American Axle & Manufacturing (AXL) - 2023 Q2 - Quarterly Report

Part I Financial Information Financial Statements This section presents the unaudited condensed consolidated financial statements, highlighting increased net sales but decreased net income and operating cash flow Condensed Consolidated Statements of Income Net sales increased for both the quarter and six-month periods, while net income significantly declined Consolidated Income Statement Highlights (in millions, except EPS) | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,570.7 | $1,438.3 | $3,064.6 | $2,874.5 | | Gross Profit | $178.2 | $173.5 | $338.8 | $360.3 | | Operating Income | $57.8 | $57.7 | $93.9 | $128.0 | | Net Income | $8.0 | $22.9 | $2.9 | $23.9 | | Diluted EPS | $0.07 | $0.19 | $0.02 | $0.20 | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income significantly improved for both the quarter and six-month periods, driven by gains on cash flow hedges and foreign currency adjustments Comprehensive Income (Loss) (in millions) | Metric | Q2 2023 | Q2 2022 | 6 Months 2023 | 6 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $8.0 | $22.9 | $2.9 | $23.9 | | Other Comprehensive Income (Loss) | $11.9 | $(42.7) | $22.5 | $(19.7) | | Comprehensive Income (Loss) | $19.9 | $(19.8) | $25.4 | $4.2 | Condensed Consolidated Balance Sheets Total assets and liabilities remained stable as of June 30, 2023, with a slight increase in total stockholders' equity over the six-month period Balance Sheet Summary (in millions) | Metric | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $2,109.6 | $1,993.4 | | Total Assets | $5,507.4 | $5,469.4 | | Total Current Liabilities | $1,233.6 | $1,199.3 | | Total Liabilities | $4,862.6 | $4,842.1 | | Total Stockholders' Equity | $644.8 | $627.3 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased in the first six months of 2023, while investing activities used less cash and financing activities remained stable Cash Flow Summary - Six Months Ended June 30 (in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $164.9 | $215.2 | | Net cash used in investing activities | $(77.9) | $(150.2) | | Net cash used in financing activities | $(87.4) | $(86.7) | | Net decrease in cash | $(0.4) | $(28.8) | | Cash at end of period | $511.1 | $501.4 | Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosures on restructuring programs, long-term debt, segment revenue, the Tekfor acquisition, and an ongoing income tax dispute - The company is engaged in multiple restructuring programs, including the 2020 Program, the closure of the Emporium facility, and actions related to the Tekfor acquisition, with expected total charges of $10-$20 million in 2023[29][31] - Total long-term debt stood at $2.9 billion. In June 2023, the company amended its credit agreement to temporarily increase the total net leverage ratio covenant and reduce the interest coverage ratio covenant[43][44] - The company is contesting an IRS Notice of Deficiency regarding its 2015 tax return. If unsuccessful, the potential additional income tax expense for years 2015-2022 is estimated to be between $285 million and $335 million[83] - The acquisition of Tekfor Group in June 2022 resulted in a final gain on bargain purchase of $13.6 million. For the first six months of 2023, Tekfor contributed approximately $199 million in net sales[109][111][113] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses increased sales driven by acquisition and volumes, offset by reduced profitability due to higher costs and interest expenses, while maintaining strong liquidity Results of Operations Net sales increased for both periods, driven by acquisition and volumes, but gross margin compressed and net income sharply declined due to higher costs and expenses - Q2 2023 net sales increased by $132.4 million (9.2%) YoY, primarily due to the Tekfor acquisition ($69 million) and higher production volumes, partially offset by lower metal pass-throughs ($38 million)[142] - Gross margin declined to 11.3% in Q2 2023 from 12.1% in Q2 2022, and to 11.1% for H1 2023 from 12.5% in H1 2022, reflecting higher labor and manufacturing costs that outpaced sales growth[144][157] - Net income for H1 2023 was $2.9 million, a steep decline from $23.9 million in H1 2022, impacted by lower gross profit, higher SG&A, increased interest expense, and a significant unrealized loss on equity securities in the prior year[169] Segment Reporting Driveline segment sales and Adjusted EBITDA increased, while Metal Forming sales grew due to acquisition but its Adjusted EBITDA significantly declined due to higher costs Segment Net Sales - Six Months Ended June 30 (in millions) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Driveline | $2,100.2 | $2,070.1 | | Metal Forming | $964.4 | $804.4 | | Total | $3,064.6 | $2,874.5 | Segment Adjusted EBITDA - Six Months Ended June 30 (in millions) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Driveline | $266.2 | $255.2 | | Metal Forming | $100.8 | $136.0 | | Total | $367.0 | $391.2 | Liquidity and Capital Resources The company maintained strong liquidity of nearly $1.5 billion, despite a decrease in operating cash flow, with capital expenditures projected at 3.5% to 4.0% of sales - Total liquidity at June 30, 2023 was nearly $1.5 billion, consisting of $511 million in cash, $891 million available under the Revolving Credit Facility, and $73 million under foreign credit facilities[183] - Net cash from operating activities decreased by $50.3 million in H1 2023 compared to H1 2022, primarily due to less favorable changes in accounts payable and higher income tax payments[184][186][187] - Capital spending is expected to be between 3.5% and 4.0% of sales in 2023. Capital expenditures were $90.7 million in H1 2023, up from $71.2 million in H1 2022[190] Quantitative and Qualitative Disclosures About Market Risk The company manages currency exchange and interest rate risks using derivatives, including foreign currency forward contracts and interest rate swaps on variable-rate debt - To hedge currency risk, the company held forward contracts with a notional value of $197.6 million and a fixed-to-fixed cross-currency swap with a notional value of €200.0 million as of June 30, 2023[209][210] - To mitigate interest rate risk, the company has hedged $700.0 million of its variable-rate debt using variable-to-fixed interest rate swaps[212] - A one-percentage-point increase in interest rates would result in an annualized pre-tax earnings and cash flow impact of approximately $4.9 million[212] Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting, and Tekfor Group's integration is ongoing - Management concluded that disclosure controls and procedures were effective as of the end of the period[214] - The company is continuing to integrate the policies and processes of the Tekfor Group, acquired in June 2022, and will include it in the year-end 2023 assessment of internal controls[215] Part II Other Information Risk Factors There were no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for December 31, 2022 - There were no material changes from the risk factors previously disclosed in the December 31, 2022 Form 10-K[217] Unregistered Sales of Equity Securities and Use of Proceeds The company purchased 21,086 shares at $7.81 per share to satisfy employee tax withholding obligations, not as part of a formal repurchase plan Issuer Purchases of Equity Securities (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | 21,086 | $7.81 | | May 2023 | 0 | N/A | | June 2023 | 0 | N/A | | Total | 21,086 | $7.81 | - Share repurchases were conducted to satisfy employee tax withholding obligations upon the vesting of stock-based compensation, not as part of a formal buyback program[196] Exhibits This section lists all exhibits filed with the Form 10-Q, including the amended credit agreement, CEO/CFO certifications, and XBRL data files - A list of exhibits filed with the report is provided, including[223] - First Amendment to the Amended and Restated Credit Agreement (Exhibit 10.1) - CEO and CFO Certifications pursuant to Rule 13a-14(a) (Exhibits 31.1, 31.2) - CEO and CFO Certifications pursuant to Sarbanes-Oxley Act Section 906 (Exhibit 32) - XBRL Interactive Data Files (Exhibits 101 and 104)