AMERICAN AXLE & MANUFACTURING HOLDINGS, INC. 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 over 80 facilities in 18 countries, AAM is bringing the future faster for a safer and more sustainable tomorrow. 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 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 2022, 37% in 2021, and 39% in 2020. 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 and the AWD Chrysler Pacifica. 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 2022, and 19% in both 2021 and 2020. We are also a supplier to Ford Motor Company (Ford) for driveline system products on certain vehicle programs including the Bronco Sport, Maverick, Edge, Escape and Lincoln Nautilus, and we also sell various products to Ford from our Metal Forming segment. Sales to Ford were approximately 12% of our consolidated net sales in 2022, 2021 and 2020.
No other customer represented 10% or more of consolidated net sales during these periods.
Supply Chain Constraints Impacting the Automotive Industry
During 2022, the automotive industry has experienced, and continues 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 in 2023. 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.
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, aluminum, and other metallic materials, and resources used in
vehicle electrification and electronic components, labor shortages and increased
labor costs, fluctuations in exchange rates and interest rates 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 as certain original equipment manufacturers (OEMs) place
increased emphasis on the development of battery and hybrid electric vehicles.
The ability to respond timely to 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.
23
--------------------------------------------------------------------------------
INCREASED INVESTMENT IN VEHICLE ELECTRIFICATION AND DEMAND FOR EMISSIONS
REDUCTIONS The electrification of vehicles continues to expand, driven by a
shift in focus by certain OEMs toward battery and hybrid electric vehicles,
government regulations related to emissions, such as the Corporate Average Fuel
Economy standards, and consumer demand for greater vehicle performance, enhanced
functionality, increased electronic content and vehicle connectivity, reduced
environmental impact and affordable convenience options. As vehicle
electrification and electronic components become an increasingly larger focus
for OEMs and suppliers, the industry has seen, and will likely continue to see,
competition to develop and market new and alternative technologies, including
from new market entrants such as non-traditional automotive companies and
technology companies. Further, some traditional automotive industry participants
are developing strategic partnerships with technology companies as each party
seeks to leverage the existing customer relationships and technical knowledge of
the partner, and expedite the development and commercialization of this new
technology. An area of focus will be the product development cycle and bridging
the gap between the shorter development cycles of information technology (IT)
software and controls and the longer development cycles of traditional
powertrain components. OEMs and suppliers are developing new products, such as
hybrid and electric vehicles and the associated vehicle components, and are
improving existing products to reduce emissions through lightweighting and
efficiency initiatives, such as higher speed transmissions, and downsized
engines.
We are responding, in part, with ongoing research and development (R&D)
activities to develop hybrid and electric driveline systems and related
subsystems and components. In 2022, AAM's electric drive innovations were
recognized by Automotive News with three PACE awards, which are among the
industry's most prestigious awards regarding innovation. AAM's electric drive
technology on the Mercedes-AMG GT 63 S E Performance was awarded a PACE award,
as well as a PACE Innovation Partnership award for our high level of
collaboration with Mercedes-AMG on the program. AAM's highly integrated
three-in-one wheel-end electric drive unit was awarded a PACEpilot Innovation to
Watch award, which recognizes post-pilot, pre-commercial innovation in the
automotive and future mobility industry. Additionally, we have continued to
enhance our product portfolio to allow us to meet our customers' needs for high
performance vehicles with reduced emissions and reduced environmental impact
through our acquisition of Tekfor Group (Tekfor) during 2022. Tekfor is a
leading provider of driveline and powertrain components for both internal
combustion (ICE) and hybrid vehicles, as well as e-mobility applications.
Through our e-drive systems, e-beam axle technology, lightweight axles,
high-efficiency axles, all-wheel drive systems, high-strength connecting rod
technology, refined vibration control systems and forged axle tubes, we have
significantly advanced our efforts to improve ride and handling performance,
while reducing emissions and mass. To date, our hybrid and electric driveline
systems have been awarded multiple contracts and received multiple awards, and
our efforts have positioned us to compete in the evolving global marketplace.
INCREASED FOCUS ON ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) INITIATIVES AND
REPORTING There has been a growing focus on ESG initiatives and reporting,
including those related to Diversity, Equity, and Inclusion (DEI), by industry
stakeholders, including customers, suppliers, providers of debt and equity
capital, regulators and those in the workforce. These topics are increasingly
driving decisions made by our stakeholders. Particularly within the automotive
industry, trends toward electrification and reduced emissions have increased
focus on the environmental impact of OEMs and suppliers. The ability of OEMs and
suppliers to continually communicate and meet expectations on ESG programs and
initiatives will impact their competitive advantage to attract and retain
business, as well as a skilled workforce.
We have responded to this trend by implementing and launching programs and
initiatives addressing each topic under ESG, such as E4 (E-to-the-fourth), AAM's
energy and environmental sustainability program to drive continuous improvement
in our operations by reducing energy consumption, greenhouse gas (GHG) emissions
and water use while minimizing waste and lessening the environmental impact of
our production operations. Also, as part of our continued focus on reducing GHG
emissions, during 2022 we committed to reaching net-zero carbon emissions by
2040, and achieved the validation of our net-zero emissions targets by the
climate-action organization Science Based Targets Initiative (SBTi). The SBTi is
a partnership between CDP (formerly known as the Climate Disclosure Project ),
the United Nations Global Compact, World Resources Institute (WRI) and the World
Wide Fund for Nature (WWF) that drives ambitious climate action in the private
sector by enabling companies to set greenhouse gas emissions reduction targets
that are in line with what the latest climate science deems necessary to meet
the goals of the Paris Agreement.
