Dauch Corp annual report, FY2019

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Business context and reporting period

This is American Axle & Manufacturing Holdings, Inc. (AAM; NYSE: AXL) Form 10-K for the fiscal year ended December 31, 2019—not a filing identified in the document as Dauch Corp. AAM is a global automotive supplier of driveline and metal-forming products. It reorganized its business during 2019 and sold its U.S. casting operations in December; retained casting operations in Mexico moved into Driveline.

Financial performance and position

Unless stated otherwise, amounts are in millions of dollars.

  • Revenue: Net sales were $6,530.9, down 10.2% from $7,270.4 in 2018. AAM cited lower full-size truck volumes, customer insourcing, the GM work stoppage, program changeovers, lower crossover volumes, metal pass-throughs and foreign exchange; new program launches partly offset declines.
  • Profit and margins: Gross profit fell to $902.6 from $1,140.4; gross margin was 13.8% versus 15.7%. Operating loss was $301.6 (operating margin -4.6%), compared with operating income of $106.4 (1.5% margin). Net loss attributable to AAM was $484.5, or $4.31 per diluted share, versus a $57.5 loss, or $0.51 per share.
  • Significant charges and adjusted results: GAAP results included $665.0 of impairment charges: $440.0 goodwill impairment in Metal Forming and $225.0 to write down U.S. Casting operations held for sale. Total Segment Adjusted EBITDA, a company-defined non-GAAP measure, was $970.3 versus $1,183.9; EBITDA as reported was $221.2 versus $631.2.
  • Cash flow and investment: Operating cash flow was $559.6, down from $771.5. Capital expenditures were $433.3 versus $524.7, leaving operating cash flow less capital expenditures of approximately $126.3. Investing activities used $306.6, including the effect of the Casting sale proceeds. Financing activities used $200.0.
  • Liquidity and debt: Cash was $532.0, up from $476.4. Current assets of $1,857.8 and current liabilities of $1,026.4 imply a current ratio of about 1.81, compared with about 1.50 in 2018. Total debt was $3,692.2 before debt issuance costs; long-term debt, net, was $3,612.3. The revolving facility had $898.8 available, and the weighted-average debt interest rate was 5.8%. No common cash dividend was paid.
  • Segments and customer concentration: 2019 net external sales and Segment Adjusted EBITDA were Driveline $4,449.7 and $610.8; Metal Forming $1,453.5 and $316.5; and Casting $627.7 and $43.0. GM represented 37% of sales and FCA 17%, together 54%.

Material changes versus 2018

  • Sales declined $739.5, while Segment Adjusted EBITDA declined $213.6. The reported net loss widened substantially, with impairment charges a major factor in both years: $665.0 in 2019 and $485.5 in 2018.
  • Operating cash flow decreased $211.9. Cash from lower inventories was partly offset by less favorable movements in accounts payable and accrued expenses.
  • AAM sold its U.S. Casting operations for stated consideration of $245.0: $185.0 cash and a $60.0 deferred payment obligation accruing 6% annually from January 1, 2020 for 12 years. It received $141.2 net cash at closing, subject to post-closing adjustments, and recorded a $21.3 sale loss after the earlier $225.0 impairment. The sale was not classified as discontinued operations.
  • AAM reorganized four former segments into Driveline and Metal Forming reporting units and recorded a $440.0 Metal Forming goodwill impairment after its annual test. Driveline’s fair value exceeded carrying value by approximately 7%; Metal Forming’s carrying value approximated fair value after impairment.
  • GM’s second-half work stoppage reduced sales by approximately $243. AAM also cited customer insourcing of part of a replacement program.

Outlook, management commentary, risks and contingencies

  • 2020 expectations: Management expected capital spending of approximately 5.5% of sales, interest expense of $200–$210, restructuring charges of $20–$30, additional integration charges of $10–$15, and restructuring/acquisition-related cash payments of $30–$45. It expected about 15 new or replacement program launches in 2020. These are management expectations, not guarantees.
  • Backlog and strategy: Gross new and incremental business backlog was approximately $750 for programs launching in 2020–2022, versus approximately $1.25 billion for 2019–2021 reported in 2018. Backlog depends on customer production estimates, launch timing and foreign exchange; it is not assured revenue. AAM emphasized electrification, hybrid/electric driveline products, efficiency, lightweighting, geographic and customer diversification, and cost reductions.
  • Key risks: Automotive production cyclicality; customer concentration and potential lower demand or insourcing; price-reduction pressure; exposure to light trucks, SUVs and crossovers; reliance on the Guanajuato Manufacturing Complex; competition and technology shifts; launch execution; labor and supply interruptions; tariffs, trade policy and foreign exchange; raw-material costs; cyber/IT risks; and substantial debt, covenant and refinancing risks. AAM also flagged potential public-health crises as a risk to global operations.
  • Other exposures: Warranty accrual was $62.0, up from $57.7; legal and environmental matters were described as not expected to have a material adverse effect, though outcomes are uncertain. AAM reported significant pension and postretirement obligations and a $236.0 estimated future GM cost-sharing asset. Goodwill impairment depends on estimates of future cash flows, market comparables, discount rates and growth rates.
  • Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective as of year-end. The auditor identified goodwill impairment testing and the U.S. Casting sale accounting as critical audit matters; the audit opinion on the financial statements was unqualified.

Important facts for investors to verify

  1. Whether GM and FCA production, customer sourcing decisions and the GM work-stoppage effects improve or worsen, and how customer concentration evolves.
  2. Whether the $750 backlog converts to sales on schedule and at expected margins, and whether planned launches and restructuring/integration deliver savings.
  3. The final post-closing adjustments and collection terms for the Casting sale, including the $60 deferred payment obligation.
  4. Metal Forming and Driveline forecasts and valuation assumptions, given the Metal Forming impairment and Driveline’s approximately 7% fair-value cushion.
  5. Debt maturities, interest costs, covenant headroom and liquidity under weaker production or cash-flow conditions.
  6. Warranty, pension/OPEB and tax exposures, including the recoverability of deferred tax assets and the GM cost-sharing receivable.