AMERICAN AXLE & MANUFACTURING HOLDINGS, INC. This management's discussion and analysis (MD&A) should be read in conjunction with the unaudited condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Unless the context otherwise requires, references to "we," "our," "us" or "AAM" shall mean collectively (i)American Axle & Manufacturing Holdings, Inc. (Holdings), aDelaware corporation, (ii)American Axle & Manufacturing, Inc. (AAM, Inc. ), aDelaware corporation, and its direct and indirect subsidiaries, and, (iii)Metaldyne Performance Group, Inc. (MPG) and its direct and indirect subsidiaries.AAM Inc. and MPG are wholly owned subsidiaries of Holdings.
COMPANY OVERVIEW
As a leading global tier 1 automotive and mobility supplier, AAM designs, engineers and manufactures Driveline and Metal Forming technologies to support electric, hybrid, and internal combustion vehicles. Headquartered inDetroit , with nearly 85 facilities in 18 countries, AAM is bringing the future faster for a safer and more sustainable tomorrow.
Major Customers
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 (SUVs), and crossover vehicles manufactured inNorth America , supplying a significant portion ofGM's rear axle and four-wheel drive and all-wheel drive (4WD/AWD) axle requirements for these vehicle platforms. We also supplyGM with various products from our Metal Forming segment. Sales toGM were approximately 40% of our consolidated net sales in the first nine months of 2022, and 37% for both the first nine months of 2021 and the full year 2021. We also supply driveline system products to Stellantis N.V. (Stellantis) for programs including the heavy-duty Ram full-size pickup trucks and its derivatives, the AWD Chrysler Pacifica and the AWD Jeep Cherokee. In addition, we sell various products to Stellantis from our Metal Forming segment. Sales to Stellantis were approximately 18% of our consolidated net sales in the first nine months of 2022, and 19% for both the first nine months of 2021 and the full year 2021. We are also a supplier to Ford Motor Company (Ford) for driveline system products on certain vehicle programs including the FordBronco Sport , Ford Edge, Ford Escape and Lincoln Nautilus, and we sell various products to Ford from our Metal Forming segment. Sales to Ford were approximately 11% of our consolidated net sales for the first nine months of 2022, and 12% for both the first nine months of 2021 and the full year 2021.
No other customer represented 10% or more of consolidated net sales during these periods.
Supply Chain Constraints Impacting the Automotive Industry
During the first nine months of 2022, the automotive industry has continued to experience significant disruptions in the supply chain, including a shortage of semiconductor chips used by our customers, increased metal and commodity costs, higher utility costs, increased transportation costs, higher labor costs and labor shortages. As a result, we have experienced increased volatility in our production schedules, including manufacturing downtime, often with little notice from customers, higher inventory levels and increased labor costs, which have negatively impacted our results of operations and cash flows during this period. We continue to work with customers and suppliers in our effort to protect continuity of supply as we expect these challenges to continue throughout 2022. Due to the ongoing uncertainty associated with the impact of the COVID-19 pandemic, the conflict betweenRussia andUkraine and other factors causing, or exacerbating, these supply chain constraints, the ultimate impact on our net sales, results of operations and cash flows is unknown. 32 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS -- THREE MONTHS ENDED
Net Sales Three Months Ended September 30, (in millions) 2022 2021 Change Percent Change Net sales$ 1,535.2 $ 1,213.1 $ 322.1 26.6 % The increase in the third quarter of 2022, as compared to the third quarter of 2021, reflects approximately$92 million as a result of our acquisition of Tekfor in 2022. In addition, we estimate that net sales in the three months endedSeptember 30, 2022 andSeptember 30, 2021 were impacted by the semiconductor shortage and other supply chain constraints affecting the automotive industry by approximately$109 million and$245 million , respectively, resulting in an increase in sales of approximately$136 million for the three months endedSeptember 30, 2022 . Cost of Goods Sold Three Months Ended September 30, (in millions) 2022 2021 Change Percent Change Cost of goods sold$ 1,357.8 $ 1,047.5 $ 310.3 29.6 % The change in cost of goods sold reflects an increase of approximately$92 million as the impact on production volumes of the semiconductor shortage and other supply chain constraints affecting the automotive industry lessened in the three months endedSeptember 30, 2022 , as compared to the three months endedSeptember 30, 2021 , and cost of goods sold increased by approximately$88 million as a result of our acquisition of Tekfor in 2022. Cost of goods sold was also impacted by increased net manufacturing costs, including metal and commodity costs, utility costs and transportation costs. For the three months endedSeptember 30, 2022 , material costs were approximately 60% of total cost of goods sold, as compared to approximately 59% for the three months endedSeptember 30, 2021 . In the first quarter of 2021, one of our Major Customers announced its intention to cease production operations inBrazil in 2021 as part of their restructuring actions. This decision impacted certain of the programs that we supported and, as a result, we accelerated approximately$10 million of depreciation on certain property, plant and equipment in the third quarter of 2021. Gross Profit Three Months Ended September 30, (in millions) 2022 2021 Change Percent Change Gross profit$ 177.4 $ 165.6 $ 11.8 7.1 %
Gross margin was 11.6% in the third quarter of 2022, as compared to 13.7% in the
third quarter of 2021. Gross profit and gross margin were impacted by the
factors discussed in
33
--------------------------------------------------------------------------------Selling, General and Administrative Expenses (SG&A)
Three Months Ended September 30,
(in millions) 2022 2021 Change Percent Change
Selling, general & administrative
expenses $ 85.7 $ 90.5 $ (4.8) (5.3) %
SG&A as a percentage of net sales was 5.6% in the third quarter of 2022, as
compared to 7.5% of net sales in the third quarter of 2021. Research and
development (R&D) expense, net of customer engineering, design and development
(ED&D) recoveries, was approximately $35.4 million in the third quarter of 2022,
as compared to $34.7 million in the third quarter of 2021. The decrease in SG&A
expense is primarily related to lower compensation-related expense, partially
offset by the increase in R&D expense.
