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MarketScreener Homepage  >  Equities  >  Nyse  >  American Axle & Manufacturing Holdings, Inc.    AXL

AMERICAN AXLE & MANUFACTURING HOLDINGS,

(AXL)
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AMERICAN AXLE & MANUFACTURING : Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (form 10-K)

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02/14/2020 | 12:14pm EDT

COMPANY OVERVIEW

We are a global Tier 1 supplier to the automotive industry. We design, engineer and manufacture driveline and metal forming products that are making the next generation of vehicles smarter, lighter, safer and more efficient. We employ over 20,000 associates, operating at nearly 80 facilities in 17 countries, to support our customers on global and regional platforms with a focus on operational excellence, quality and technology leadership.

In the first quarter of 2019, we initiated a new global restructuring program (the 2019 Program) to further streamline our business by consolidating our four existing segments into three segments. The activity occurred through the disaggregation of our former Powertrain segment, with a portion moving into our Driveline segment and a portion moving into our Metal Forming segment. The primary objectives of this consolidation are to further the integration of MPG, align AAM's product and process technologies, and to achieve efficiencies within our corporate and business unit support teams to reduce cost in our business.

In the fourth quarter of 2019, we completed the sale of the U.S. operations of our Casting segment (the Casting Sale). The Casting Sale did not include the entities that conduct AAM's casting operations in El Carmen, Mexico, which are now included in our Driveline segment. The Casting Sale did not qualify for classification as discontinued operations, as it did not represent a strategic shift in our business that has had, or will have, a major effect on our operations and financial results.

We are a primary supplier of driveline components to General Motors Company (GM) for its full-size rear-wheel drive (RWD) light trucks, sport utility vehicles (SUV), and crossover vehicles manufactured in North America, supplying a significant portion of GM's rear axle and four-wheel drive and all-wheel drive (4WD/AWD) axle requirements for these vehicle platforms. We also supply GM with various products from our Metal Forming segment. Sales to GM were approximately 37% of our consolidated net sales in 2019, 41% in 2018, and 47% in 2017.

We also supply driveline system products to FCA US LLC (FCA) for heavy-duty Ram full-size pickup trucks and its derivatives, the AWD Jeep Cherokee, and a passenger car driveshaft program. In addition, we sell various products to FCA from our Metal Forming segment. Sales to FCA were approximately 17% of our consolidated net sales in 2019, 13% in 2018 and 14% in 2017.

INDUSTRY TRENDS

There are a number of significant trends affecting the markets in which we compete. Intense competition, volatility in the price of raw materials, including steel, other metallic materials and resources used in electronic components, and significant pricing pressures remain. At the same time, there is a focus on investing in future products that will incorporate the latest technology and meet changing customer demands. The continued advancement of technology and product innovation, as well as the capability to source programs on a global basis, are critical to attracting and retaining business in our global markets.

INCREASE IN DEMAND FOR ELECTRIFICATION AND ELECTRONIC INTEGRATION The electrification of vehicles continues to expand, driven by government regulations related to emissions, such as the Corporate Average Fuel Economy standards, as well as consumer demand for greater vehicle performance, enhanced functionality, increased electronic content and vehicle connectivity, and affordable convenience options. We are responding, in part, through the development of our e-AAM™ hybrid and electric driveline systems, and related subsystems and components, which allow us to meet our customers' needs for high performance vehicles with improved fuel economy and reduced emissions. To date, our e-AAM™ hybrid and electric driveline systems have been awarded multiple contracts, and began production during 2018.

As electronic components become an increasingly larger focus for OEMs and suppliers, the industry will likely continue to see the addition of new market entrants from non-traditional automotive companies, including increased competition from technology companies. An area of focus will be the product development cycle and bridging the gap between the shorter development cycles of IT hardware and software and the longer development cycles of traditional powertrain components. Our EcoTrac® Disconnecting AWD system, VecTrac™ Torque Vectoring Technology and TracRite® Differential Technology, are examples of AAM's enhanced capabilities in electronic integration.


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EVOLUTION OF THE AUTOMOTIVE INDUSTRY AS DEMAND FOR CAR-SHARING, RIDE-SHARING AND AUTONOMOUS VEHICLES INCREASES In addition to selling vehicles, OEMs are increasingly focused on offering their own car-sharing rental businesses and ride-sharing services. Car-sharing typically allows consumers to rent a car for a short period of time, while ride-sharing matches people to available carpools or other services that provide on-demand mobility. With continued urbanization, population growth, increased government regulations to ease congestion and generational shifts in preferences, it is expected that the markets for these services will continue to grow, which could cause a change in the type of vehicles utilized. As such, many OEMs are exploring and expanding their own car-sharing and ride-sharing efforts.

Another trend developing is the expectation that autonomous, self-driving cars will become more common with continued advancements in technology. Autonomous vehicles present many possible benefits, such as a reduction in deadly traffic collisions caused by human error and reduced traffic congestion, but there are also foreseeable challenges such as liability for damage and software safety and reliability. The increased integration of electronics and vehicle connectivity that will likely be required in autonomous vehicle developments will provide an opportunity for suppliers, such as AAM, with advanced capabilities in this area to be competitive in this expanding market.

GLOBAL AUTOMOTIVE PRODUCTION AND INDUSTRY CONSOLIDATION As our customers design their products for global markets, they will continue to require global support from their suppliers. For this reason, it is critical that suppliers maintain a global presence in these markets in order to compete for new contracts. We have engineering offices around the world to support our global locations and provide technical solutions to our customers on a regional basis.

The cyclical nature of the automotive industry, volatile commodity prices, the shifting demands of consumer preference, regulatory requirements and trade agreements require OEMs and suppliers to remain agile with regard to product development and global capability. A critical objective for OEMs and suppliers is the ability to meet these global demands while effectively managing costs. OEMs and suppliers are preparing for these challenges through merger and acquisition activity, development of strategic partnerships and reduction of vehicle platform complexity. In order to effectively drive technology development, recognize cost synergies, and increase global footprint, the industry may continue to see consolidation in the supply base as companies recognize and respond to the need for scalability. Our acquisition of MPG in 2017 was a critical step in achieving the aforementioned objectives.

INCREASED DEMAND FOR FUEL EFFICIENCY AND EMISSIONS REDUCTIONS There has been an increased demand for technologies designed to help reduce emissions, increase fuel economy and minimize the environmental impact of vehicles. As a result, OEMs and suppliers are competing to develop and market new and alternative technologies, such as electric vehicles, hybrid vehicles, fuel cells, higher speed transmissions, and downsized, fuel-efficient engines. At the same time, OEMs and suppliers are improving products to increase fuel economy and reduce emissions through lightweighting and efficiency initiatives.

We are responding with ongoing research and development (R&D) activities that focus on fuel economy, emissions reductions and environmental improvements by integrating electronics and technology. Through the development of our EcoTrac® Disconnecting AWD system, e-AAM™ hybrid and electric driveline systems, QuantumTM lightweight axle technology, high-efficiency axles, PowerLite® axles and PowerDense® gears, high strength connecting rod technology, refined vibration control systems, and forged axle tubes, we have significantly advanced our efforts to improve fuel efficiency, safety, and ride and handling performance while reducing emissions and mass. These efforts have led to new business awards and further position us to compete in the global marketplace.