24
--------------------------------------------------------------------------------
AAM's commitment to DEI begins with our Board of Directors (Board). The Board's
active oversight reflects the importance of our DEI journey to our business and
demonstrates the power of accountability to this critical initiative. With
oversight from our Board and direction from senior leadership, our DEI Steering
Committee (DEI Committee) helps to ensure that our initiatives are guided by the
experiences and recommendations of our associates. Comprised of talented and
diverse associates, the DEI Committee helps develop new company initiatives
designed to advance a respectful and inclusive company culture and to reinforce
the importance of inclusion at AAM. Refer to Item 1. Business - Human Capital
Management , for specific DEI highlights.
An in-depth review of non-financial metrics and strategies related to our ESG
initiatives and programs is included in our annual Sustainability Report, which
includes more details on our sustainability programs, initiatives and future
objectives. This report and other ESG areas of focus, such as AAM's leadership,
are made available to stakeholders through our company website. While evolving
expectations and reporting standards are driving increased ESG reporting, this
trend aligns with our cultural values and commitment to profitably grow our
business in a way that is sustainable and socially responsible.
SHIFT IN CONSUMER PREFERENCE AND OEM PRODUCTION TO LIGHT TRUCK , CROSS-OVER
VEHICLES (CUVs) AND SPORT-UTILITY VEHICLES (SUVs) There has been a trend toward
increased demand for light trucks, CUVs and SUVs in certain markets, while
demand for passenger cars has decreased. This increase in demand for light
trucks, CUVs and SUVs has been driven by changes in consumer preference as
technology advancements have made these vehicles lighter and more efficient.
Certain OEMs are responding to this change in consumer preference by shifting
their focus to developing and manufacturing these types of vehicles, resulting
in a significant reduction of passenger car vehicle programs, especially in
North America . We have benefited from this trend as a significant portion of our
business supports light truck, CUV and SUV programs in North America .
GLOBAL AUTOMOTIVE PRODUCTION AND INDUSTRY CONSOLIDATION Our customers continue
to design their products to meet demand in global markets and therefore 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 business and engineering offices around the world to
support our global locations and provide technical solutions to our customers on
a regional basis, including in North America , which represents the largest
portion of our core business, as well as in China and Europe where consumer
acceptance of electric vehicles has been stronger.
During 2022, the automotive industry experienced, and continues 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. We continue to work with customers and suppliers in our effort
to protect continuity of supply as we expect these challenges to continue in
2023.
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.
Some OEMs and suppliers may be preparing for these challenges through merger and
acquisition (M&A) 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.
In addition to AAM's technology development relationships and organic growth in
technology and processes, our joint venture partnerships and strategic
acquisitions, including the Tekfor acquisition during 2022, have provided us
with complementary technologies, expanded our product portfolio, diversified our
global customer base, and strengthened our long-term financial profile through
greater scale. The synergies achieved, or expected to be achieved through our
strategic initiatives, enhance AAM's ability to compete in today's technological
and regulatory environment, while remaining cost competitive through increased
scale and integration.
25-------------------------------------------------------------------------------- EVOLUTION OF THE AUTOMOTIVE INDUSTRY AS DEMAND FOR AUTONOMOUS VEHICLES AND RIDE-SHARING INCREASES A developing trend is the expectation that autonomous, self-driving cars are expected to become more common with continued advancements in technology, including applications such as last mile delivery. Autonomous vehicles present many possible benefits, such as a reduction in 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 with advanced capabilities in this area to be competitive in this expanding market. With population growth, increased government regulations to ease congestion and generational shifts in preferences, it is expected that the markets for ride-sharing services will continue to grow, which could cause a change in the type of vehicles utilized. However, the growth in this area has been curtailed by the impact of COVID-19, as social distancing recommendations have led to reduced utilization of ride-sharing services by consumers.