Amortization of Intangible Assets Amortization expense related to intangible
assets was $21.5 million for the three months ended September 30, 2022 and $21.4
million for the three months ended September 30, 2021 .
Restructuring and Acquisition-Related Costs Restructuring and
acquisition-related costs were
Operating Income Operating income was$62.3 million in the third quarter of 2022, as compared to$46.3 million in the third quarter of 2021. Operating margin was 4.1% in the third quarter of 2022, as compared to 3.8% in the third quarter of 2021. The changes in operating income and operating margin were primarily due to factors discussed inNet Sales and Cost of Goods Sold above. Interest Expense and Interest Income Interest expense was$44.8 million in the third quarter of 2022, as compared to$49.7 million in the third quarter of 2021. The decrease in interest expense was primarily the result of our ongoing debt reduction initiatives and our previous refinancing actions. The weighted-average interest rate of our long-term debt outstanding was 5.7% in the third quarter of 2022 and 5.9% in the third quarter of 2021.
Interest income was
Debt Refinancing and Redemption Costs In the third quarter of 2022, we made voluntary prepayments totaling$50.0 million on our Term Loan B Facility. As a result, we expensed approximately$0.2 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of this borrowing. In the third quarter of 2021, we made a voluntary prepayment of$12.7 million on our Term Loan A Facility. As a result, we expensed approximately$0.1 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of this borrowing. In the third quarter of 2021, we voluntarily redeemed our 6.25% Notes due 2025. This resulted in principal payments totaling$700.0 million and$19.4 million in accrued interest. We also expensed approximately$9.6 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$21.9 million for the payment of an early redemption premium. 34 -------------------------------------------------------------------------------- Gain on Bargain Purchase of Business OnJune 1, 2022 , our acquisition of Tekfor became effective, which resulted in a gain on bargain purchase. During the third quarter, the gain on bargain purchase was increased by approximately$1.4 million as a result of measurement period adjustments recorded during the period. See Note 14 - Acquisitions and Dispositions for additional detail on this acquisition. Unrealized Loss on Equity Securities We have an investment in the equity securities of REE Automotive, an e-mobility company. These equity securities are measured at fair value each reporting period with changes in fair value reported through an unrealized gain or loss within Other income (expense), net in our Condensed Consolidated Statement of Operations. As ofSeptember 30, 2022 , our investment in REE shares was valued at$3.4 million resulting in an unrealized loss of$2.3 million for the three months endedSeptember 30, 2022 . Other Expense, Net Other expense, net 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 cost. Other expense, net was$1.0 million in the third quarter of 2022, as compared to$3.1 million in the third quarter of 2021. Income Tax Benefit Income tax benefit was$5.7 million for the three months endedSeptember 30, 2022 , as compared to$13.6 million for the three months endedSeptember 30, 2021 . Our effective income tax rate was (27.4)% in the third quarter of 2022, as compared to 85.0% in the third quarter of 2021. For the three months endedSeptember 30, 2022 , we recognized a net income tax benefit of$7.5 million related to the release of a valuation allowance in a foreign jurisdiction. During the three months endedSeptember 30, 2021 , we recognized a net income tax benefit of approximately$5.2 million related to our ability to carry back prior year losses to tax years with the higher 35% corporate income tax rate under provisions of the CARES Act. Our effective income tax rate for the three months endedSeptember 30, 2022 varies from our effective income tax rate for the three months endedSeptember 30, 2021 primarily as a result of the release of the foreign valuation allowance during the three months endedSeptember 30, 2022 as noted above, as well as the mix of earnings on a jurisdictional basis during these periods. For the three months endedSeptember 30, 2022 and 2021, our effective income tax rates vary from theU.S. federal statutory rate primarily due to the discrete items noted above, the benefit from foreign derived intangible income deductions, the change in jurisdictional mix of earnings, and favorable foreign tax rates and the impact of tax credits. Net Income (Loss) and Earnings (Loss) Per Share (EPS) Net income was$26.5 million in the third quarter of 2022, as compared to a loss of$2.4 million in the third quarter of 2021. Diluted earnings per share was$0.22 per share in the third quarter of 2022, as compared to diluted loss per share of$0.02 in the third quarter of 2021. Net income (loss) and EPS for the third quarters of 2022 and 2021 were primarily impacted by the factors discussed above. 