In addition to AAM's organic growth in technology and processes, our acquisitions of MPG and certain operations of Mitec Automotive AG (Mitec), as well as our investment in our Liuzhou AAM joint venture, have provided us with complementary technologies, expanded our product portfolio, significantly diversified our global customer base, and strengthened our long-term financial profile through greater scale. The synergies achieved through our strategic initiatives have enhanced AAM's ability to compete in today's technological and regulatory environment, while remaining cost competitive through increased scale and integration.



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The discussion of our Results of Operations and Liquidity and Capital Resources for 2018, as compared to 2017, can be found within "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Annual Report on Form 10-K filed with the SEC on February 15, 2019, which discussion is incorporated herein by reference.

RESULTS OF OPERATIONS

NET SALES Net sales were $6,530.9 million in 2019 as compared to $7,270.4 million in 2018. Our change in sales in 2019, as compared to 2018, primarily reflects the impact of lower full-sized truck sales resulting from the in-sourcing by our largest customer of a portion of a replacement program that launched in the second half of 2018, and a reduction of approximately $243 million associated with the impact of the GM work stoppage in the second half of 2019. Net sales in 2019 were also impacted by customer downtime as a result of program changeovers in 2019, and lower volumes on certain crossover vehicle programs that we support, as well as a decrease of approximately $142 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. These factors were partially offset by the impact of program launches associated with our new business backlog.

COST OF GOODS SOLD Cost of goods sold was $5,628.3 million in 2019 as compared to $6,130.0 million in 2018. The change in cost of goods sold in 2019, as compared to 2018, primarily reflects the impact of lower global automotive production volumes, a decrease of approximately $159 million associated with the impact of the GM work stoppage, and a decrease of approximately $142 million related to metal market pass-through costs and the impact of foreign exchange. This was partially offset by the impact of costs associated with program launches from our new business backlog.

Materials costs as a percentage of total cost of goods sold were approximately 56% in 2019 and 59% in 2018.

GROSS PROFIT Gross profit was $902.6 million in 2019 as compared to $1,140.4 million in 2018. Gross margin was 13.8% in 2019 as compared to 15.7% in 2018. Gross profit and gross margin were impacted by the factors discussed in Net Sales and Cost of Goods Sold above.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) SG&A (including R&D) was $364.7 million in 2019 as compared to $385.7 million in 2018. SG&A as a percentage of net sales was 5.6% in 2019 and 5.3% in 2018. R&D spending was $144.7 million in 2019 as compared to $146.2 million in 2018. The change in SG&A in 2019, as compared to 2018, was primarily attributable to lower compensation-related expense due, in part, to our restructuring initiatives.

AMORTIZATION OF INTANGIBLE ASSETS Amortization expense for the year ended December 31, 2019 was $95.4 million as compared to $99.4 million for the year ended December 31, 2018. The decrease in amortization expense for 2019 as compared to 2018 was primarily attributable to the customer platforms and relationships associated with the U.S. operations of our Casting segment, which ceased to be amortized upon being classified as held-for-sale in September 2019.

IMPAIRMENT CHARGES In the third quarter of 2019, we entered into a definitive agreement to sell the U.S. operations of our Casting segment. As a result, we recorded a pre-tax impairment charge of $225.0 million to reduce the carrying value of this business to fair value less cost to sell upon reclassifying the assets and liabilities to held-for-sale. See Note 2 - Sale of Business for further detail.

As a result of our annual goodwill impairment test in the fourth quarter of 2019, we determined that the carrying value of our Metal Forming segment was greater than its fair value. As such, we recorded a goodwill impairment charge of $440.0 million in 2019 associated with this segment. As a result of our annual goodwill impairment test in the fourth quarter of 2018, we determined that the carrying values of our Casting and former Powertrain segments were greater than their respective fair values. As such, we recorded a total goodwill impairment charge of $485.5 million in 2018 associated with these segments. See Note 5 - Goodwill and Other Intangible Assets for further detail.

RESTRUCTURING AND ACQUISITION-RELATED COSTS Restructuring and acquisition-related costs were $57.8 million in 2019 and $78.9 million in 2018. As part of our restructuring actions, we incurred severance charges of approximately $19.4 million, as well as implementation costs, consisting primarily of plant exit costs, of


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approximately $20.4 million during 2019. In 2018, we incurred severance charges of approximately $2.5 million, as well as implementation costs, consisting primarily of plant exit costs and professional fees, of approximately $11.7 million, and long-lived asset impairment charges of $30.0 million.

In 2019, we initiated a new global restructuring program (the 2019 Program) to further streamline our business by consolidating our four existing segments into three segments. This activity occurred through the disaggregation of our former Powertrain segment, with a portion moving into our Driveline segment and a portion moving into our Metal Forming segment. The primary objectives of this consolidation are to further the integration of MPG, align AAM's product and process technologies, and to achieve efficiencies within our corporate and business unit support teams to reduce cost in our business. We incurred approximately $18 million of restructuring costs in 2019 under the 2019 Program. We expect to incur approximately $20 million to $30 million of total restructuring charges in 2020, substantially all of which are under the 2019 Program.

During 2018, we initiated actions to exit operations at manufacturing facilities in our Driveline, Metal Forming and former Powertrain segments. As a result of these actions, we were required to assess the associated long-lived assets for impairment. Based on our analysis, assets that were not to be redeployed to other AAM facilities were determined to be fully impaired resulting in total charges of $30.0 million in 2018.

In 2019, we completed the acquisition of Mitec, and in 2017, we completed our acquisitions of MPG and USM Mexico. During 2019, we incurred $1.8 million of acquisition-related costs and $16.2 million of integration expenses associated with the acquisition of MPG. This compares to $1.2 million of acquisition-related costs, $0.5 million of acquisition-related severance costs and $33.0 million of integration expenses, primarily associated with the acquisition of MPG, for the year ended December 31, 2018.

Acquisition-related costs primarily consist of advisory, legal, accounting, valuation and certain other professional or consulting fees incurred. Integration expenses primarily reflect costs incurred for information technology infrastructure and enterprise resource planning (ERP) systems, and consulting fees incurred in conjunction with the acquisitions. We expect to incur additional integration charges of approximately $10 million to $15 million in 2020 as we finalize the integration of ERP systems at legacy MPG locations. (GAIN) LOSS ON SALE OF BUSINESS In December 2019, we completed the Casting Sale and recorded a loss on sale of business of $21.3 million, which is presented in the (Gain) loss on sale of business line item of our Consolidated Statement of Operations for the year ended December 31, 2019. See Note 2 - Sale of Business for further detail.

In April 2018, we completed the sale of the aftermarket business associated with our former Powertrain segment for approximately $50 million. As a result, we recorded a $15.5 million pre-tax gain, which is presented in the (Gain) loss on sale of business line item of our Consolidated Statement of Operations for the year ended December 31, 2018.

OPERATING INCOME (LOSS) Operating loss was $301.6 million in 2019 as compared to income of $106.4 million in 2018. Operating margin was (4.6)% in 2019 as compared to 1.5% in 2018. The changes in operating income (loss) and operating margin in 2019, as compared to 2018, were due to the factors discussed in Net Sales, Cost of Goods Sold, SG&A, Amortization of Intangible Assets, Impairment Charges, Restructuring and Acquisition-Related Costs and (Gain) Loss on Sale of Business above.

INTEREST EXPENSE Interest expense was $217.3 million in 2019 and $216.3 million in 2018. The weighted-average interest rate of our total debt outstanding was 5.8% in both 2019 and 2018. We expect our interest expense in 2020 to be approximately $200 million to $210 million.

