American Axle & Manufacturing Holdings, Inc. (AAM) — Q2 2021 Form 10-Q
Filing identity: Although the request identifies Dauch Corp, the supplied filing is for American Axle & Manufacturing Holdings, Inc. It covers the quarter and six months ended June 30, 2021; dollar amounts are in millions unless stated otherwise.
Business context and period
AAM is a global automotive supplier of driveline and metal-forming products, with about 20,000 associates and nearly 80 facilities in 17 countries. Results are highly tied to automotive production. The year-earlier quarter was severely disrupted by COVID-19 production declines, so year-over-year improvement compares against an unusually weak base. AAM reorganized its segments in 2021 and retrospectively restated 2020 segment comparisons.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First six months 2021 | First six months 2020 |
|---|---|---|---|---|
| Net sales | $1,283.3 | $515.3 | $2,708.4 | $1,858.8 |
| Gross profit (loss) | $190.0 | $(98.9) | $417.1 | $96.4 |
| Gross margin | 14.8% | (19.2)% | 15.4% | 5.2% |
| Operating income (loss) | $66.4 | $(205.6) | $161.9 | $(651.0) |
| Operating margin | 5.2% | (39.9)% | 6.0% | (35.0)% |
| Net income (loss) attributable to AAM | $16.0 | $(213.2) | $54.6 | $(714.5) |
| Diluted EPS | $0.13 | $(1.88) | $0.46 | $(6.33) |
| Segment Adjusted EBITDA (non-GAAP) | $222.6 | $(52.1) | $485.5 | $161.2 |
Revenue rebounded with higher production volumes; metal-market pass-throughs and foreign-exchange translation also contributed. Management estimated semiconductor-related production reductions lowered sales by about $162 million in Q2 and $225 million in the six-month period. Segment Adjusted EBITDA improved in both Driveline and Metal Forming, which management attributed to higher volumes, improved operating performance and cost control, partly offset by higher metal and commodity costs.
- Cash flow: Operating cash flow was $346.2 for the first six months, versus an outflow of $3.1 in 2020. Investing cash outflow was $74.3, including $82.4 of capital expenditure; financing cash outflow was $240.2, principally reflecting debt repayments. Cash increased $30.7 to $587.7.
- Liquidity: AAM reported more than $1.5 billion of liquidity at June 30: $587.7 cash, $895.2 available under its revolving facility and $60.7 available under foreign facilities. Current assets were $1,950.5 and current liabilities $1,152.1.
- Debt: Gross debt was $3,273.2, down from $3,500.6 at year-end 2020; long-term debt, net of issuance costs, was $3,118.5, plus $116.5 current debt. The weighted-average interest rate was 5.9%. AAM made $247.3 of voluntary term-loan prepayments during the first half.
Material changes and unusual items
- Q2 sales rose from $515.3 to $1,283.3, while first-half sales rose from $1,858.8 to $2,708.4. Management attributed much of the comparison to COVID-related production declines in 2020, estimated at $947 million of Q2 sales and $1,116 million for the first half.
- The first-half 2020 comparison included a $510.0 goodwill impairment charge, with no corresponding charge in 2021. This materially affects the operating-loss comparison.
- Malvern facility fire: first-half 2021 results included $5.4 net pre-tax income from fire-related charges and estimated insurance recoveries. A $20.6 insurance recovery receivable remained at June 30; the claim and relocation-cost estimates were not final.
- Restructuring and acquisition-related costs were $33.4 in the first half. The Emporium, Pennsylvania facility acquisition had a $14.9 purchase price, including $10.0 deferred consideration; reported operating results were insignificant. Sale of a consolidated joint-venture interest resulted in a $2.7 loss.
- Following quarter-end, AAM paid $100 of principal and $1.8 accrued interest to redeem part of its 6.25% notes due 2025, and recorded a $3.1 early-redemption premium and $1.4 debt-cost write-off. AAM also disclosed that its REE Automotive investment, carried at $3.0 at June 30, was valued at about $41 million on July 29 after REE became publicly traded; shares were subject to a 180-day transfer restriction.
Outlook, risks and contingencies
- No specific full-year sales or earnings guidance is stated in the supplied filing. Management expected 2021 capital spending of about 4%–4.5% of sales, interest expense of $195–$205, restructuring charges of $50–$65, and about $5 of integration charges.
- Management expected regulatory pension funding below $1 in 2021 and net cash payments for other postretirement benefits of about $17. It also expected restructuring and acquisition-related cash payments of $50–$65.
- Management said the semiconductor shortage could continue to reduce automotive production; the ultimate effect on sales and results was uncertain. COVID-19 resurgence, customer production decisions, raw-material and freight costs, and customer concentration are also material risks. GM represented about 38% of first-half sales, Stellantis 19%, and Ford 11%.
- Other disclosed exposures include foreign-exchange and interest-rate movements, debt covenant compliance and financing access, warranty and product claims, tax audits and valuation allowances, labor relations, environmental obligations, cybersecurity, and execution of program launches. Management did not believe current litigation or environmental matters would have a material adverse effect, but tax audit outcomes could be material.
- The company stated that disclosure controls and procedures were effective at June 30, 2021. It reported no material change in risk factors from its 2020 Form 10-K.
Important facts for investors to verify
- Whether semiconductor constraints and customer production changes persist, and how they affect volumes, mix and margins.
- How much of the year-over-year recovery reflects the unusually depressed 2020 comparison versus durable improvement in operations.
- Cash conversion and working-capital trends, including inventory growth and the timing and collectability of Malvern fire insurance recoveries.
- Debt reduction, interest costs, covenant headroom and remaining liquidity after the July 2021 note redemption.
- Actual restructuring spending versus the $50–$65 million estimate, and progress on facility relocation and integration initiatives.
- Exposure to major customers, tax examinations, warranty estimates and the post-quarter fair-value changes in the REE investment.