35 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS -- NINE MONTHS ENDED
Net Sales Nine Months Ended September 30, (in millions) 2022 2021 Change Percent Change Net sales$ 4,409.7 $ 3,921.5 $ 488.2 12.4 % The increase in the first nine months of 2022, as compared to the first nine months of 2021, primarily reflects approximately$55 million associated with the net effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. Net sales also increased in the first nine months of 2022 by approximately$121 million as a result of our acquisition of Tekfor in the second quarter of 2022. In addition, we estimate that sales in the first nine months of 2022 and 2021 were impacted by the semiconductor shortage and other supply chain constraints affecting the automotive industry by approximately$303 million and$471 million , respectively, resulting in an increase in sales of approximately$168 million for the nine months endedSeptember 30, 2022 . Cost of Goods Sold Nine Months Ended September 30, (in millions) 2022 2021 Change Percent Change Cost of goods sold$ 3,872.0 $ 3,338.8 $ 533.2 16.0 % The change in cost of goods sold in the first nine months of 2022, as compared to the first nine months of 2021, primarily reflects approximately$81 million related to metal market costs and the impact of foreign exchange. Cost of goods sold was also impacted by increased net manufacturing costs, including metal and commodity costs, utility costs and transportation costs. In addition, cost of goods sold increased by approximately$119 million as the impact on production volumes of the semiconductor shortage and other supply chain constraints affecting the automotive industry lessened in the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , and increased by approximately$116 million as a result of our acquisition of Tekfor in the second quarter of 2022. For the nine months endedSeptember 30, 2022 , material costs were approximately 61% of total costs of goods sold as compared to approximately 60% for the nine months endedSeptember 30, 2021 . In the first quarter of 2021, one of our Major Customers announced its intention to cease production operations inBrazil in 2021 as part of their restructuring actions. This decision impacted certain of the programs that we supported and, as a result, we accelerated depreciation on certain property, plant and equipment beginning in the first quarter of 2021. The impact on cost of goods sold of this acceleration was approximately$32 million in the first nine months of 2021. Gross Profit Nine Months Ended September 30, (in millions) 2022 2021 Change Percent Change Gross profit$ 537.7 $ 582.7 $ (45.0) (7.7) % Gross margin was 12.2% in the first nine months of 2022 as compared to 14.9% in the first nine months of 2021. Gross profit and gross margin were impacted by the factors discussed inNet Sales and Cost of Goods Sold above. 36 --------------------------------------------------------------------------------
Selling, General and Administrative Expenses (SG&A)
Nine Months Ended September 30,
(in millions) 2022 2021 Change Percent Change
Selling, general & administrative
expenses $ 256.6 $ 266.7 $ (10.1) (3.8) %
SG&A as a percentage of net sales was 5.8% in the first nine months of 2022 as
compared to 6.8% of net sales in the first nine months of 2021. R&D expense, net
of ED&D recoveries, was approximately $105.3 million in the first nine months of
2022 as compared to $96.5 million in the first nine months of 2021. The decrease
in SG&A expense is primarily related to lower compensation-related expense,
partially offset by the increase in R&D expense.
Amortization of Intangible Assets Amortization expense related to intangible
assets was $64.4 million for the nine months ended September 30, 2022 and $64.3
million for the nine months ended September 30, 2021 .