VOLUMES AND OUTLOOK
Our results of operations, financial condition and cash flows are significantly impacted by fluctuations in production volumes on the vehicle programs that we support. The following table represents historical and forecasted light vehicle production volumes inNorth America as our business is most significantly impacted by production volume fluctuations in this region. As our business is dependent on certain automotive segments, primarily the light truck, SUV and CUV segments, production volume fluctuations for the light vehicle market as a whole may not necessarily be indicative of the vehicle programs that we support. (units in millions, except percentages) 2023 Outlook % change 2022 % change 2021 North America 15.1 5.6 % 14.3 10.0 % 13.0 Source: IHS MarkitJanuary 2023
Production volumes in
We expect production volumes inNorth America to be in the range of 14.5 million to 15.1 million units in 2023, and we expect volumes in all other geographic regions in which we operate to increase in 2023, as compared to 2022. These expected increases are primarily the result of projected improvements in the supply chain as the disruptions that adversely impacted production volumes continue to diminish, including the impact of the semiconductor chip shortage on our customers. 26
-------------------------------------------------------------------------------- The discussion of our Results of Operations, Reportable Segments, and Liquidity and Capital Resources for 2021, as compared to 2020, can be found within "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report on Form 10-K filed with theSecurities and Exchange Commission (SEC) onFebruary 11, 2022 , which discussion is incorporated herein by reference. RESULTS OF OPERATIONS NET SALES Year Ended December 31, (in millions) 2022 2021 Change Percent Change Net sales$ 5,802.4 $ 5,156.6 $ 645.8 12.5 % The increase in sales in 2022, as compared to 2021, reflects approximately$204 million as a result of our acquisition of Tekfor in the second quarter of 2022. In addition, we estimate that sales in 2022 and 2021 were impacted by the semiconductor shortage and other supply chain constraints affecting the automotive industry by approximately$418 million and$607 million , respectively, resulting in an increase in sales of approximately$189 million for the year endedDecember 31, 2022 . Sales in 2022 were also positively impacted, as compared to 2021, by an increase in production volumes on certain light truck and CUV programs that we support inNorth America . COST OF GOODS SOLD Year Ended December 31, (in millions) 2022 2021 Change Percent Change Cost of goods sold$ 5,097.5 $ 4,433.9 $ 663.6 15.0 % The change in cost of goods sold reflects an increase of approximately$146 million as the impact on production volumes of the semiconductor shortage and other supply chain constraints affecting the automotive industry lessened in the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , and cost of goods sold increased by approximately$202 million as a result of our acquisition of Tekfor in the second quarter of 2022. Cost of goods sold was also impacted by increased production volumes on certain light truck and CUV programs that we support inNorth America , as well as a net increase in manufacturing costs, including metal and commodity costs, and costs for labor, utilities and transportation. In 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 support 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$32 million in the year endedDecember 31, 2021 . Materials costs as a percentage of total cost of goods sold were approximately 60% in both 2022 and 2021. GROSS PROFIT Year Ended December 31, (in millions) 2022 2021 Change Percent Change Gross profit$ 704.9 $ 722.7 $ (17.8) (2.5) % Gross margin was 12.1% in 2022 as compared to 14.0% in 2021. Gross profit and gross margin were impacted by the factors discussed in Net sales and Cost of goods sold above. 27 --------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
Year Ended December 31,
(in millions) 2022 2021 Change Percent Change
Selling, general and administrative
expenses $ 345.1 $ 344.2 $ 0.9 0.3 %
SG&A as a percentage of net sales was 5.9% in 2022 as compared to 6.7% in 2021.
R&D spending was $144.0 million in 2022 as compared to $116.8 million in 2021,
which includes customer engineering, design and development (ED&D) recoveries of
approximately $15 million in 2021. The change in SG&A expense in 2022, as
compared to 2021, was primarily attributable to increased R&D expense, partially
offset by lower compensation-related expense.
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense for the year ended
RESTRUCTURING AND ACQUISITION-RELATED COSTS Restructuring and acquisition-related costs were$30.2 million in 2022 and$49.4 million in 2021. As part of our restructuring actions, we incurred severance charges of approximately$3.5 million , as well as implementation costs, consisting primarily of plant exit costs and professional fees, of approximately$18.2 million during 2022. In 2021, we incurred severance charges of approximately$2.9 million , as well as implementation costs, consisting primarily of plant exit costs and professional fees, of approximately$40.3 million . We expect to incur approximately$10 million to$20 million of total restructuring costs in 2023. Acquisition-related costs and integration charges of$8.5 million were incurred in 2022 as we completed our acquisition of Tekfor and furthered the integration of other acquisitions completed in prior periods. This compares to$6.2 million of acquisition-related costs and integration charges incurred in 2021 as we completed our acquisition of a manufacturing facility inEmporium, Pennsylvania and furthered the integration of global enterprise planning (ERP) systems at legacy MPG locations. Acquisition-related costs primarily consist of advisory, legal, accounting, valuation and certain other professional or consulting fees incurred, and integration expenses primarily reflect costs for information technology infrastructure and enterprise resource planning systems, and consulting fees incurred in conjunction with integration activities. We expect to incur up to$10 million of integration costs in 2023 associated with our 2022 acquisition of Tekfor. See Note 2 - Restructuring and Acquisition-Related Costs for further detail. LOSS ON SALE OF BUSINESS In 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 . This loss is presented in the Loss on sale of business line item of our Consolidated Statement of Operations for the year endedDecember 31, 2021 . See Note 16 - Acquisitions and Dispositions for further detail. OPERATING INCOME Operating income was$243.9 million in 2022 as compared to$240.6 million in 2021. Operating margin was 4.2% in 2022 as compared to 4.7% in 2021. The changes in operating