INTEREST INCOME Interest income was $5.8 million in 2019 and $2.0 million in 2018. Interest income includes interest earned on cash and cash equivalents, realized and unrealized gains and losses on our short-term investments during the period, and the impact of the interest rate differential on our fixed-to-fixed cross-currency swap.

OTHER INCOME (EXPENSE) Following are the components of Other Income (Expense) for 2019 and 2018:

Debt refinancing and redemption costs In July 2019, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the First Amendment to the Credit Agreement. The First Amendment, among other things,


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established $340 million in incremental term loan A commitments under the Amended Credit Agreement with a maturity date of July 29, 2024 (Term Loan A Facility due 2024), reduced the availability under the Revolving Credit Facility from $932 million to $925 million and extended the maturity date of the Revolving Credit Facility from April 6, 2022 to July 29, 2024, and modified the applicable margin with respect to interest rates under the Term Loan A Facility due 2024 and interest rates and commitment fees under the Revolving Credit Facility. The applicable margin and the maturity date for the Term Loan B Facility remained unchanged. The proceeds of $340 million were used to repay all of the outstanding loans under the existing Term Loan A Facility and a portion of the outstanding Term Loan B Facility, resulting in no additional indebtedness. We expensed $5.1 million for the write-off of the unamortized debt issuance costs related to the existing Term Loan A Facility and a portion of the unamortized debt issuance costs related to our Term Loan B Facility that we had been amortizing over the expected life of the borrowings.

In December 2019, we used a portion of the cash proceeds from the Casting Sale to make a payment on our Term Loan B Facility, which included a principal payment of $59.8 million and $0.4 million in accrued interest. We also expensed approximately $1.0 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing.

In May 2019, we voluntarily redeemed the remaining balance outstanding under our 7.75% Notes due 2019. This resulted in a principal payment of $100 million and $0.3 million in accrued interest. We also expensed approximately $0.1 million for the write-off of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing, and approximately $2.2 million for an early redemption premium.

In November 2018, we voluntarily redeemed a portion of our 7.75% Notes due 2019. This resulted in a principal payment of $100 million, and a payment of $3.9 million in accrued interest. As a result of the redemption, we expensed approximately $0.3 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing, and approximately $4.5 million for an early redemption premium.

In May 2018, we voluntarily redeemed a portion of our 6.625% Notes due 2022. This resulted in a principal payment of $100 million, and a payment of $0.8 million in accrued interest. As a result of the redemption, we expensed $0.8 million for the write-off of a portion of the remaining unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing and $3.3 million for an early redemption premium.

In March 2018, we made a tender offer for our 6.25% Notes due 2021. Under this tender offer, we retired $383.1 million of the 6.25% Notes due 2021. We redeemed the remaining $16.9 million of the 6.25% Notes due 2021 during the second quarter of 2018. As a result of the tender and subsequent redemption, we expensed $2.5 million for the write-off of the remaining unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing and $8.0 million in tender premiums.

Gain on bargain purchase of a business In the fourth quarter of 2019, we completed the acquisition of Mitec, under which we acquired $20.2 million of net assets for a purchase price of $9.4 million, which was funded entirely with available cash. We recognized a gain on bargain purchase of $10.8 million associated with this acquisition.

Gain on settlement of capital lease In the second quarter of 2018, we reached a settlement agreement related to a capital lease obligation that we had recognized as a result of the acquisition of MPG. This settlement resulted in a gain of $15.6 million, including accrued interest.

Pension settlement charge In 2019, we offered a voluntary one-time lump sum payment option to certain eligible terminated vested participants in our U.S. pension plans that, if accepted, would settle our pension obligations to them. This resulted in a non-cash settlement charge of $9.8 million in the fourth quarter of 2019 related to the accelerated recognition of certain deferred losses.

Other, net Other, net, which includes the net effect of foreign exchange gains and losses, our proportionate share of earnings from equity in unconsolidated subsidiaries, and all components of net periodic pension and postretirement benefit costs other than service costs and certain settlement charges, was expense of $12.5 million in 2019, compared to expense of $2.2 million in 2018. The increased expense in other, net in 2019, as compared to 2018, was primarily the result of increased net foreign currency remeasurement losses of approximately $6.3 million.


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INCOME TAX EXPENSE (BENEFIT) Income tax was a benefit of $48.9 million in 2019, as compared to a benefit of $57.1 million in 2018. Our effective income tax rate was 9.2% in 2019 as compared to 50.1% in 2018.

In 2019, our income tax benefit varied from the tax benefit computed at the U.S. federal statutory rate primarily as a result of the goodwill impairment charge, which resulted in no income tax benefit, as well as the incremental tax expense associated with the global intangible low-taxed income inclusion under the Tax Cuts and Jobs Act of 2017 (the 2017 Act), and our inability to realize an income tax benefit for losses incurred in certain foreign and state jurisdictions. These items were partially offset by the impact of favorable foreign tax rates and income tax credits. In addition, as part of the 2017 Act, a one-time transition tax (Transition Tax) was imposed on certain foreign earnings for which U.S. income tax was previously deferred. The Department of Treasury and Internal Revenue Service issued final regulations on February 5, 2019 regarding the Transition Tax, which changed the manner in which we are required to compute the Transition Tax when it is recognized over a two-year period. The application of the final regulations resulted in a $9.3 million income tax benefit, which has been recorded in 2019, the period in which the final regulations were issued.

In 2018, our income tax benefit is higher than the tax benefit computed at the U.S. federal statutory rate primarily due to the impact of favorable foreign tax rates, and the impact of income tax credits, partially offset by our inability to realize an income tax benefit for losses incurred in certain foreign and state jurisdictions. In addition, during 2018, we finalized an advance pricing agreement in a foreign jurisdiction and settled various other matters, which resulted in an income tax benefit and a reduction of our liability for unrecognized tax benefits and related interest and penalties of approximately $20 million. We also recorded an income tax benefit of approximately $85 million in 2018 as a result of the goodwill impairment charge, partially offset by a discrete tax expense related to the sale of the aftermarket business associated with our former Powertrain segment.

NET INCOME (LOSS) ATTRIBUTABLE TO AAM AND EARNINGS (LOSS) PER SHARE (EPS) Net income (loss) attributable to AAM was a loss of $484.5 million in 2019 as compared to a loss of $57.5 million in 2018. Diluted loss per share was $4.31 in 2019 as compared to a diluted loss of $0.51 per share in 2018. Net Income (Loss) and EPS were primarily impacted by the factors discussed above.



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SEGMENT REPORTING

In the first quarter of 2019, we reorganized our business to disaggregate our former Powertrain segment, with a portion moving to our Driveline segment and a portion moving to our Metal Forming segment. The Powertrain amounts previously reported for the years ended December 31, 2018 and 2017 have been reclassified to Driveline and Metal Forming accordingly.

Additionally, in the fourth quarter of 2019, we completed the Casting Sale. The Casting Sale did not include the entities that conduct AAM's casting operations in El Carmen, Mexico, which are now included in our Driveline segment. The Casting Sale did not qualify for classification as discontinued operations, as it did not represent a strategic shift in our business that has had, or will have, a major effect on our operations and financial results. As such, we continue to present Casting as a segment in the tables below, which is now comprised entirely of the U.S. casting operations that were included in the sale. The amounts previously reported in our Casting segment for the retained operations in El Carmen, Mexico have been reclassified to our Driveline segment for the years presented.

As a result of these activities, our business is now organized into Driveline and Metal Forming segments, with each representing a reportable segment under ASC 280 Segment Reporting. The results of each segment are regularly reviewed by the chief operating decision maker to assess the performance of the segment and make decisions regarding the allocation of resources.