Restructuring and Acquisition-Related Costs Restructuring and
acquisition-related costs were
OnJune 1, 2022 , our acquisition of Tekfor became effective. During the nine months endedSeptember 30, 2022 , we incurred$5.8 million of acquisition-related costs associated with this acquisition. Acquisition-related costs primarily consist of advisory, legal, accounting, valuation and certain other professional or consulting fees incurred. We do not expect to incur significant additional acquisition-related costs in the fourth quarter of 2022. We expect to incur approximately$5 million of total integration costs in 2022 associated with the acquisition of Tekfor and other past acquisitions completed. Integration expenses primarily reflect costs incurred for information technology infrastructure and enterprise resource planning systems, and consulting fees incurred in conjunction with integration activities. See Note 2 - Restructuring and Acquisition-Related Costs for additional detail regarding our restructuring, acquisition and integration activity. Loss on Sale of Business In the first nine months of 2021, we completed the sale of our ownership interest in a consolidated joint venture. As a result of the sale and deconsolidation of this joint venture, we recognized a loss of$2.7 million . Operating Income Operating income was$190.3 million in the first nine months of 2022 as compared to$208.2 million in the first nine months of 2021. Operating margin was 4.3% in the first nine months of 2022 as compared to 5.3% in the first nine months of 2021. The changes in operating income and operating margin were due primarily to the factors discussed inNet Sales , Cost of Goods Sold, SG&A and Restructuring and Acquisition-Related Costs above. Interest Expense and Interest Income Interest expense was$132.2 million in the first nine months of 2022 as compared to$150.7 million in the first nine months of 2021. The decrease in interest expense was primarily the result of our ongoing debt reduction initiatives and our previous refinancing actions. The weighted-average interest rate of our long-term debt outstanding was 5.6% for the nine months endedSeptember 30, 2022 and 5.9% for the nine months endedSeptember 30, 2021 . We expect our interest expense for the full year 2022 to be approximately$180 million .
Interest income was
Debt Refinancing and Redemption Costs In the first nine months of 2022, we amended and restated our existing Credit Agreement. See Note 5 - Long-Term Debt for further detail on the Amended & Restated Credit Agreement. As a result, we incurred$0.2 million of third-party debt refinancing costs during the nine months endedSeptember 30, 2022 . In the first quarter of 2022, we used the proceeds from the upsized Term Loan A Facility to voluntarily redeem a portion of our 6.25% Notes due 2026. This resulted in a principal payment of$220 million and$0.2 million in accrued interest. We also expensed approximately$1.8 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$3.4 million for the payment of an early redemption premium. 37 -------------------------------------------------------------------------------- In the nine months endedSeptember 30, 2022 , we made voluntary prepayments totaling$100.0 million on our Term Loan B Facility. As a result, we expensed approximately$0.6 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of this borrowing. In the nine months endedSeptember 30, 2021 , we made voluntary prepayments totaling$238.8 million on our Term Loan B Facility and$21.2 million on our Term Loan A Facility. As a result, we expensed approximately$2.5 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of these borrowings. In the third quarter of 2021, we voluntarily redeemed our 6.25% Notes due 2025. This resulted in principal payments totaling$700.0 million and$19.4 million in accrued interest. We also expensed approximately$9.6 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$21.9 million for the payment of an early redemption premium. Gain on Bargain Purchase of Business OnJune 1 2022 , our acquisition of Tekfor became effective, which resulted in a gain on bargain purchase of$13.0 million . See Note 14 - Acquisitions and Dispositions for additional detail on this acquisition. Unrealized Loss on Equity Securities We have an investment in the equity securities of REE Automotive, an e-mobility company. These equity securities are measured at fair value each reporting period with changes in fair value reported through an unrealized holding gain or loss within Other income (expense), net in our Condensed Consolidated Statement of Operations. As ofSeptember 30, 2022 , our investment in REE shares was valued at$3.4 million resulting in an unrealized loss of$24.0 million for the nine months endedSeptember 30, 2022 . Other Expense, Net Other expense, net 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 cost. Other expense, net was$4.4 million in the first nine months of 2022 as compared to$1.3 million in the first nine months of 2021. Income Tax Benefit Income tax benefit was$2.1 million for the nine months endedSeptember 30, 2022 as compared to$2.4 million for the nine months endedSeptember 30, 2021 . Our effective income tax rate was (4.3)% in the first nine months of 2022 as compared to (4.8)% in the first nine months of 2021. For the nine months endedSeptember 30, 2022 , we recognized a net income tax benefit of$7.5 million related to the release of a valuation allowance in a foreign jurisdiction. During the nine months endedSeptember 30, 2021 , we recognized a net income tax benefit of approximately$5.2 million related to our ability to carry back prior year losses to tax years with the higher 35% corporate income tax rate under provisions of the CARES Act. Our effective income tax rate for the nine months endedSeptember 30, 2022 varies from our effective income tax rate for the nine months endedSeptember 30, 2021 primarily as a result of the$13.0 million gain on bargain purchase of business recognized in the nine months endedSeptember 30, 2022 , which was not subject to income tax, as well as the release of the foreign valuation allowance during the nine months endedSeptember 30, 2022 noted above and the mix of earnings on a jurisdictional basis during these periods. For the nine months endedSeptember 30, 2022 and 2021, our effective income tax rates vary from theU.S. federal statutory rate primarily due to the gain on bargain purchase of business, the discrete items noted above, the benefit from foreign derived intangible income deductions, the change in jurisdictional mix of earnings, and favorable foreign tax rates and the impact of tax credits. Due to the uncertainty associated with the extent and ultimate impact of the significant supply chain constraints affecting the automotive industry, including COVID-19, the semiconductor shortage and resulting impact on global automotive production volumes, and the conflict betweenRussia andUkraine , we may experience lower than projected earnings in certain jurisdictions in future periods, and as a result, it is reasonably possible that changes in valuation allowances could be recognized in future periods and such changes could be material to our financial statements. Net Income and Earnings Per Share (EPS) Net income was$50.4 million in the first nine months of 2022 as compared to$52.2 million in the first nine months of 2021. Diluted EPS was$0.42 per share in the first nine months of 2022 as compared to$0.44 per share in the first nine months of 2021. Net income and EPS for the first nine months of 2022 and 2021 were primarily impacted by the factors discussed above. 38 --------------------------------------------------------------------------------
SEGMENT REPORTING
Our business is 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 to the segments.
