Business context and reporting period
This Form 10-Q is for the quarter ended June 30, 2020. The registrant is American Axle & Manufacturing Holdings, Inc. (AAM), a global automotive supplier of driveline and metal-forming products; this differs from the “Dauch Corp” company label in the request. AAM reported Driveline and Metal Forming as its operating segments. The prior-year comparison includes U.S. Casting operations sold in the fourth quarter of 2019.
Financial performance and liquidity
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $515.3 | $1,704.3 | $1,858.8 | $3,423.5 |
| Gross profit (loss); margin | $(98.9); (19.2)% | $248.3; 14.6% | $96.4; 5.2% | $470.5; 13.7% |
| Operating income (loss); margin | $(205.6); (39.9)% | $119.9; 7.0% | $(651.0); (35.0)% | $214.3; 6.3% |
| Net income (loss) attributable to AAM | $(213.2) | $52.5 | $(714.5) | $94.1 |
| Diluted EPS | $(1.88) | $0.45 | $(6.33) | $0.81 |
| Operating cash flow | Not separately stated for the quarter | $(3.1) | $136.9 | |
| Capital expenditures | Not separately stated for the quarter | $105.6 | $237.5 |
Q2 segment adjusted EBITDA was a loss of $52.1 million, compared with income of $266.0 million a year earlier: Driveline $(31.2) million and Metal Forming $(20.9) million. For the first half, segment adjusted EBITDA was $161.2 million versus $511.0 million.
At June 30, cash and cash equivalents were $893.3 million. Total debt was $4,188.4 million, including $200.0 million drawn on the revolving facility; long-term debt, net of issuance costs, was $3,561.4 million. AAM reported more than $1.6 billion of liquidity, including approximately $691 million of available revolving-credit capacity and $79 million available under foreign credit facilities. Stockholders’ equity was $198.8 million, down from $980.4 million at year-end 2019.
Material changes versus the prior comparable period
- Sales fell sharply amid COVID-19-related automotive production shutdowns. Management estimated COVID-19 reduced sales by $947 million in Q2 and $1,116 million in the first half; it estimated the associated gross-profit impact at $299 million and $346 million, respectively.
- The $510.0 million first-quarter goodwill impairment, with no corresponding tax benefit, contributed to the first-half operating and net losses. It impaired all Metal Forming goodwill and $210.8 million of Driveline goodwill.
- Cash from operations moved from $136.9 million provided in the first half of 2019 to $3.1 million used in the first half of 2020. Receivables fell to $550.2 million from $815.4 million at year-end, while accounts payable fell to $353.2 million from $623.5 million.
- AAM issued $400 million of 6.875% notes due 2028 and redeemed $100 million of 6.625% notes due 2022 in Q1. The remaining $350 million of 2022 notes was redeemed in July 2020. In April, AAM amended its credit agreement, including revising financial covenants.
- AAM completed the sale of its U.S. Casting operations in late 2019; the sale reduced the year-over-year comparison base and is distinct from the COVID-related decline.
Outlook, management commentary, risks and unusual items
- AAM restarted North American and European operations in May and was ramping production into Q3. Management said recovery timing depends on customer production, public-health measures and supply-chain readiness. It could not estimate COVID-19’s full-year impact and provided no revenue or earnings guidance in the supplied filing text.
- Management expected 2020 capital spending of approximately $250 million, interest expense of $205–$215 million, restructuring charges of $70–$80 million, and restructuring and acquisition-related cash payments of $55–$70 million. It also expected $10–$15 million of 2020 integration charges.
- Cost and liquidity actions included variable-cost reductions, expense controls, lower executive and director compensation, reduced projected capital spending, credit-agreement covenant changes, and tax-payment deferrals or reductions. AAM believed liquidity and projected operating cash flows would meet primary cash needs over the next 12 months.
- Tax items included a $36.0 million partial valuation allowance on U.S. interest-expense carryforwards, partly offset by tax benefits including CARES Act loss carrybacks and a foreign advance-pricing agreement. Management said additional valuation allowances could be possible within 12 months if earnings forecasts weaken.
- COVID-19, customer concentration, automotive cyclicality, supply-chain disruption, production recovery, debt-covenant compliance, and potential further Driveline impairment are key risks. Driveline’s post-impairment fair value approximated carrying value, making results sensitive to forecast cash flows and valuation assumptions. AAM reported no legal or environmental matter that it believed would have a material adverse effect.
Investor verification priorities
- Confirm the registrant identity: the filing is for American Axle & Manufacturing Holdings, Inc., despite the request’s “Dauch Corp” label.
- Track customer production and supplier readiness, particularly given that GM, FCA and Ford represented approximately 40%, 16% and 12% of first-half sales, respectively.
- Review the cash-flow and working-capital trajectory, and whether the reported liquidity remains adequate after the July 2020 $350 million note redemption and accrued interest payment.
- Monitor covenant compliance, refinancing costs and debt maturities, including the effects of the April credit-agreement amendment.
- Assess the assumptions supporting Driveline goodwill and the potential for further impairment or deferred-tax valuation allowances.