Business context and reporting period
American Axle & Manufacturing Holdings, Inc. (AAM; NYSE: AXL) filed this Form 10-Q for the quarter ended September 30, 2020. The filing describes AAM as a global automotive Tier 1 supplier of driveline and metal-forming products. The request identifies “Dauch Corp,” but that is not the registrant named in the filing.
Results reflect the severe disruption to global automotive production from COVID-19 and the 2019 sale of AAM’s U.S. Casting operations. Comparative 2019 sales include those sold operations; they were not presented as discontinued operations.
Financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,414.1m | $1,677.4m | $3,272.9m | $5,100.9m |
| Gross profit / margin | $249.8m / 17.7% | $248.7m / 14.8% | $346.2m / 10.6% | $719.2m / 14.1% |
| Operating income (loss) | $152.0m | $(104.4)m | $(499.0)m | $109.9m |
| Net income (loss) attributable to AAM | $117.2m | $(124.2)m | $(597.3)m | $(30.1)m |
| Diluted EPS | $0.99 | $(1.10) | $(5.28) | $(0.27) |
| Segment Adjusted EBITDA | $297.1m | $265.8m | $458.3m | $776.8m |
Q3 sales fell 15.7% year over year, while gross profit was broadly unchanged and gross margin improved. Management attributed the sales decline mainly to estimated COVID-19 effects of $87m and the Casting sale effect of $155m. Nine-month sales declined about 35.8%; management estimated COVID-19 reduced sales by $1.203bn and the Casting sale reduced sales by $509m. The nine-month loss included $510m of goodwill impairment charges, with no corresponding tax benefit.
For the nine months, operating cash flow was $246.4m, versus $378.6m a year earlier; capital expenditures were $146.3m versus $335.3m. Cash and cash equivalents were $537.3m at September 30, compared with $532.0m at year-end 2019. Total debt was $3.631bn ($3.555bn long-term debt, net, plus $26.5m current debt); the weighted-average interest rate was 5.7%. AAM reported nearly $1.5bn of liquidity: approximately $537m cash, $891m available on its revolving facility and $55m available on foreign facilities. Current assets were $1.913bn and current liabilities $1.024bn.
Material changes, outlook and risks
- COVID-19 sharply reduced production and sales in the first half; facilities restarted in May and production ramped through Q3. Management said sustained normalized production depended on developments outside its control. Estimated COVID-19 impact on gross profit was $16m in Q3 and $362m for the nine months.
- First-quarter goodwill impairment totaled $510m: $210.8m for Driveline and $299.2m for Metal Forming, fully impairing Metal Forming goodwill. Management warned that lower Driveline cash flows or adverse valuation assumptions could trigger further impairment.
- A September 22 fire at the Malvern, Ohio facility caused $28.4m of asset charges; a $19.8m insurance receivable was recorded, leaving an $8.6m net pre-tax Q3 impact. The total effect and timing of insurance recoveries remained uncertain; AAM was using other facilities to support supply continuity.
- AAM issued $400m of 6.875% notes due 2028 and redeemed the remaining $350m of 6.625% notes due 2022 in Q3. The April credit-agreement amendment revised financial covenants to provide additional flexibility. Management reported no significant debt maturities before 2024.
- Management expected 2020 capital spending of up to $250m, restructuring charges of $70m–$80m, restructuring and acquisition-related cash payments of $55m–$70m, integration charges of $10m–$15m, and interest expense of $205m–$215m. It believed liquidity and projected operating cash flow would cover primary cash needs for the next 12 months. No specific revenue or earnings guidance was stated in the provided filing text.
- Key risks include further COVID-19 disruption, customer and supplier interruptions, automotive cyclicality, customer concentration and debt-covenant compliance. GM, FCA and Ford represented approximately 40%, 18% and 12% of nine-month sales, respectively. AAM said disclosure controls were effective as of September 30, 2020; it reported no material change in internal control from remote work.
Investor verification priorities
- Confirm subsequent automotive production, customer demand and whether the company sustained its Q3 recovery.
- Track the Malvern facility’s repair, customer-supply effects and the amount and timing of insurance recoveries.
- Review covenant headroom, cash generation, debt servicing and refinancing progress against the roughly $1.5bn reported liquidity.
- Assess goodwill impairment sensitivity, especially the Driveline reporting unit, and any further valuation-allowance changes.
- Reconcile performance with management’s stated 2020 spending, restructuring, integration and interest-cost expectations.