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, SUVs, crossover vehicles, passenger cars and commercial vehicles; and •Metal Forming products consist primarily of engine, transmission, driveline and safety-critical components for traditional internal combustion engine and electric vehicle architectures including light vehicles, commercial vehicles and off-highway vehicles, as well as products for industrial markets.
On
The following table represents sales by reportable segment for the three and
nine months ended
Nine Months Ended
Three Months Ended September 30, September 30,
2022 2021 2022 2021
Driveline $ 1,061.1 $ 870.4 $ 3,163.6 $ 2,831.9
Metal Forming 591.2 422.7 1,585.9 1,352.1
Eliminations (117.1) (80.0) (339.8) (262.5)
Net Sales $ 1,535.2 $ 1,213.1 $ 4,409.7 $ 3,921.5
The Driveline segment experienced increased production volumes on certain
vehicle programs that we support as the impact of the semiconductor shortage and
other supply chain constraints affecting the automotive industry lessened in the
three and nine months ended September 30, 2022 , as compared to the three and
nine months ended September 30, 2021 . We estimate that Driveline sales increased
by $118 million and $199 million for the three and nine months ended
September 30, 2022 , respectively, as a result of this increase in production
volumes. The increase in Driveline sales for the nine months ended September 30,
2022 , as compared to the nine months ended September 30, 2021 , also reflects
approximately $37 million associated with the effect of metal market
pass-throughs to our customers and the impact of foreign exchange related to
translation adjustments.
The increase in Metal Forming sales for the three and nine months ended
September 30, 2022 , as compared to the three and nine months ended September 30,
2021 , primarily reflects approximately $92 million and $121 million ,
respectively, associated with the acquisition of Tekfor that became effective on
June 1, 2022 . The increase in Metal Forming sales for the nine months ended
September 30, 2022 , as compared to the nine months ended September 30, 2021 ,
also reflects approximately $18 million associated with the effect of metal
market pass-throughs to our customers and the impact of foreign exchange related
to translation adjustments.
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. We define EBITDA to be earnings before interest expense, income taxes,
depreciation and amortization. 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, loss on the
sale of a business, impairment charges, pension settlements, unrealized gains or
losses on equity securities, and non-recurring items.
39
--------------------------------------------------------------------------------
The amounts for Segment Adjusted EBITDA for the three and nine months ended
Nine Months Ended
Three Months Ended September 30, September 30,
2022 2021 2022 2021
Driveline $ 146.4 $ 128.4 $ 420.3 $ 450.2
Metal Forming 52.0 54.8 169.3 218.5
Total segment adjusted EBITDA $ 198.4 $ 183.2 $ 589.6 $ 668.7
For the three months ended September 30, 2022 , as compared to the three months
ended September 30, 2021 , the increase in Segment Adjusted EBITDA for the
Driveline segment was primarily attributable to a net increase in production
volumes on vehicle programs we support, partially offset by increased
manufacturing costs, including higher metal and commodity costs, increased labor
costs and increased transportation costs.
For the nine months ended September 30, 2022 , as compared to the nine months
ended September 30, 2021 , the change in Segment Adjusted EBITDA for the
Driveline segment was primarily attributable to the impact of increased
manufacturing costs, including higher metal and commodity costs, higher utility
costs and increased transportation costs, partially offset by a net increase in
production volumes on vehicle programs we support.
For the three and nine months ended September 30, 2022 , as compared to the three
and nine months ended September 30, 2021 , the change in Segment Adjusted EBITDA
for the Metal Forming segment was primarily attributable to the impact of
increased net manufacturing costs, including higher metal and commodity costs,
increased labor costs, higher utility costs and increased transportation costs,
offset by a net increase in production volumes on the vehicle programs we
support.