income and operating margin in 2022, as compared to 2021, were due to the factors discussed in Net sales, Cost of goods sold, SG&A and Restructuring and acquisition-related costs above. INTEREST EXPENSE Interest expense was$174.5 million in 2022 and$195.2 million in 2021. The decrease in interest expense in 2022, as compared to 2021, was primarily the result of our ongoing debt reduction initiatives and the impact of our previous debt refinancing actions. The weighted-average interest rate of our total debt outstanding was 5.7% in 2022 and 5.8% in 2021. We expect our interest expense in 2023 to be approximately$195 million to$205 million . INTEREST INCOME Interest income was$17.0 million in 2022 and$10.9 million in 2021. Interest income primarily includes interest earned on cash and cash equivalents, realized and unrealized gains and losses on our short-term investments during the period, and the deferred payment obligation associated with the sale of our former Casting segment, as well as the impact of the interest rate differential on our fixed-to-fixed cross-currency swap. 28 --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE) Following are the components of Other Income (Expense) for 2022 and 2021:
Debt refinancing and redemption costs InMarch 2022 , we entered into the Amended and Restated Credit Agreement (Amended and Restated Credit Agreement), which, among other things, increased the principal amount of the Term Loan A Facility (Term Loan A Facility) to$520.0 million , extended the maturity date of the Term Loan A Facility and the Revolving Credit Facility (Revolving Credit Facility) and established the use of updated reference rates. As a result, we expensed$0.2 million of debt refinancing costs related to the Amended and Restated Credit Agreement in 2022. See Note 4 - Long-Term Debt for further detail on the Amended and Restated Credit Agreement. InDecember 2022 , we entered into the Refinancing Facility Agreement No.1 (Refinancing Facility Agreement), under the Amended and Restated Credit Agreement and established a new Term Loan B Facility of$675.0 million . Additionally, the Refinancing Facility Agreement, among other things, extended the maturity date of the Term Loan B Facility and established the use of updated reference rates. As a result, we expensed$0.4 million of debt refinancing costs related to the Refinancing Facility Agreement. See Note 4 - Long-Term Debt for further detail on the Refinancing Facility Agreement. In 2022, prior to entering into the Refinancing Facility Agreement, we made voluntary prepayments totaling$100.0 million on our then outstanding 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. Also in 2022, we used the proceeds from our 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. In 2021, we made voluntary prepayments totaling$21.2 million on our Term Loan A Facility and$238.8 million on our Term Loan B 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. Also, in 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$13.6 million . See Note 16 - Acquisitions and Dispositions for additional detail on this acquisition. Unrealized gain (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 as an unrealized holding gain or loss within Other income (expense), net in our Consolidated Statements of Operations. As ofDecember 31, 2022 , our investment in REE shares was valued at$1.9 million resulting in an unrealized loss of$25.5 million for the year endedDecember 31, 2022 . This compares to an unrealized gain of$24.4 million associated with our investment in REE shares for the year endedDecember 31, 2021 . Pension settlement charges In the fourth quarter of 2021, we purchased group annuity contracts from an insurance company to settle our pension obligations for certainUnited States (U.S. ) plan participants. This resulted in a non-cash pre-tax settlement charge of$42.3 million in the fourth quarter of 2021 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, was expense of$1.8 million in 2022, as compared to expense of$3.2 million in 2021. 29 -------------------------------------------------------------------------------- INCOME TAX EXPENSE (BENEFIT) Income tax expense was$2.0 million in 2022, as compared to an income tax benefit of$4.7 million in 2021. Our effective income tax rate was 3.0% in 2022 as compared to (391.7)% in 2021. For the year endedDecember 31, 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 year endedDecember 31, 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 year endedDecember 31, 2022 varies from our effective income tax rate for the year endedDecember 31, 2021 primarily as a result of the$13.6 million gain on bargain purchase of business recognized in the year endedDecember 31, 2022 , which was not subject to income tax, as well as the release of the foreign valuation allowance during the year endedDecember 31, 2022 noted above and as a result of the benefit from foreign derived intangible income deductions in theU.S. For the year endedDecember 31, 2022 , our effective income tax rate varies from theU.S. federal statutory rate primarily due to the gain on bargain purchase of business, the discrete items noted above and the benefit from foreign derived intangible income deductions in theU.S. For the year endedDecember 31, 2021 , our effective income tax rate varied from theU.S. federal statutory rate primarily as a result of recognizing 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. 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$64.3 million in 2022 as compared to$5.9 million in 2021. Diluted earnings per share was$0.53 in 2022 as compared to$0.05 per share in 2021. Net income and EPS were primarily impacted by the factors discussed above. 30 --------------------------------------------------------------------------------
SEGMENT REPORTING
Our business is organized into Driveline and Metal Forming segments, with each representing a reportable segment under Accounting Standards Codification (ASC) 280 - Segment Reporting. The results of each segment are regularly reviewed by the chief operating decision maker to assess the performance of the segment and make decisions regarding the allocation of resources to the segments.
Our product offerings by segment are as follows:
•Driveline products consist primarily of front and rear axles, driveshafts, differential assemblies, clutch modules, balance shaft systems, disconnecting driveline technology, and electric and hybrid driveline products and systems for light trucks, SUVs, CUVs, passenger cars and commercial vehicles; and •Metal Forming products consist primarily of engine, transmission, driveline and safety-critical components for traditional internal combustion engine and electric vehicle architectures including light vehicles, commercial vehicles and off-highway vehicles, as well as products for industrial markets.