Our product offerings by segment are as follows:

•      Driveline products consist primarily of front and rear axles, driveshafts,
       differential assemblies, clutch modules, balance shaft systems,
       disconnecting driveline technology, and electric and hybrid driveline
       products and systems for light trucks, sport utility vehicles (SUVs),
       crossover vehicles, passenger cars and commercial vehicles;


•      Metal Forming products consist primarily of axle and transmission shafts,
       ring and pinion gears, differential gears and assemblies, connecting rods
       and variable valve timing products for Original Equipment Manufacturers
       and Tier 1 automotive suppliers; and


•      Prior to the Casting Sale, the Casting segment produced both thin wall
       castings and high strength ductile iron castings, as well as transmission
       pump bodies, steering knuckles, control arms, brake anchors and calipers,
       and ball joint housings for the global light vehicle, commercial and
       industrial markets.




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The following tables outline our sales and Segment Adjusted EBITDA for each of
our reportable segments for the years ended December 31, 2019, 2018 and 2017 (in
millions):

                                        Year Ended December 31, 2019

                            Driveline     Metal Forming      Casting      Total
Sales                      $  4,550.2$       1,845.2$  669.2$ 7,064.6
Less: Intersegment sales        100.5              391.7        41.5        533.7
Net external sales         $  4,449.7$       1,453.5$  627.7$ 6,530.9

Segment adjusted EBITDA    $    610.8    $         316.5    $   43.0$   970.3



                                        Year Ended December 31, 2018

                            Driveline     Metal Forming      Casting      Total
Sales                      $  5,001.2$       2,046.0$  780.6$ 7,827.8
Less: Intersegment sales         89.8              428.3        39.3        557.4
Net external sales         $  4,911.4$       1,617.7$  741.3$ 7,270.4

Segment adjusted EBITDA    $    754.5    $         376.5    $   52.9$ 1,183.9



                                        Year Ended December 31, 2017

                            Driveline     Metal Forming      Casting      Total
Sales                      $  4,567.8$       1,634.9$  576.1$ 6,778.8
Less: Intersegment sales         65.9              417.7        29.2        512.8
Net external sales         $  4,501.9$       1,217.2$  546.9$ 6,266.0

Segment adjusted EBITDA    $    762.3    $         305.7    $   34.7$ 1,102.7

The change in Driveline sales for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily reflects the impact of lower full-size truck sales resulting from the in-sourcing by our largest customer of a portion of a replacement program that launched in the second half of 2018, and a reduction of approximately $217 million associated with the impact of the GM work stoppage. Net sales in 2019 were also impacted by customer downtime as a result of program changeovers in 2019, and lower volumes on certain crossover vehicle programs that we support, as well as a decrease of approximately $95 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. These factors were partially offset by the impact of program launches associated with our new business backlog.

The increase in Driveline sales for the year ended December 31, 2018, as compared to the year ended December 31, 2017, primarily reflects higher volumes related to crossover vehicles and increased production volumes from program launches associated with our new business backlog. This was partially offset by the impact of lower full-size truck sales resulting from the in-sourcing by our largest customer of a portion of a replacement program that launched in the second half of 2018, and a reduction in production volumes for certain North American light truck programs we support as we prepared for program changeovers in 2018. Driveline sales for the year


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ended December 31, 2018, as compared to the year ended December 31, 2017, were also impacted by an increase related to metal market pass-throughs to our customers of approximately $31 million.

The change in sales in our Metal Forming segment for the year ended December 31, 2019, as compared to the year ended December 31, 2018, reflects lower global automotive production volumes, as well as a reduction in intersegment sales to our Driveline segment due to the factors discussed for Driveline above. Metal Forming sales for the year ended December 31, 2019 were also negatively impacted by approximately $47 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments, and by approximately $17 million associated with the GM work stoppage.

The increase in sales in our Metal Forming segment for the year ended December 31, 2018, as compared to the year ended December 31, 2017, primarily reflects the inclusion of twelve months of MPG sales in 2018, as compared to nine months of MPG sales in 2017, as the acquisition was completed in April 2017. The increase in sales in 2018, as compared to 2017, also reflects an increase in metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments totaling approximately $43 million.

The change in sales in our Casting segment for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily reflects lower production volumes in the automotive, commercial and industrial markets, and the impact of AAM completing the sale of the U.S. Casting operations on December 16, 2019. Casting sales in 2019 were also negatively impacted by approximately $9 million associated with the GM work stoppage.

The increase in sales in our Casting segment for the year ended December 31, 2018, as compared to the year ended December 31, 2017, reflects the inclusion of twelve months of MPG sales in 2018, as compared to nine months of MPG sales in 2017, and an increase of approximately $13 million in metal market pass-throughs to our customers.

We use Segment Adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. Segment Adjusted EBITDA is defined as EBITDA for our reportable segments excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, gain (loss) on the sale of a business, impairment charges, pension settlements, and non-recurring items.

For the year ended December 31, 2019, as compared to the year ended December 31, 2018, the change in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to lower global automotive production volumes and the impact of the GM work stoppage. Driveline Segment Adjusted EBITDA was also impacted by a change in product mix due to customer downtime as a result of program changeovers in 2019.

For the year ended December 31, 2018, as compared to the year ended December 31, 2017, the change in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to increased material and freight costs, as well as an increase in project expense of approximately $15 million, and costs associated with increased levels of global launch activity in 2018.

The change in Metal Forming Segment Adjusted EBITDA for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was primarily attributable to lower global automotive production volumes, as well as an increase in net manufacturing costs, including higher material, freight and tariff costs, of approximately $10 million. The increase in Metal Forming Segment Adjusted EBITDA for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was primarily due to the acquisition of MPG, partially offset by increased material and freight costs.

The change in Casting Segment Adjusted EBITDA for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily reflects lower production volumes, offset by the impact of price increases to customers. The increase in Casting Segment Adjusted EBITDA for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was primarily due to the acquisition of MPG, which was partially offset by increased labor costs in an effort to address workforce shortages at certain locations.



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Reconciliation of Non-GAAP and GAAP Information

In addition to results reported in accordance with accounting principles generally accepted in the United States of America (GAAP) in this MD&A, we have provided certain non-GAAP financial measures such as EBITDA and Total Segment Adjusted EBITDA. Such information is reconciled to its closest GAAP measure in accordance with Securities and Exchange Commission rules below.

We define EBITDA to be earnings before interest expense, income taxes, depreciation and amortization. Total Segment Adjusted EBITDA is defined as EBITDA excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, gain (loss) on the sale of a business, impairment charges, pension settlements, and non-recurring items. We believe that EBITDA and Total Segment Adjusted EBITDA are meaningful measures of performance as they are commonly utilized by management and investors to analyze operating performance and entity valuation. Our management, the investment community and the banking institutions routinely use EBITDA and Total Segment Adjusted EBITDA, together with other measures, to measure our operating performance relative to other Tier 1 automotive suppliers and to assess the relative mix of Adjusted EBITDA by segment. We also believe that Total Segment Adjusted EBITDA is a meaningful measure as it is used for operational planning and decision-making purposes. These non-GAAP financial measures are not and should not be considered a substitute for any GAAP measure. Additionally, non-GAAP financial measures as presented by AAM may not be comparable to similarly titled measures reported by other companies.