Reconciliation of Non-GAAP and GAAP Information
In addition to results reported in accordance with accounting principles generally accepted inthe 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 withSecurities 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 for our reportable segments excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, loss on the sale of a business, impairment charges, pension settlements, unrealized gains or losses on equity securities, 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. EBITDA and Total Segment Adjusted EBITDA are also key metrics used in our calculation of incentive compensation. 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. 40 -------------------------------------------------------------------------------- Nine Months Ended Three Months Ended September 30, September 30, 2022 2021 2022 2021 (in millions) Net income (loss) $ 26.5$ (2.4) $ 50.4 $ 52.2 Interest expense 44.8 49.7 132.2 150.7 Income tax benefit (5.7) (13.6) (2.1) (2.4) Depreciation and amortization 124.8 135.6 367.1 421.2 EBITDA $ 190.4$ 169.3 $ 547.6 $ 621.7 Restructuring and acquisition-related costs 7.9 7.4 26.4 40.8 Debt refinancing and redemption costs 0.2 31.6 6.0 34.0 Loss on sale of business - - - 2.7 Unrealized loss (gain) on equity securities 2.3 (19.4) 24.0 (19.4) Non-recurring items:Malvern Fire charges, net of recoveries (1.0) (5.7) (6.4) (11.1) Gain on bargain purchase of business (1.4) - (13.0) - Acquisition-related fair value - - 5.0 - inventory adjustment Total segment adjusted EBITDA $ 198.4$ 183.2 $ 589.6 $ 668.7
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 borrowing capacity under our Senior Secured Credit Facilities and foreign credit facilities will be sufficient to meet these needs.
At
Operating Activities In the first nine months of 2022, net cash provided by operating activities was$300.4 million as compared to$436.0 million in the first nine months of 2021. The following factors impacted cash from operating activities in the first nine months of 2022, as compared to the first nine months of 2021: Impact of Supply Chain Constraints We experienced lower earnings and cash flows from operating activities as a result of the significant supply chain constraints that continued to impact the automotive industry during the nine months endedSeptember 30, 2022 , including increased metal and commodity costs, higher utility costs, increased transportation costs, higher labor costs and labor shortages. We expect these supply chain constraints to continue through 2022. Accounts receivable For the nine months endedSeptember 30, 2022 , we experienced a decrease in cash flow from operating activities of approximately$252 million related to the change in our accounts receivable balance fromDecember 31, 2021 toSeptember 30, 2022 , as compared to the change in our accounts receivable balance fromDecember 31, 2020 toSeptember 30, 2021 . This change was primarily attributable to the timing of sales to customers in the applicable periods. Inventories For the nine months endedSeptember 30, 2022 , we experienced an increase in cash flow from operating activities of approximately$82 million related to the change in our inventories balance fromDecember 31, 2021 toSeptember 30, 2022 , as compared to the change in our inventories balance fromDecember 31, 2020 toSeptember 30, 2021 . In the nine months endedSeptember 30, 2021 , we began to increase inventory levels as a result of volatility in production schedules and unexpected downtime at certain of our manufacturing facilities as a result of the semiconductor chip shortage that has impacted the automotive industry. This increase in inventory levels in the first nine months of 2021 was more significant than the increase in the first nine months of 2022. 41 -------------------------------------------------------------------------------- Accounts payable and accrued expenses For the nine months endedSeptember 30, 2022 , we experienced an increase in cash flow from operating activities of approximately$130 million related to the change in our accounts payable and accrued expenses balance fromDecember 31, 2021 toSeptember 30, 2022 , as compared to the change in our accounts payable and accrued expenses balance fromDecember 31, 2020 toSeptember 30, 2021 . This change was primarily attributable to the timing of production and the associated purchases from suppliers within the applicable periods, as well as the timing of payments to suppliers. Income taxes Income taxes paid, net was$28.5 million in the first nine months of 2022, as compared to$17.8 million in the first nine months of 2021. During the first nine months of 2022 and 2021, we received income tax refunds of approximately$5.4 million and$6.0 million , respectively, related to the utilization of net operating losses under the provisions of the CARES Act.