On
The following tables outline our sales and Segment Adjusted EBITDA for each of our reportable segments for the years endedDecember 31, 2022 , 2021 and 2020 (in millions): Year Ended December 31, 2022 Driveline Metal Forming Total Sales$ 4,130.8 $ 2,113.0 $ 6,243.8 Less: Intersegment sales 4.7 436.7 441.4 Net external sales$ 4,126.1 $ 1,676.3 $ 5,802.4 Segment adjusted EBITDA $ 547.0$ 200.3 $ 747.3 Year Ended December 31, 2021 Driveline Metal Forming Total Sales$ 3,744.9 $ 1,762.2 $ 5,507.1 Less: Intersegment sales 3.4 347.1 350.5 Net external sales$ 3,741.5 $ 1,415.1 $ 5,156.6 Segment adjusted EBITDA $ 577.7$ 255.6 $ 833.3 Year Ended December 31, 2020 Driveline Metal Forming Total Sales$ 3,375.5 $ 1,652.0 $ 5,027.5 Less: Intersegment sales 2.9 313.8 316.7 Net external sales$ 3,372.6 $ 1,338.2 $ 4,710.8 Segment adjusted EBITDA $ 474.8$ 245.0 $ 719.8 31
-------------------------------------------------------------------------------- The increase in Driveline sales for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , primarily reflects increased production volumes as the impact of the semiconductor shortage and other supply chain constraints affecting the automotive industry lessened in the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 . We estimate that Driveline sales increased by$214 million for the year endedDecember 31, 2022 as a result of this increase in production volumes. Driveline sales in 2022 were also positively impacted, as compared to 2021, by an increase in production volumes on certain light truck and CUV programs that we support inNorth America . The increase in sales in our Metal Forming segment for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 , primarily reflects$204 million associated with the acquisition of Tekfor that became effective onJune 1, 2022 . Metal Forming sales in 2022 also reflect an increase in intersegment sales to Driveline as the Driveline segment experienced increased production volumes on certain light truck and CUV programs that we support inNorth America . 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. For the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 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 year endedDecember 31, 2022 , as compared to the year endedDecember 31, 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, partially 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. 32 -------------------------------------------------------------------------------- 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. Year Ended December 31, 2022 2021 2020 (in millions) Net income (loss)$ 64.3 $ 5.9 $ (561.1) Interest expense 174.5 195.2 212.3 Income tax expense (benefit) 2.0
(4.7) (49.2)
Depreciation and amortization 492.1
544.3 521.9
EBITDA$ 732.9 $
740.7
Restructuring and acquisition-related costs 30.2
49.4 67.2
Debt refinancing and redemption costs 6.4 34.0 7.9 Loss on sale of business - 2.7 1.0 Impairment charges - - 510.0 Unrealized loss (gain) on equity securities 25.5 (24.4) - Pension settlements - 42.3 0.5
Non-recurring items:
Gain on bargain purchase of business (13.6) - -
Acquisition-related fair value inventory adjustment 5.0
- - Total Segment Adjusted EBITDA$ 747.3 $ 833.3 $ 719.8 33
--------------------------------------------------------------------------------
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. AtDecember 31, 2022 we had over$1.4 billion of liquidity consisting of approximately$512 million of cash and cash equivalents, approximately$866 million of available borrowings under our Revolving Credit Facility and approximately$58 million of available borrowings under foreign credit facilities. We have no significant debt maturities before 2026. We believe that operating cash flow, available cash and cash equivalent balances and available committed borrowing capacity under our Senior Secured Credit Facilities and foreign credit facilities will be sufficient to meet these needs.
OPERATING ACTIVITIES Net cash provided by operating activities was
Impact of Supply Chain Constraints We experienced an adverse impact on cash flows from operating activities as a result of the significant supply chain constraints that continued to impact the automotive industry during the year endedDecember 31, 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 in 2023. Accounts receivable For the year endedDecember 31, 2022 , we experienced a decrease in cash flow from operating activities of$62 million related to the change in our accounts receivable balance fromDecember 31, 2021 toDecember 31, 2022 , as compared to the change in our accounts receivable balance fromDecember 31, 2020 toDecember 31, 2021 . This change was primarily attributable to the timing of sales to customers in the applicable periods. Inventories In 2022, we experienced an increase in year-over-year cash flow from operating activities of approximately$72 million related to the change in our inventories balance fromDecember 31, 2021 toDecember 31, 2022 , as compared to the change in our inventories balance fromDecember 31, 2020 toDecember 31, 2021 . In 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 2021 was more significant than the increase in 2022. Interest paid Interest paid in 2022 was$172.6 million as compared to$184.9 million in 2021. The decrease in interest paid was primarily the result of our ongoing debt reduction initiatives and our previous refinancing actions. See Note 4 - Long-Term Debt for additional detail. Income taxes Income taxes paid, net was$40.4 million in 2022, as compared to$26.6 million in 2021. During the years endedDecember 31, 2022 andDecember 31, 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. See Note 1 - Organization and Summary of Significant Accounting Policies for additional detail regarding the CARES Act. As ofDecember 31, 2022 andDecember 31, 2021 , we have recorded a liability for unrecognized income tax benefits and related interest and penalties of$40.5 million and$23.4 million , respectively. InJanuary 2023 , we paid$10.1 million as a result of the Notice of Tax Due that was received from the Internal Revenue Service inDecember 2022 . See Note 9 - Income Taxes for additional detail regarding the Notice of Tax Due. Restructuring and acquisition-related costs We incurred$30.2 million and$49.4 million of charges related to restructuring and acquisition-related costs in 2022 and 2021, respectively, and a significant portion of these charges were cash charges. In 2023, we expect restructuring and acquisition-related payments to be between$20 million and$30 million for the full year. 34 -------------------------------------------------------------------------------- Pension and other postretirement benefits (OPEB) Our cash payments for OPEB, net ofGM cost sharing, were$11.9 million in 2022 and$14.2 million in 2021. This compares to our annual postretirement cost of$8.3 million in 2022 and$8.9 million in 2021. We expect our cash payments for OPEB obligations in 2023, net ofGM cost sharing, to be approximately$14.6 million .
