2012 to December 31, 2012 is referred to as the “Successor Period.”

(b)

Includes a $31.6 million deferred tax benefit attributable to a change in the assertion that the earnings of certain foreign subsidiaries were indefinitely reinvested in 2014.

(c)

Includes $11.7 million of stock-based compensation expense associated with share based award modifications as part of certain employee separation agreements in 2015.

(d)

Effective April 3, 2016, we adopted Accounting Standards Update (ASU) No. 2015-03, Interest – Imputation of Interest (Topic 835-30): Simplifying the Presentation of Debt Issuance Costs and used the retrospective application method to adjust total assets, long-term debt, total debt, and total liabilities balances.  All prior period balances have been retrospectively adjusted to conform with the current presentation.

 

 

28


 

ITEM 7.

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. See “Item 1A. Risk Factors,” 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 “Item 1A. 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 “Item 1A. Risk Factors,” and “Item 6. Selected Historical Financial Data” and the notes to the consolidated financial statements contained within “Item 8. Financial Statements and Supplementary Data.”

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 Southfield, Michigan, and our manufacturing is conducted in 55 production facilities located throughout North and South America, Europe, and Asia.

Our History, the Combination and the IPO

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, driveline 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 “HHI Transaction”). 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 Powertrain components for the global light vehicle markets. These components include connecting rods, VVT components, balance shaft systems, engine crankshaft dampers, net formed differential gears and pinions and assemblies, differential assemblies, valve bodies, hollow and solid shafts, clutch modules, and assembled 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 in 2000 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”). 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 (agriculture, construction, mining, rail, wind energy and oil field) vehicle and equipment 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 an 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 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).

29


 

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. 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, Metaldyne, and Grede were carried over to MPG. See Note 2 of the notes to the consolidated financial statements contained within “Item 8. Financial Statements and Supplementary Data.”

The Refinancing

On October 20, 2014, MPG Holdco, our wholly owned subsidiary, entered into senior credit facilities in the aggregate amount of $1,600.0 million (the “Senior Credit Facilities”). The Senior Credit Facilities provide for (i) the seven-year $1,350.0 million Term Loan Facility and (ii) the five-year $250.0 million revolving credit facility (the “Revolving Credit Facility”). The Senior Credit Facilities rank guaranteed by MPG and substantially all of our existing and future domestic restricted subsidiaries and are secured by substantially all of our and the guarantors’ assets on a first lien basis, subject, in each case, to certain limitations. On May 8, 2015, the Term Loan Facility was refinanced pursuant to an amendment (the “First Amendment”) with a $1,072.6 million U.S. Dollar denominated term loan (the “USD Term Loan”) and a €225.0 million term loan (the “Euro Term Loan” and together, the “Refinanced Term Loan Facility”).  The Refinanced Term Loan Facility has substantially the same terms as the Term Loan Facility, except that the Refinanced Term Loan Facility has reduced interest rate margins.  On October 20, 2014, MPG Holdco also entered into an indenture pursuant to which it issued $600.0 million aggregate principal amount of its 7.375% senior notes due 2022 (the “Senior Notes”). The Senior Notes are pari passu in right of payment with the Senior Credit Facilities, but are effectively subordinated to the Senior Credit Facilities to the extent of the value of the assets securing such indebtedness. For further information on the Senior Credit Facilities, see “—Liquidity and Capital Resources.”

The net proceeds of the Senior Notes and the borrowings under the Senior Credit Facilities, together with cash on hand, were used to prepay all amounts outstanding under each of HHI, Metaldyne, and Grede’s existing senior secured credit facilities as described below:

 

the HHI Credit Facilities consisting of (i) the HHI Term Loans in an original aggregate principal amount of $735.0 million and (ii) the $75.0 million HHI Revolver;

 

the Metaldyne Credit Facilities consisting of (i) the U.S. Dollar Metaldyne Term Loans in an original aggregate principal amount of $537.0 million, (ii) the Euro denominated Metaldyne Term Loans in an original aggregate principal amount of €100.0 million, and (iii) the $75.0 million Metaldyne Revolver; and

 

the Grede Credit Facilities consisting of (i) Grede Term Loans in an original aggregate principal amount of $600.0 million and (ii) the $75.0 million Grede Revolver.

Collectively, we refer to these refinancing transactions and the payment of fees and expenses related to the foregoing as the “Refinancing.”

The IPO

On December 12, 2014 a portion of the Company’s common stock was offered for sale by affiliates of American Securities. As of December 31, 2016, American Securities owned 76% of our outstanding common stock. As a result, American Securities is able to exert significant voting influence over fundamental and significant corporate matters and transactions. “Item 1A. Risk Factors—Risks Related Our Capital Structure and Our Organizational Structure.”

Basis of Presentation

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

 

the results of HHI and Metaldyne for the years ended December 31, 2014, 2015, and 2016; and

 

the results of Grede from June 2, 2014 through December 31, 2014 and for the years ended December 31, 2015 and 2016.

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.

30


 

Factors Affecting the Comparability of Our Results of Operations

As a result of a number of factors, our results of operations for 2016, 2015, and 2014 are not comparable.  Also, 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. The following is a brief discussion of the key factors impacting the comparability of our results of operations.

The Grede Transaction and the Combination

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

 

Our Historical Results Do Not Reflect All of Our Businesses. Our results for the periods prior to June 2, 2014, the date of the Grede Transaction, do not include the results of Grede.