                                                           Year Ended December 31,
                                                       2019         2018          2017
Net income (loss)                                   $ (484.1 )$   (56.8 )$   337.5
Interest expense                                       217.3         216.3         195.6
Income tax expense (benefit)                           (48.9 )       (57.1 )         2.5
Depreciation and amortization                          536.9         528.8         428.5
EBITDA                                              $  221.2$   631.2$   964.1
Restructuring and acquisition-related costs             57.8          78.9         110.7
Debt refinancing and redemption costs                    8.4          19.4           3.5
(Gain) loss on sale of business                         21.3         (15.5 )           -
Impairment charges                                     665.0         485.5             -
Pension settlement                                       9.8             -           3.2
Non-recurring items:
Gain on bargain purchase of business                   (10.8 )           -
Gain on settlement of capital lease                        -         (15.6 )           -
Acquisition-related fair value inventory adjustment        -             -          24.9
Impact of change in accounting principle                   -             -          (3.7 )
Other non-recurring items                               (2.4 )           -             -
Total Segment Adjusted EBITDA                       $  970.3$ 1,183.9$ 1,102.7




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LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to fund debt service obligations, capital expenditures and working capital requirements, in addition to advancing our strategic initiatives. We believe that operating cash flow, available cash and cash equivalent balances and available committed borrowing capacity under our Senior Secured Credit Facilities will be sufficient to meet these needs.

OPERATING ACTIVITIES Net cash provided by operating activities was $559.6 million in 2019 as compared to $771.5 million in 2018. The following factors impacted cash provided by operating activities:

Inventories We experienced an increase in cash flow from operating activities of $139.2 million related to the change in our inventories balance from December 31, 2018 to December 31, 2019, as compared to the change in our inventories balance from December 31, 2017 to December 31, 2018. This change was primarily the result of increased levels of inventories as of December 31, 2018 in preparation for program changeovers and new launch activity that occurred in the second half of 2018. As of December 31, 2019, inventories have decreased as the program changeovers and new launch activity have transitioned into production, and as a result of inventory reduction initiatives in 2019.

Accounts payable and accrued expenses We experienced a decrease in cash flow from operating activities of $105.2 million related to the change in our accounts payable and accrued expenses balance from December 31, 2018 to December 31, 2019, as compared to the change in our accounts payable and accrued expenses balance from December 31, 2017 to December 31, 2018. This change was attributable primarily to accounts payable and was the result of increased levels of accounts payable as of December 31, 2018 in preparation for program changeovers and new launch activity that occurred in the second half of 2018. As of December 31, 2019, there has been a decrease in accounts payable primarily associated with the decrease in inventories discussed above, as well as the timing of payments to suppliers.

Restructuring and acquisition-related costs We incurred $57.8 million and $78.9 million of charges related to restructuring and acquisition-related costs in 2019 and 2018, respectively, and a significant portion of these charges were cash charges. In 2020, we expect restructuring and acquisition-related payments to be between $30 million and $45 million for the full year.

Pension and other postretirement benefits (OPEB) Our cash payments for OPEB, net of GM cost sharing, were $15.5 million in 2019 and $9.9 million in 2018. This compares to our annual postretirement cost of $11.7 million in 2019 and $10.3 million in 2018. We expect our cash payments for other postretirement benefit obligations in 2020, net of GM cost sharing, to be approximately $17 million.

Due to the availability of our pre-funded pension balances (previous contributions in excess of prior required pension contributions) related to certain of our U.S. pension plans, we expect our regulatory pension funding requirements in 2020 to be approximately $2 million.

Interest paid Interest paid in 2019 was $205.4 million as compared to $199.7 million in 2018.

Income taxes Income taxes paid in 2019 totaled $57.1 million as compared to $46.0 million in 2018. Based on the status of audits, and the protocol of finalizing audits by the relevant tax authorities, it is not possible to estimate the timing or impact of changes, if any, to previously recorded uncertain tax positions. As of December 31, 2019 and December 31, 2018, we have recorded a liability for unrecognized income tax benefits and related interest and penalties of $52.6 million and $45.6 million, respectively.

During the next 12 months, we may finalize an advance pricing agreement in a foreign jurisdiction, which would result in a cash payment to the relevant tax authorities and a reduction of our liability for unrecognized tax benefits and related interest and penalties. Although it is difficult to estimate with certainty the amount of our tax liabilities for the years that remain subject to audit, we do not expect the settlements will be materially different from what we have recorded in unrecognized tax benefits. We will continue to monitor the progress and conclusions of current and future audits and other communications with tax authorities, and will adjust our estimated liability as necessary.

INVESTING ACTIVITIES Capital expenditures were $433.3 million in 2019 and $524.7 million in 2018. We expect our capital spending in 2020 to be approximately 5.5% of sales, which includes support for our global


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program launches in 2020 and 2021 within our new and incremental business backlog, as well as program capacity increases and future launches of replacement programs.

In the fourth quarter of 2019, we completed the sale of our U.S. casting operations. As a result of this sale, we received net cash proceeds of $141.2 million, which are subject to customary post-closing adjustments. We expect to finalize the post-closing adjustments in the first quarter of 2020.

Also in 2019, we completed the acquisition of Mitec for approximately $9 million, and made payments totaling approximately $9 million as part of our investment in the Liuzhou AAM joint venture that was formed in 2018.

In 2018, we completed the sale of the aftermarket business associated with our former Powertrain segment. As a result of this sale, we received net proceeds of approximately $47 million.

FINANCING ACTIVITIES Net cash used in financing activities was $200.0 million in 2019, compared to net cash used in financing activities of $184.5 million in 2018. Total debt outstanding, net of debt issuance costs, was $3,641.0 million at year-end 2019 and $3,808.4 million at year-end 2018. The change in total debt outstanding, net of issuance costs, at year-end 2019, as compared to year-end 2018, was primarily due to the factors noted below.

Senior Secured Credit Facilities In July 2019, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the First Amendment (First Amendment) to the Credit Agreement (as amended by the First Amendment, the Amended Credit Agreement). The First Amendment, among other things, established $340 million in incremental term loan A commitments under the Amended Credit Agreement with a maturity date of July 29, 2024 (Term Loan A Facility due 2024), reduced the availability under the Revolving Credit Facility from $932 million to $925 million and extended the maturity date of the Revolving Credit Facility from April 6, 2022 to July 29, 2024, and modified the applicable margin with respect to interest rates under the Term Loan A Facility due 2024 and interest rates and commitment fees under the Revolving Credit Facility. The applicable margin and the maturity date for the Term Loan B Facility remain unchanged. The proceeds of $340 million were used to repay all of the outstanding loans under the existing Term Loan A Facility and a portion of the outstanding Term Loan B Facility, resulting in no additional indebtedness. This also satisfies all payment requirements under the Term Loan B Facility until maturity in 2024. In 2019, we expensed $5.1 million for the write-off of the unamortized debt issuance costs related to the existing Term Loan A Facility and a portion of the unamortized debt issuance costs related to our Term Loan B Facility that we had been amortizing over the expected life of the borrowings.

In December 2019, we used a portion of the cash proceeds from the Casting Sale to make a payment on our Term Loan B Facility, which included a principal payment of $59.8 million and $0.4 million in accrued interest. We also expensed approximately $1.0 million for the write-off of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing.

At December 31, 2019, $898.8 million was available under the Revolving Credit Facility. This availability reflects a reduction of $26.2 million for standby letters of credit issued against the facility. The proceeds of the Revolving Credit Facility are used for general corporate purposes.