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 2023 to be less than
Malvern Fire In 2022, we received$29.1 million of cash as reimbursements and advances under our insurance policies, of which$12.1 million was associated with operating expenses incurred as a result of the Malvern Fire and has been presented as an operating cash inflow in our Consolidated Statement of Cash Flows for the period. AtDecember 31, 2022 , we have an insurance recovery receivable of$24.0 million , which is included in Prepaid expenses and other in our Consolidated Balance Sheet. This amount was fully collected inJanuary 2023 . In 2021, we received$59.1 million of cash as reimbursements and advances under our insurance policies of which$36.0 million was associated with operating expenses incurred as a result of the Malvern Fire and has been presented as an operating cash inflow in our Consolidated Statement of Cash Flows for the period. AtDecember 31, 2021 , we had an insurance recovery receivable of$11.3 million , which was included in Prepaid expenses and other in our Consolidated Balance Sheet. See Note 15 - Manufacturing Facility Fire and Insurance Recovery for additional detail. INVESTING ACTIVITIES For the year endedDecember 31, 2022 , net cash used in investing activities was$243.0 million as compared to$161.1 million for the year endedDecember 31, 2021 . Capital expenditures were$171.4 million in 2022 and$181.2 million in 2021. We expect our capital spending in 2023 to be 3.5% to 4% of sales, which includes support for our global program launches in 2023 and 2024 within our new and incremental business backlog, as well as program capacity increases and future launches of replacement programs. 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 2022, we made payments for the acquisition of a supplier inMexico and began to pay the deferred consideration associated with our acquisition ofEmporium that was completed in 2021. These payments totaled approximately$9 million in the year endedDecember 31, 2022 . In 2021, we paid cash of$4.9 million for the acquisition ofEmporium . See Note 16 - Acquisitions and Dispositions for further detail. In 2022 and 2021, in addition to the$12.1 million and$36.0 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$17.0 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 inflow based on the nature of the associated loss incurred. FINANCING ACTIVITIES Net cash used in financing activities was$217.2 million in 2022, compared to net cash used in financing activities of$401.4 million in 2021. Total debt outstanding, net of debt issuance costs, was$2,921.0 million at year-end 2022 and$3,104.5 million at year-end 2021. The change in total debt outstanding, net of issuance costs, at year-end 2022, as compared to year-end 2021, was primarily due to the factors noted below. 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 Consolidated Balance Sheet. InMarch 2022 , Holdings andAAM, Inc. entered into the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement, among other things, increased the principal amount of the Term Loan A Facility to$520.0 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 4 - Long-Term Debt for further detail on the Amended and 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$4.5 million in 2022 related to the Amended and Restated Credit Agreement. 35 -------------------------------------------------------------------------------- InDecember 2022 , Holdings andAAM, Inc. entered into the Refinancing Facility Agreement, under the Amended and Restated Credit Agreement and established a new Term Loan B Facility of$675.0 million . The proceeds from the Refinancing Facility Agreement, together with$50.0 million cash on hand and the proceeds of a$25.0 million borrowing under the Revolving Credit Facility, were used to (a) prepay the entire principal amount of the then outstanding Term Loan B Facility, (b) pay all accrued and unpaid interest due under the Term Loan B Facility and (c) pay fees, costs and expenses payable in connection with the refinancing of the Term Loan B Facility. We expensed$0.4 million of debt refinancing costs, paid accrued interest of$2.4 million , and paid debt issuance costs of$26.9 million related to the Refinancing Facility Agreement. See Note 4 - Long-Term Debt for further detail on the Refinancing Facility Agreement. In 2022, prior to entering into the Refinancing Facility Agreement, we made voluntary prepayments totaling$100.0 million on our then outstanding 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 2021, we made voluntary prepayments totaling$21.2 million on our Term Loan A Facility and$238.8 million on our Term Loan B 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. AtDecember 31, 2022 ,$865.9 million was available under the Revolving Credit Facility. This availability reflects a reduction of$34.1 million for standby letters of credit issued against the facility. The proceeds of the Revolving Credit Facility are used for general corporate purposes. 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.
Repayment of Tekfor Group Indebtedness Upon the acquisition of Tekfor, we
assumed
5.00% Notes due 2029 In 2021, we issued$600.0 million in aggregate principal amount of 5.00% 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 year endedDecember 31, 2021 related to the 5.00% Notes. Redemption of 6.25% Notes due 2025 In 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. Foreign Credit Facilities We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries. AtDecember 31, 2022 ,$72.7 million was outstanding under our foreign credit facilities and an additional$57.8 million was available, as compared toDecember 31, 2021 , when$86.1 million was outstanding under our foreign credit facilities and an additional$65.1 million was available.
