American Axle & Manufacturing Holdings, Inc. (AAM) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The supplied filing is for American Axle & Manufacturing Holdings, Inc. (NYSE: AXL), not a registrant named Dauch Corp. Amounts below are in millions of dollars unless otherwise stated.
Business context
AAM is a global automotive supplier of driveline and metal-forming products, with approximately 20,000 associates and nearly 80 facilities in 17 countries. Its reportable segments are Driveline and Metal Forming. For the first nine months of 2021, GM represented about 37% of sales, Stellantis 19%, and Ford 12%.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,213.1 | $1,414.1 | $3,921.5 | $3,272.9 |
| Gross profit | $165.6 | $249.8 | $582.7 | $346.2 |
| Gross margin | 13.7% | 17.7% | 14.9% | 10.6% |
| Operating income (loss) | $46.3 | $152.0 | $208.2 | $(499.0) |
| Operating margin | 3.8% | 10.7% | 5.3% | (15.2)% |
| Net income (loss) attributable to AAM | $(2.4) | $117.2 | $52.2 | $(597.3) |
| Diluted EPS | $(0.02) | $0.99 | $0.44 | $(5.28) |
| Total Segment Adjusted EBITDA | $183.2 | $297.1 | $668.7 | $458.3 |
Cash from operations was $436.0 for the first nine months, versus $246.4 a year earlier. Capital expenditures were $115.8, and net cash used in investing activities was $94.9. Financing activities used $394.2; cash declined by $56.3 to $500.7.
At September 30, 2021, total debt was $3,154.0, including $3,104.1 of long-term debt, net of issuance costs. Cash was $500.7, implying approximately $2,653 of debt net of cash. Current assets were $1,822.0 and current liabilities $1,003.2. AAM reported nearly $1.5 billion of liquidity: about $501 of cash, $895 of revolving-credit availability, and $62 of foreign-credit availability. There were no significant debt maturities before 2024.
Material changes versus comparable periods
- Third-quarter sales fell $201.0 year over year. Management estimated the semiconductor shortage reduced Q3 sales by about $245; metal pass-throughs and foreign exchange added about $86. The prior-year quarter was itself affected by an estimated $87 of COVID-related lost sales.
- Despite nine-month sales rising $648.6, Q3 gross profit, operating income, and segment adjusted EBITDA declined year over year. The nine-month sales comparison benefited from the pandemic-related production decline in 2020; management estimated COVID reduced 2020 nine-month sales by $1,203, while the 2021 semiconductor shortage reduced 2021 nine-month sales by about $471.
- Nine-month operating results improved substantially from 2020, which included a $510 goodwill impairment charge. The 2021 nine-month result also included a $19.4 unrealized gain on REE Automotive shares and $34.0 of debt refinancing and redemption costs.
- Debt declined from $3,500.6 at December 31, 2020. AAM issued $600 of 5.00% notes due 2029 and used the proceeds to redeem the remaining $600 of 6.25% notes due 2025; it also redeemed an additional $100 of those notes and prepaid term loans. Reported weighted-average debt interest was 5.6% at quarter-end, versus 5.8% at year-end 2020.
- Inventory increased to $417.9 from $323.2 at year-end, while cash decreased to $500.7 from $557.0.
Outlook, commentary, risks and unusual items
- Management expected semiconductor, labor, metal and other supply-chain constraints to continue into 2022, with production volatility, downtime, higher inventory and labor costs affecting results and cash flow. The ultimate impact was not known.
- Management expected 2021 capital spending to be less than 4% of sales; full-year interest expense of approximately $195–$205; restructuring and acquisition-related cash payments of $55–$65; and $45–$55 of restructuring charges. It also expected up to $10 of integration charges in 2021.
- The Malvern facility fire and relocation generated $11.1 of net pretax income in the first nine months of 2021 after estimated insurance recoveries. A $16.9 insurance receivable remained at September 30; settlement could continue into 2022, and final eligible costs and recoveries were uncertain.
- AAM accelerated about $32 of depreciation in the first nine months because a major customer planned to cease production in Brazil; management did not expect additional impact in Q4 2021.
- Other important risks include dependence on major automakers, cyclicality of vehicle production, customer and supplier labor disruptions, commodity and freight costs, foreign-exchange and interest-rate exposure, tax examinations, warranty obligations, and environmental and legal matters. AAM stated that disclosed legal matters were not then expected to have a material adverse effect, while noting tax-audit outcomes could be material. No material changes to the risk factors in the 2020 Form 10-K were reported.
- Management said disclosure controls and procedures were effective as of September 30, 2021. No formal sales or earnings guidance is stated in the supplied filing text.
Most important facts for investors to verify
- Whether semiconductor availability and customer production recover as assumed, and how that affects volumes, margins, working capital and cash generation.
- The terms, covenant headroom and refinancing needs of the debt structure, including the impact of the 2021 refinancing and available revolver capacity.
- Whether the reported liquidity remains adequate as inventory, restructuring payments, capital spending and debt service evolve.
- The final costs and insurance recoveries associated with the Malvern fire and production relocation.
- The sustainability of reported earnings, including the effects of debt-redemption charges, the REE fair-value gain, tax benefits and prior-year impairment comparisons.
- Exposure to the three largest customers, and potential changes in their production plans, programs or sourcing decisions.