The Senior Secured Credit Facilities provide back-up liquidity for our foreign credit facilities. We intend to use the availability of long-term financing under the Senior Secured Credit Facilities to refinance any current maturities related to such debt agreements that are not otherwise refinanced on a long-term basis in their local markets, except where otherwise reclassified to Current portion of long-term debt on our Consolidated Balance Sheet.

Redemption of 7.75% Notes Due 2019 In the second quarter of 2019, we voluntarily redeemed the remaining balance outstanding under our 7.75% Notes due 2019. This resulted in a principal payment of $100.0 million and $0.3 million in accrued interest. We also expensed approximately $0.1 million for the write-off of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing, and approximately $2.2 million for an early redemption premium.

In the fourth quarter of 2018, we voluntarily redeemed a portion of our 7.75% Notes due 2019. This resulted in a principal payment of $100.0 million and $3.9 million in accrued interest. We also expensed approximately $0.3 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing, and approximately $4.5 million for an early redemption premium.



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Redemption of 6.625% Notes Due 2022 In the second quarter of 2018, we voluntarily redeemed a portion of our 6.625% Notes due 2022. This resulted in a principal payment of $100.0 million, and a payment of $0.8 million in accrued interest. During 2018, we expensed $0.8 million for the write-off of a portion of the remaining unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing and $3.3 million for an early redemption premium.

6.25% Notes Due 2026 In the first quarter of 2018, we issued $400.0 million in aggregate principal amount of 6.25% senior notes due 2026 (the 6.25% Notes due 2026). Proceeds from the 6.25% Notes due 2026 were used primarily to fund the tender offer for the 6.25% senior notes due 2021 (the 6.25% Notes due 2021) described below. We paid debt issuance costs of $6.6 million during 2018 related to the 6.25% Notes due 2026.

Tender Offer of 6.25% Notes Due 2021 Also during the first quarter of 2018, we made a tender offer for our 6.25% Notes due 2021. Under this tender offer, we retired the $400.0 million of the 6.25% Notes due 2021 and expensed $2.5 million for the write-off of the remaining unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing and $8.0 million in tender premiums.

Settlement of Capital Lease Obligation In the second quarter of 2018, we reached a settlement agreement related to a capital lease obligation that we had recognized as a result of the acquisition of MPG. In the third quarter of 2018, we paid $6.6 million related to this settlement agreement. During the fourth quarter of 2018, we paid the remaining $4.8 million related to this settlement agreement.

Foreign Credit Facilities We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries. At December 31, 2019, $106.0 million was outstanding under our foreign credit facilities and an additional $89.1 million was available, as compared to December 31, 2018, when $127.1 million was outstanding under our foreign credit facilities and an additional $78.2 million was available.

Subsequent Event In January 2020, we issued an irrevocable notice to the holders of the 6.625% Notes due 2022 to voluntarily redeem a portion of our 6.625% Notes due 2022 in the first quarter of 2020. This will result in a principal payment of $100.0 million and $2.0 million in accrued interest. We expect to expense approximately $0.4 million for the write-off of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing, and approximately $1.1 million for the payment of an early redemption premium.

Treasury stock Treasury stock increased by $7.5 million in 2019 to $209.3 million as compared to $201.8 million at year-end 2018, due to the withholding and repurchase of shares of AAM stock to satisfy employee tax withholding obligations due upon the vesting of performance shares and restricted stock units.

Credit ratings To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to our securities as an indicator of credit quality for fixed income investors. A credit rating agency may change or withdraw its ratings based on its assessment of our current and future ability to meet interest and principal repayment obligations. Credit ratings affect our cost of borrowing under our Revolving Credit Facility and may affect our access to debt capital markets and other costs to fund our business. The credit ratings and outlook currently assigned to our securities by the rating agencies are as follows:

                            Corporate      Senior       Senior
                              Family     Unsecured     Secured
                              Rating    Notes Rating Notes Rating        Outlook
Standard & Poor's              BB-           B            BB              Stable
Moody's Investors Services      B1           B2          Ba2              Stable


Dividend program We have not declared or paid any cash dividends on our common stock in 2019 or 2018.



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Contractual obligations The following table summarizes payments due on our contractual obligations as of December 31, 2019:

                                                     Payments due by period
                                  Total        <1yr         1-3 yrs        3-5 yrs       >5 yrs
                                                         (in millions)

Current and long-term debt $ 3,692.2$ 53.2$ 548.4$ 1,490.6$ 1,600.0 Interest obligations

              1,020.0      205.8           388.6         309.3        116.3
Finance lease obligations             7.8        3.2             4.4           0.2            -
Operating leases (1)                151.4       28.2            39.8          24.1         59.3
Purchase obligations (2)            131.9      118.7            13.2             -            -
Other long-term liabilities (3)     568.7       57.9           111.0         111.4        288.4
Total                           $ 5,572.0$ 467.0$    1,105.4$  1,935.6$ 2,064.0



(1)  Operating leases include all lease payments through the end of the
     contractual lease terms, which includes elections for repurchase options
     which we are reasonably certain to exercise. These commitments include
     machinery and equipment, commercial office and production facilities,
     vehicles and other assets.



(2)  Purchase obligations represent our obligated purchase commitments for
     capital expenditures and related project expense.



(3)  Other long-term liabilities primarily represent our estimated pension and
     other postretirement benefit obligations, net of GM cost sharing, that were
     actuarially determined through 2029.




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CYCLICALITY AND SEASONALITY

Our operations are cyclical because they are directly related to worldwide automotive production, which is itself cyclical and dependent on general economic conditions and other factors. Our business is moderately seasonal as our major OEM customers historically have an extended shutdown of operations (typically 1-2 weeks) in conjunction with their model year changeover and an approximate one-week shutdown in December. Our major OEM customers also occasionally have longer shutdowns of operations (up to 6 weeks) for program changeovers. Accordingly, our quarterly results may reflect these trends.

LEGAL PROCEEDINGS

We are involved in, or potentially subject to, various legal proceedings or claims incidental to our business. These include, but are not limited to, matters arising out of product warranties, tax or contractual matters, and environmental obligations. Although the outcome of these matters cannot be predicted with certainty, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.

We are subject to various federal, state, local and foreign environmental and occupational safety and health laws, regulations and ordinances, including those regulating air emissions, water discharge, waste management and environmental cleanup. We closely monitor our environmental conditions to ensure that we are in compliance with applicable laws, regulations and ordinances. We have made, and anticipate continuing to make, capital and other expenditures (including recurring administrative costs) to comply with environmental requirements at our current and former facilities. Such expenditures were not significant in 2019, 2018 and 2017.

EFFECT OF NEW ACCOUNTING STANDARDS

See Note 1 - Organization and Summary of Significant Accounting Policies in Item 8, "Financial Statements and Supplementary Data" for discussion of new accounting standards and the effect on AAM.

CRITICAL ACCOUNTING ESTIMATES

In order to prepare consolidated financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts and disclosures in our consolidated financial statements. These estimates are subject to an inherent degree of uncertainty and actual results could differ from our estimates.

Other items in our consolidated financial statements require estimation. In our judgment, they are not as critical as those disclosed below. We have discussed and reviewed our critical accounting estimates disclosure with the Audit Committee of our Board of Directors.

GOODWILL We record goodwill when the purchase price of acquired businesses exceeds the value of their identifiable net tangible and intangible assets acquired. We periodically evaluate goodwill for impairment in accordance with the accounting guidance for goodwill and other indefinite-lived intangibles that are not amortized. We review our goodwill for impairment annually during the fourth quarter. In addition, we review goodwill for impairment whenever adverse events or changes in circumstances indicate a possible impairment.