36
--------------------------------------------------------------------------------
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 may affect our cost of borrowing and/or our access
to debt capital markets. The credit ratings and outlook currently assigned to
our securities by the rating agencies are as follows:
Senior Unsecured Senior Secured
Corporate Family Rating Notes Rating Notes Rating Outlook
Standard & Poor's BB- B+ BB+ Stable
Moody's Investors Services B1 B2 Ba1 Stable
Dividend program We have not declared or paid any cash dividends on our common stock in 2022 or 2021.
Contractual obligations Our contractual obligations consist primarily of: 1) current and long-term debt; 2) operating and finance lease obligations; 3) obligated purchase commitments for capital expenditures and related project expense; 4) pension and other postretirement benefit obligations, net ofGM cost sharing; and 5) interest obligations. Information regarding expected payments by period can be found in Item 8, "Financial Statements and Supplementary Data" in this Form 10-K at Note 4 - Long-Term Debt for our current and long-term debt obligations, Note 14 - Leasing for our operating and finance lease obligations, Note 11 - Commitments and Contingencies for purchase commitments related to capital expenditures and project expense, and Note 7 - Employee Benefit Plans for pension and other postretirement benefit obligations. The expected future interest obligations associated with our current and long-term debt and finance lease obligations are approximately as follows:$192 million in 2023,$188 million in 2024,$186 million in 2025,$173 million in 2026,$126 million in 2027, and$184 million in 2028 and thereafter. 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. 37 -------------------------------------------------------------------------------- The following represents summarized financial information of 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) Year Ended December Year Ended December 31, 2022 31, 2021 Net sales $ 4,429.5 $ 3,983.0 Gross profit 445.2 410.8 Income (loss) from operations 25.1 (27.4) Net loss (59.7) (158.6) Balance Sheet Information (in millions) December 31, 2022 December 31, 2021 Current assets $ 1,061.9 $ 1,034.6 Noncurrent assets 2,317.9 2,524.2 Current liabilities 1,360.4 1,183.7 Noncurrent liabilities 3,345.3 3,791.1 Redeemable preferred stock - - Noncontrolling interest - -
At
38
--------------------------------------------------------------------------------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 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 the month of 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. LEGAL PROCEEDINGS
See Note 11 - Commitments and Contingencies in Item 8, "Financial Statements and Supplementary Data" for discussion of legal proceedings and the effect on AAM.
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. 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 ASC 740 - 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 ofDecember 31, 2022 , we have a valuation allowance of approximately$217.5 million related to net deferred tax assets in several foreign jurisdictions andU.S. federal, state and local jurisdictions. As ofDecember 31, 2021 and 2020, our valuation allowance was$201.7 million and$208.0 million , respectively. If, in the future, we generate taxable income on a sustained basis in foreign andU.S. federal, 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. Further, 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. 39 --------------------------------------------------------------------------------
Unrecognized Income Tax Benefits
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). As ofDecember 31, 2022 and 2021, we had a liability for unrecognized income tax benefits and related interest and penalties of$40.5 million and$23.4 million , respectively. We continue to monitor the progress and conclusions of all ongoing audits and other communications with tax authorities and adjust our estimated liability as necessary.
Other Income Tax Matters
We operate in multiple jurisdictions throughout the world and the income tax returns of several subsidiaries in various tax jurisdictions are currently under examination. During their examination of our 2015 U.S. federal income tax return, the Internal Revenue Service (IRS) asserted that income earned by a Luxembourg subsidiary from its Mexican branch operations should be categorized as foreign base company sales income (FBCSI) under Section 954(d) of the Internal Revenue Code and recognized currently as taxable income on our 2015U.S. federal income tax return. As a result of this assertion, theIRS issued a Notice of Proposed Adjustment (NOPA). AAM disagreed with the NOPA, believes that the proposed adjustment is without merit and contested the matter through theIRS's administrative appeals process. No resolution was reached in the appeals process and inSeptember 2022 , theIRS issued a Notice of Deficiency. TheIRS subsequently issued a Notice of Tax Due inDecember 2022 and AAM paid the assessed tax and interest of$10.1 million inJanuary 2023 . We intend to file a claim for refund for the amount of tax and interest paid related to this matter for the 2015 tax year and, if necessary, file suit in the U.S.Court of Federal Claims . We believe it is likely that we will be successful in ultimately defending our position. As such, we have not recorded any impact of theIRS's proposed adjustment in our consolidated financial statements as of, and for the year ended,December 31, 2022 . As ofDecember 31, 2022 , in the event AAM is not successful in defending its position, the potential additional income tax expense, including estimated interest charges, related to tax years 2015 through 2022, is estimated to be in the range of approximately$285 million to$335 million . In a matter of related interest, inMay 2020 , theU.S Tax Court ruled against anotherU.S. corporation, finding that the income it earned through a Mexican branch of its Luxembourg subsidiary corporation was FBCSI. In that situation, the taxpayer appealed theU.S. Tax Court decision to theU.S. Court of Appeals for the Sixth Circuit . InDecember 2021 , theU.S. Court of Appeals affirmed, in a split decision, the Tax Court decision in favor of theIRS . InJanuary 2022 , the taxpayer in the above referenced matter filed a petition for rehearing and this petition was denied. Finally, inJune 2022 , the taxpayer filed a petition with theU.S. Supreme Court to review the judgment of theU.S. Court of Appeals for the Sixth Circuit and inNovember 2022 that petition was also denied. Notwithstanding the decisions rendered in that case, and because our position is based upon different facts and circumstances, including but not limited to, differences in structure, and different income tax regulations in effect for our tax years under examination, we continue to believe, after consultation with tax and legal counsel that it is more likely than not that our structure does not give rise to FBCSI. 