Interest paid Interest paid was
Malvern Fire In the first nine months of 2022 and 2021, we received$14.0 million and$51.1 million of cash, respectively, as reimbursements and advances under our insurance policies, of which$7.7 million and$28.0 million , respectively, were associated with operating expenses incurred as a result of the Malvern Fire and have been presented as operating cash inflows in our Condensed Consolidated Statement of Cash Flows for these periods. AtSeptember 30, 2022 , we have an insurance recovery receivable of$5.9 million , which is included in Prepaid expenses and other in our Condensed Consolidated Balance Sheet. See Note 15 - Manufacturing Facility Fire and Insurance Recovery for additional detail. Restructuring and acquisition-related costs For the full year 2022, we expect restructuring and acquisition-related payments in cash flows from operating activities to be between$30 million and$40 million , and we expect the timing of cash payments to approximate the timing of charges incurred. Pension and other postretirement benefits Due to the availability of our pre-funded pension balances (previous contributions in excess of prior required pension contributions), we expect our regulatory pension funding requirements in 2022 to be less than$1 million . We expect our cash payments for other postretirement benefit obligations in 2022, net ofGM cost sharing, to be approximately$16.5 million . Investing Activities In the first nine months of 2022, net cash used in investing activities was$197.4 million as compared to$94.9 million for the nine months endedSeptember 30, 2021 . Capital expenditures were$117.9 million in the first nine months of 2022 as compared to$115.8 million in the first nine months of 2021. We expect our capital spending in 2022 to be 3% to 3.5% of sales. OnJune 1, 2022 , our acquisition of Tekfor became effective and we paid approximately$80 million , net of cash acquired, which was funded entirely with cash on hand. Also in the first nine months of 2022, we made payments for the acquisition of a supplier inMexico and began to pay the deferred consideration associated with our acquisition of Emporium that was completed in 2021. These payments totaled approximately$8 million in the nine months endedSeptember 30, 2022 . We paid cash of$4.9 million in the first nine months of 2021 for the acquisition of Emporium. See Note 14 - Acquisitions and Dispositions for further detail. In the first nine months of 2022 and 2021, in addition to the$7.7 million and$28.0 million , respectively, of cash reimbursements and advances received under our insurance policies associated with operating expenses incurred as a result of the Malvern Fire, we received$6.3 million and$23.1 million , respectively, of cash associated with machinery and equipment that was damaged or destroyed as a result of the Malvern Fire. This cash received has been classified as an investing cash flow based on the nature of the associated loss incurred. Financing Activities In the first nine months of 2022, net cash used in financing activities was$147.8 million , as compared to$394.2 million in the first nine months of 2021. The following factors impacted cash from financing activities in the first nine months of 2022, as compared to the first nine months of 2021: 42 -------------------------------------------------------------------------------- Senior Secured Credit Facilities Our Senior Secured Credit Facilities, which are comprised of our Revolving Credit Facility, our Term Loan A Facility, and our Term Loan B Facility, 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 Condensed Consolidated Balance Sheet. InMarch 2022 , Holdings, andAAM, Inc. entered into the Amended & Restated Credit Agreement. The Amended & Restated Credit Agreement, among other things, increased the principal amount of the Term Loan A Facility to$520 million , extended the maturity date of the Term Loan A Facility and the Revolving Credit Facility, and established the use under the Term Loan A Facility and Revolving Credit Facility of updated reference rates. See Note 5 - Long-Term Debt for further detail on the Amended & Restated Credit Agreement. As a result, we expensed$0.2 million of debt refinancing costs, paid accrued interest of$1.0 million , and paid debt issuance costs of$4.4 million in the nine months endedSeptember 30, 2022 related to the Amended & Restated Credit Agreement. In the first nine months of 2022, we made voluntary prepayments totaling$100.0 million on our Term Loan B Facility. As a result, we expensed approximately$0.6 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of this borrowing. In the first nine months of 2021, we made voluntary prepayments of$238.8 million on our Term Loan B Facility and$21.2 million on our Term Loan A Facility. As a result, we expensed approximately$2.5 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the life of these borrowings. AtSeptember 30, 2022 , we had$893.5 million available under the Revolving Credit Facility. This availability reflects a reduction of$31.5 million for standby letters of credit issued against the facility. The proceeds of the Revolving Credit Facility are used for general corporate purposes. See Note 5 - Long-Term Debt for additional information regarding our Senior Secured Credit Facilities. Redemption of 6.25% Notes due 2026 In the first quarter of 2022, we used the proceeds from the upsized Term Loan A Facility to voluntarily redeem a portion of our 6.25% Notes due 2026. This resulted in a principal payment of$220.0 million and$0.2 million in accrued interest. We also expensed approximately$1.8 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$3.4 million for the payment of an early redemption premium. 5.00% Notes due 2029 In the third quarter of 2021, we issued$600.0 million in aggregate principal amount of 5.00% senior notes due 2029 (the 5.00% Notes). Proceeds from the 5.00% Notes were used to fund the redemption of the remaining$600.0 million of our former 6.25% senior notes due 2025. We paid debt issuance costs of$9.2 million in the nine months endedSeptember 30, 2021 related to the 5.00% Notes. Redemption of 6.25% Notes due 2025 In the third quarter of 2021, we voluntarily redeemed our 6.25% Notes due 2025. This resulted in principal payments totaling$700 million and$19.4 million in accrued interest. We also expensed approximately$9.6 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$21.9 million for the payment of an early redemption premium.