This review is performed at the reporting unit level, and involves a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess carrying value over fair value.

In performing goodwill impairment testing, we utilize a third-party valuation specialist to assist management in determining the fair value of our reporting units. Fair value of each reporting unit is estimated based on a combination of discounted cash flows and the use of pricing multiples derived from an analysis of comparable public companies multiplied against historical and/or anticipated financial metrics of each reporting unit. These calculations contain uncertainties as they require management to make assumptions including, but not limited to, market comparables, future cash flows of the reporting units, and appropriate discount and long-term growth rates.



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Subsequent to our acquisition of MPG in 2017, our business was organized into four segments: Driveline, Metal Forming, Powertrain, and Casting. Under the goodwill guidance, we determined that each of our segments represented a reporting unit. The determination of our reporting units and impairment indicators also require us to make significant judgments.

In the first quarter of 2019, we initiated a global restructuring program (the 2019 Program) to further streamline our business by consolidating our four existing segments into three segments. Under this program, the goodwill that was previously attributable to our former Powertrain reporting unit was reallocated to the Driveline and Metal Forming reporting units based on the relative fair value of the respective portions that became attributable to those reporting units. The initiation of the 2019 Program and the reorganization of our business represented a triggering event in the first quarter of 2019 to test goodwill for impairment prior to reallocating the former Powertrain goodwill to Driveline and Metal Forming. No impairment was identified as a result of completing this goodwill impairment test.

Additionally, in the fourth quarter of 2019, we completed the sale of the U.S. operations of our Casting business. This sale did not include the entities that conduct AAM's casting operations in El Carmen, Mexico, which are now reflected in our Driveline reporting unit.

As a result of these activities, as of December 31, 2019, our business is now organized into Driveline and Metal Forming reporting units, which were evaluated for impairment as part of our fourth quarter 2019 test. During this test, we determined that the carrying value of our Metal Forming reporting unit was greater than its fair value. As such, we recorded a non-cash goodwill impairment charge of $440.0 million in 2019 associated with this reporting unit. See Note 5 - Goodwill and Other Intangible Assets for further detail.

Also during our annual goodwill impairment test in the fourth quarter of 2019, we determined that the fair value of our Driveline reporting unit exceeded its carrying value by approximately 7% and the carrying value of our Metal Forming reporting unit approximated fair value after the impairment charge. A decline in the actual cash flows of Driveline or Metal Forming in future periods, as compared to the projected cash flows used in the valuation, could result in the carrying value of the reporting units exceeding their respective fair values. Further, a change in market comparables, discount rate or long-term growth rate, as a result of a change in economic conditions or otherwise, could result in the carrying values of the reporting units exceeding their respective fair values.

As a result of our annual goodwill impairment test in the fourth quarter of 2018, we determined that the carrying values of our Casting and former Powertrain reporting units were greater than their respective fair values. As such, we recorded non-cash goodwill impairment charges of $405.5 million associated with Casting and $80.0 million associated with our former Powertrain reporting unit in 2018.

IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, excluding goodwill, to be held and used are reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. Recoverability of each "held for use" asset group affected by impairment indicators is determined by comparing the forecasted undiscounted cash flows of the operations to which the assets relate to their carrying amount. If the carrying amount of an asset group exceeds the undiscounted cash flows and is therefore not recoverable, the assets in this group are written down to their estimated fair value. We estimate fair value based on market prices, when available, or on a discounted cash flow analysis. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Significant judgments and estimates used by management when evaluating long-lived assets for impairment include:

• An assessment as to whether an adverse event or circumstance has triggered

the need for an impairment review;

• Determination of asset groups, the primary asset within each group, and the

primary asset's average estimated useful life;

• Undiscounted future cash flows generated by the assets; and

• Determination of fair value when an impairment is deemed to exist, which may

     require assumptions related to future general economic conditions, future
     expected production volumes, product pricing and cost estimates, working
     capital and capital investment requirements, discount rates and estimated
     liquidation values.


Upon reclassification of the U.S. casting operations to held-for-sale in the third quarter of 2019, we recorded a pre-tax impairment charge of $225.0 million to reduce the carrying value of this business to fair value less cost to sell. See Note 2 - Sale of Business for further detail.


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The goodwill impairment charges recognized in 2019 and 2018 as described above represented triggering events for testing the recoverability of other long-lived assets, including property, plant and equipment and amortizable intangible assets associated with our Metal Forming segment in 2019 and our Casting and former Powertrain segments in 2018. No impairments of long-lived assets were identified as a result of these recoverability tests.

PENSION AND OTHER POSTRETIREMENT BENEFITS In calculating our assets, liabilities and expenses related to pension and OPEB, key assumptions include the discount rate, expected long-term rates of return on plan assets, mortality projections and rates of increase in health care costs.

The discount rates used in the valuation of our U.S. pension and OPEB obligations were based on an actuarial review of a hypothetical portfolio of long-term, high quality corporate bonds matched against the expected payment stream for each of our plans. In 2019, the weighted-average discount rates determined on that basis were 3.40% for the valuation of our pension benefit obligations and 3.35% for the valuation of our OPEB obligations. The discount rate used in the valuation of our United Kingdom (U.K.) pension obligations were based on hypothetical yield curves developed from corporate bond yield information within each regional market. In 2019, the weighted-average discount rates determined on that basis were 2.05% for our U.K. plans. The expected weighted-average long-term rates of return on our plan assets were 7.25% for our U.S. plans, and 4.00% for our U.K. plans in 2019.

We developed these rates of return assumptions based on future capital market expectations for the asset classes represented within our portfolio and a review of long-term historical returns. The asset allocation for our plans was developed in consideration of the demographics of the plan participants and expected payment stream of the liability. Our investment policy allocates approximately 30-55% of the U.S. plans' assets to equity securities, depending on the plan, with the remainder invested in fixed income securities, hedge fund investments and cash. The rates of increase in health care costs are based on current market conditions, inflationary expectations and historical information.

All of our assumptions were developed in consultation with our actuarial service providers. While we believe that we have selected reasonable assumptions for the valuation of our pension and OPEB obligations at year-end 2019, actual trends could result in materially different valuations.


The effect on our pension plans of a 0.5% decrease in both the discount rate and
expected return on assets is shown below as of December 31, 2019, our valuation
date.

                                        Expected
                          Discount      Return on
                            Rate         Assets
                               (in millions)
Decline in funded status $     50.9           N/A
Increase in 2019 expense $      0.8$      3.0

No changes in benefit levels or in the amortization of gains or losses have been assumed.

For 2020, we assumed a weighted-average annual increase in the per-capita cost of covered health care benefits of 6.50% for OPEB. The rate is assumed to decrease gradually to 5.0% by 2026 and remain at that level thereafter. A 0.5% decrease in the discount rate for our OPEB would have decreased total expense in 2019 and increased the postretirement obligation, net of GM cost sharing, at December 31, 2019 by $0.1 million and $19.6 million, respectively. A 1.0% increase in the assumed health care trend rate would have increased total service and interest cost in 2019 and the postretirement obligation, net of GM cost sharing, at December 31, 2019 by $1.4 million and $33.8 million, respectively.

AAM and GM share in the cost of OPEB for eligible retirees proportionally based on the length of service an employee had with AAM and GM. We estimate the future cost sharing payments and present it as an asset on our Consolidated Balance Sheet. As of December 31, 2019, we estimated $236.0 million in future GM cost sharing. If, in the future, GM were unable to fulfill this financial obligation, our OPEB obligations could be different than our current estimates.