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 ourU.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 2022, the weighted-average discount rates determined on that basis were 5.50% for the valuation of both our pension benefit obligations and the valuation of our OPEB obligations. The discount rates used in the valuations of our non-U.S. pension obligations were based on hypothetical yield curves developed from corporate bond yield information within each regional market. In 2022, the weighted-average discount rate determined on that basis was 4.40% for our non-U.S. plans. The expected weighted-average long-term rates of return on our plan assets were 6.75% for ourU.S. plans, and 4.00% for our non-U.S. plans in 2022. 40 -------------------------------------------------------------------------------- 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 25% - 35% of theU.S. plan assets to equity securities, 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 2022, 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 ofDecember 31, 2022 , our valuation date. Expected Discount Return on Rate Assets (in millions) Decline in funded status$ (26.3) N/A Increase in 2022 expense$ 0.1 $ 2.7
No changes in benefit levels or in the amortization of gains or losses have been assumed.
For 2023, we assumed a weighted-average annual increase in the per-capita cost of covered health care benefits of 6.4% for OPEB. The rate is assumed to decrease gradually to 5.0% by 2030 and remain at that level thereafter. A 0.5% decrease in the discount rate for our OPEB would have increased total expense in 2022 and the postretirement obligation, net ofGM cost sharing, atDecember 31, 2022 by$0.2 million and$9.3 million , respectively. A 1.0% increase in the assumed health care trend rate would have increased total service and interest cost in 2022 and the postretirement obligation, net ofGM cost sharing, atDecember 31, 2022 by$0.8 million and$14.6 million , respectively. AAM andGM share in the cost of OPEB for eligible retirees proportionally based on the length of service an employee had with AAM andGM . We estimate the future cost sharing payments and present it as an asset on our Consolidated Balance Sheet. As ofDecember 31, 2022 , we estimated$138.2 million in futureGM cost sharing. If, in the future,GM were unable to fulfill this financial obligation, our OPEB obligations could be different than our current estimates. 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. 41 -------------------------------------------------------------------------------- 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. A decline in the actual cash flows of our reporting units in future periods, as compared to the projected cash flows used in our valuations, 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. Our business is organized into two segments: Driveline and Metal Forming. Under the goodwill guidance, we determined that each of our segments represents a reporting unit. The determination of our reporting units and impairment indicators also require us to make significant judgments. AtDecember 31, 2022 all goodwill was associated with our Driveline reporting unit. As a result of our goodwill impairment test completed in the fourth quarter of 2022, we determined that the fair value of our Driveline reporting unit exceeded its carrying value by approximately 15%. See Note 3 -Goodwill and Other Intangible Assets for further detail regarding our goodwill impairment analyses for the years 2022, 2021 and 2020. 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.
See Note 3 -
42
--------------------------------------------------------------------------------
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 $54.1 million as of December 31, 2022 and $59.5 million
as of December 31, 2021 . During 2022 and 2021, 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.
43
--------------------------------------------------------------------------------
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:
•global economic conditions, including the impact of inflation, recession or
recessionary concerns, or slower growth in the markets in which we operate;
•reduced purchases of our products by General Motors Company (GM), Stellantis
N.V. (Stellantis), Ford Motor Company (Ford) 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 , Stellantis and Ford);
•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 the United
States -Mexico-Canada Agreement (USMCA), immigration policies, political
stability or geopolitical conflicts, taxes and other law changes, potential
disruptions of production and supply, and currency rate fluctuations);
•supply shortages, such as the semiconductor shortage that the automotive
industry is currently experiencing and the availability of natural gas or other
fuel and utility sources in certain regions, labor shortages, including
increased labor costs, or price increases in raw material and/or freight,
utilities or other operating supplies for us or our customers as a result of
pandemic or epidemic illness such as COVID-19, geopolitical conflicts, natural
disasters 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 attacks and other similar
disruptions;
•our suppliers', our customers' and their suppliers' ability to maintain
satisfactory labor relations and avoid work stoppages;
•cost or 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;
•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;
•risks of environmental issues, including impacts of climate-related events,
that could result in unforeseen issues or costs at our facilities, or risks of
noncompliance with environmental laws and regulations, including reputational
damage;
•our ability to maintain satisfactory labor relations and avoid work stoppages;
•our ability to consummate and successfully integrate acquisitions and joint
ventures;
•our ability to achieve the level of cost reductions required to sustain global
cost competitiveness or our ability to recover certain cost increases from our
customers;
•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;
•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 qualified personnel in key positions and
functions; 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.
44--------------------------------------------------------------------------------
© Edgar Online, source