Repayment of Tekfor Group Indebtedness Upon the acquisition of Tekfor, we
assumed
Foreign credit facilities We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries. AtSeptember 30, 2022 ,$70.2 million was outstanding under our foreign credit facilities, as compared to$86.1 million atDecember 31, 2021 . AtSeptember 30, 2022 , an additional$64.7 million was available under our foreign credit facilities.Treasury stockTreasury stock increased by$1.9 million in the first nine months of 2022 to$218.2 million as compared to$216.3 million at year-end 2021, due to the withholding and repurchase of shares of AAM stock to satisfy employee tax withholding obligations due upon the vesting of stock-based compensation. 43 -------------------------------------------------------------------------------- Subsidiary Guarantees of Registered Debt Securities Our 6.875% Notes, 6.50% Notes, 6.25% Notes, and 5.00% Notes (collectively, the Notes) are senior unsecured obligations ofAAM, Inc. (Issuer); all of which are fully and unconditionally guaranteed, on a joint and several basis, by Holdings and substantially all domestic subsidiaries ofAAM, Inc. andMPG Inc (Subsidiary Guarantors). Holdings has no significant assets other than its 100% ownership inAAM, Inc. andMPG Inc. , and no direct subsidiaries other thanAAM, Inc. andMPG Inc.
Each guarantee by Holdings and/or any of the Subsidiary Guarantors is:
•a senior obligation of the relevant Subsidiary Guarantors; •the unsecured and unsubordinated obligation of the relevant Subsidiary Guarantors; and •of equal rank with all other existing and future unsubordinated and unsecured indebtedness of the relevant Subsidiary Guarantors.
Each guarantee by a Subsidiary Guarantor provides by its terms that it will be automatically, fully and unconditionally released and discharged upon:
•any sale, exchange or transfer (by merger or otherwise) of the capital stock of such Subsidiary Guarantor, or the sale or disposition of all the assets of such Subsidiary Guarantor, which sale, exchange, transfer or disposition is made in compliance with the applicable provisions of the indentures; •the exercise by the issuer of its legal defeasance option or covenant defeasance option or the discharge of the issuer's obligations under the indentures in accordance with the terms of the indentures; or •the election of the issuer to affect such a release following the date that such guaranteed Notes have an investment grade rating from both Standard & Poor'sRatings Group, Inc , and Moody's Investors Service, Inc. The following represents summarized financial information ofAAM Holdings ,AAM Inc. and the Subsidiary Guarantors (collectively, the Combined Entities). The information has been prepared on a combined basis and excludes any investments ofAAM Holdings ,AAM Inc. , or the Subsidiary Guarantors in non-guarantor subsidiaries. Intercompany transactions and amounts between Combined Entities have been eliminated. Statement of Operations Information (in millions) Nine Months Ended Year Ended December September 30, 2022 31, 2021 Net sales $ 3,392.4 $ 3,983.0 Gross profit 330.4 410.8 Income (loss) from operations 15.6 (27.4) Net loss (67.4) (158.6) Balance Sheet Information (in millions) September 30, 2022 December 31, 2021 Current assets $ 1,062.9 $ 1,034.6 Noncurrent assets 2,436.7 2,524.2 Current liabilities 1,352.1 1,183.7 Noncurrent liabilities 3,658.0 3,791.1 Redeemable preferred stock - - Noncontrolling interest - -
At
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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. Typically, our business is also moderately seasonal as our major OEM customers historically have an extended shutdown of operations (normally 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 six weeks) for program changeovers. Accordingly, our quarterly results may reflect these trends.
LITIGATION AND ENVIRONMENTAL MATTERS
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, contractual matters, and environmental obligations. Although the outcome of these matters cannot be predicted with certainty, at this time 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 fileU.S. federal, state and local income tax returns, as well as foreign income tax returns in jurisdictions throughout the world. We are also subject to examinations of these tax returns by the relevant tax authorities. Negative or unexpected outcomes of these examinations and audits, and any related litigation, could have a material adverse impact on our results of operations, financial condition and 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 will continue to closely monitor our environmental conditions to ensure that we are in compliance with all 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 the third quarter of 2022. We are subject to risks of environmental issues, including impacts of climate-related events, that could result in unforeseen disruptions or costs at our facilities. We did not experience any climate-related events in the third quarter of 2022 that we believe could have a material adverse impact on our results of operations, financial condition and cash flows. 45
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