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PRODUCT WARRANTY We record a liability and related charge to cost of goods sold for estimated warranty obligations at the dates our products are sold or when specific warranty issues are identified. Product warranties not expected to be paid within one year are recorded as a noncurrent liability on our Consolidated Balance Sheet. Our estimated warranty obligations for products sold are based on significant management estimates, with input from our warranty, sales, engineering, quality and legal departments. For products and customers with actual warranty payment experience, we estimate warranty costs principally based on past claims history. For certain products and customers, actual warranty payment experience does not exist or is not mature. In these cases, we estimate our costs based on the contractual arrangements with our customers, existing customers' warranty program terms and internal and external warranty data, which includes a determination of our responsibility for potential warranty issues or claims and estimates of repair costs. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. We continuously evaluate these estimates and our customers' administration of their warranty programs. We closely monitor actual warranty claim data and adjust the liability, as necessary, on a quarterly basis.

In addition to our ordinary warranty provisions with our customers, we may be responsible for certain costs associated with product recalls and field actions, which are recorded at the time our obligation is probable and can be reasonably estimated.

Our warranty accrual was $62.0 million as of December 31, 2019 and $57.7 million as of December 31, 2018. During 2019 and 2018, we made adjustments to our warranty accrual to reflect revised estimates regarding our projected future warranty obligations. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods. It is possible that changes in our assumptions or future warranty issues could materially affect our financial position and results of operations.

VALUATION OF DEFERRED TAX ASSETS AND OTHER TAX LIABILITIES Because we operate in many different geographic locations, including several foreign, state and local tax jurisdictions, the evaluation of our ability to use all recognized deferred tax assets is complex. In accordance with the accounting guidance for income taxes, we review the likelihood that we will realize the benefit of deferred tax assets and estimate whether recoverability of our deferred tax assets is "more likely than not," based on forecasts of taxable income in the related tax jurisdictions. In determining the requirement for a valuation allowance, the historical results, projected future operating results based upon approved business plans, eligible carry forward periods, and tax planning opportunities are considered, along with other relevant positive and negative evidence. If, based upon available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded.

As of December 31, 2019, we have a valuation allowance of approximately $196.0 million related to net deferred tax assets in several foreign jurisdictions and U.S. state and local jurisdictions. As of December 31, 2018 and 2017, our valuation allowance was $183.3 million and $180.4 million, respectively. If, in the future, we generate taxable income on a sustained basis in foreign and U.S. state and local jurisdictions for which we have recorded valuation allowances, our current estimate of the recoverability of our deferred tax assets could change and result in the future reversal of some or all of the valuation allowance. While we believe we have made appropriate valuations of our deferred tax assets, unforeseen changes in tax legislation, regulatory activities, audit results, operating results, financing strategies, organization structure and other related matters may result in material changes in our deferred tax asset valuation allowances or our tax liabilities. We record uncertain tax positions on the basis of a two-step process whereby: (1) we determine whether it is "more likely than not" that the tax positions will be sustained based on the technical merits of the position: and (2) for those positions that meet the "more likely than not" recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. We record interest and penalties on uncertain tax positions in income tax expense (benefit).



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As of December 31, 2019 and 2018, we had a liability for unrecognized income tax benefits and related interest and penalties of $52.6 million and $45.6 million, respectively. During the next 12 months, we may finalize an advance pricing agreement in a foreign jurisdiction, which would result in a cash payment to the relevant tax authorities and a reduction of our liability for unrecognized tax benefits and related interest and penalties. Although it is difficult to estimate with certainty the amount of any audit settlement, we do not expect any potential settlement to be materially different from what we have recorded in unrecognized tax benefits. Based on the status of ongoing tax audits, and the protocol of finalizing audits by the relevant tax authorities, it is not possible to estimate the impact of changes, if any, to previously recorded uncertain tax positions. We will continue to monitor the progress and conclusions of all ongoing audits and other communications with tax authorities and will adjust our estimated liability as necessary.




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Forward-Looking Statements

In this MD&A and elsewhere in this Form 10-K (Annual Report), we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 and relate to trends and events that may affect our future financial position and operating results. The terms such as "will," "may," "could," "would," "plan," "believe," "expect," "anticipate," "intend," "project," "target," and similar words or expressions, as well as statements in future tense, are intended to identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management's good faith belief as of that time with respect to future events and are subject to risks and may differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

•      reduced purchases of our products by General Motors Company (GM), FCA US
       LLC (FCA), or other customers;


•      our ability to respond to changes in technology, increased competition or
       pricing pressures;

• our ability to develop and produce new products that reflect market demand;

• lower-than-anticipated market acceptance of new or existing products;

• our ability to attract new customers and programs for new products;


•      reduced demand for our customers' products (particularly light trucks and
       sport utility vehicles (SUVs) produced by GM and FCA);


•      risks inherent in our global operations (including tariffs and the
       potential consequences thereof to us, our suppliers, and our customers and
       their suppliers, adverse changes in trade agreements, such as NAFTA or
       USMCA, immigration policies, political stability, taxes and other law
       changes, currency rate fluctuations, and potential disruptions of
       production and supply, including those as a result of public health
       crises, such as pandemic or epidemic illness, or otherwise);


•      a significant disruption in operations at one or more of our key
       manufacturing facilities;

• negative or unexpected tax consequences;


•      risks related to a failure of our information technology systems and
       networks, and risks associated with current and emerging technology
       threats and damage from computer viruses, unauthorized access, cyber
       attack and other similar disruptions;

• global economic conditions;


•      an impairment of our goodwill, other intangible assets, or long-lived
       assets if our business or market conditions indicate that the carrying
       values of those assets exceed their fair values;


•      liabilities arising from warranty claims, product recall or field actions,
       product liability and legal proceedings to which we are or may become a
       party, or the impact of product recall or field actions on our customers;


•      our ability or our customers' and suppliers' ability to successfully
       launch new product programs on a timely basis;

• our ability to maintain satisfactory labor relations and avoid work stoppages;


•      our suppliers', our customers' and their suppliers' ability to maintain
       satisfactory labor relations and avoid work stoppages;


•      supply shortages or price increases in raw material and/or freight,
       utilities or other operating supplies for us or our customers as a result
       of natural disasters or otherwise;


•      our ability to achieve the level of cost reductions required to sustain
       global cost competitiveness;


•      our ability to realize the expected revenues from our new and incremental
       business backlog;

• price volatility in, or reduced availability of, fuel;


•      our ability to protect our intellectual property and successfully defend
       against assertions made against us;


•      availability of financing for working capital, capital expenditures,
       research and development (R&D) or other general corporate purposes
       including acquisitions, as well as our ability to comply with financial
       covenants;


•      our customers' and suppliers' availability of financing for working
       capital, capital expenditures, R&D or other general corporate purposes;


•      risks of noncompliance with environmental laws and regulations or risks of
       environmental issues that could result in unforeseen costs at our
       facilities or reputational damage;


•      adverse changes in laws, government regulations or market conditions
       affecting our products or our customers' products;


•      our ability or our customers' and suppliers' ability to comply with
       regulatory requirements and the potential costs of such compliance;


•      changes in liabilities arising from pension and other postretirement
       benefit obligations;

• our ability to attract and retain key associates; and

• other unanticipated events and conditions that may hinder our ability to

compete.

It is not possible to foresee or identify all such factors and we make no commitment to update any forward-looking statement or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement.



                                       39


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© Edgar Online, source Glimpses

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