American Axle & Manufacturing (AXL) - 2023 Q4 - Annual Report

Business Overview AAM is a global automotive supplier focusing on driveline and metal forming technologies for diverse vehicle types, serving major OEMs Business Description AAM is a global Tier 1 automotive supplier specializing in driveline and metal forming technologies for electric, hybrid, and ICE vehicles, with key customers GM, Stellantis, and Ford Company Overview & Major Customers AAM is a leading global Tier 1 automotive supplier of driveline and metal forming technologies, with GM, Stellantis, and Ford as primary customers - AAM is a leading global Tier 1 automotive supplier that designs, engineers, and manufactures Driveline and Metal Forming technologies for electric, hybrid, and internal combustion vehicles[9] Sales by Major Customer (as % of Consolidated Net Sales) | Customer | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | General Motors (GM) | 39% | 40% | 37% | | Stellantis N.V. | 16% | 18% | 19% | | Ford Motor Company | 12% | 12% | 12% | Business Strategy & Competitive Strengths AAM's strategy focuses on securing its core ICE business while growing electrification, leveraging operational excellence and technology leadership - The company's strategy is to secure and enhance its core business of internal combustion engine (ICE) programs while simultaneously growing its electrification business[12] - Key competitive strengths include operational excellence, high-quality standards, and technology leadership, with AAM receiving multiple customer awards, including the GM Overdrive Award for three consecutive years[13][16] - AAM is focused on technology leadership in both its core business (e.g., high-efficiency and lightweight axles) and its growing electrification portfolio (e.g., e-Beam axles)[18][19][23] - The company has secured significant future business, including next-generation full-size pickup truck axle programs and a new e-Beam axle program for a future Stellantis electric vehicle[20][24] - AAM is diversifying its customer base with recent business awards from customers like Jupiter Electric Mobility, Mahindra, and Skywell, and is expanding its global presence to support customer platforms worldwide[27][28] Human Capital & ESG AAM employs 19,000 associates globally, committed to net-zero emissions by 2040, with strong safety and DEI programs - AAM employs approximately 19,000 associates globally, with about 14,000 being hourly employees, of whom 72% are represented by collective bargaining agreements[38] - The company is committed to reaching net-zero carbon emissions by 2040, with targets validated by the Science Based Targets Initiative (SBTi)[37] - AAM's safety program (S-to-the-Fourth) has resulted in a Total Recordable Incident Rate (TRIR) of 0.85 in 2023, a reduction of approximately 60% since the program began in 2015[46] - The company has a formal Diversity, Equity, and Inclusion (DEI) program with Board oversight, a DEI Steering Committee, and several Associate Resource Groups (ARGs) to foster an inclusive culture[39][40] Executive Officers This section lists the key executive officers of American Axle & Manufacturing, detailing their positions Executive Officers of AAM | Name | Age | Position | | :--- | :--- | :--- | | David C. Dauch | 59 | Chairman of the Board & Chief Executive Officer | | Terri M. Kemp | 58 | Senior Vice President - Human Resources & Sustainability | | Michael J. Lynch | 59 | President & Chief Operating Officer | | Christopher J. May | 54 | Executive Vice President & Chief Financial Officer | | Tolga I. Oal | 52 | President - Driveline | | Matthew K. Paroly | 58 | Vice President & General Counsel | Cybersecurity AAM maintains a formal cybersecurity risk management program overseen by the Audit Committee, reporting no material incidents in 2023 - Cybersecurity risk is managed through an enterprise risk management program and an Information Security Council (ISC) led by the Chief Information Security Officer (CISO)[120][121] - The Audit Committee of the Board of Directors provides oversight, receiving quarterly reports on cybersecurity key performance indicators (KPIs), industry trends, and program updates[123] - No cybersecurity incidents during the year ended December 31, 2023, had a material impact on the company's strategy, financial condition, or results of operations[124] Properties AAM operates over 80 global facilities, including manufacturing plants for driveline and metal forming, and corporate/technical centers Number of Facilities by Type and Country (Selected) | Country | Driveline Mfg. | Metal Forming Mfg. | Corporate/Tech Centers | | :--- | :--- | :--- | :--- | | United States | 2 | 21 | 5 | | Mexico | 7 | 6 | 0 | | China | 4 | 1 | 2 | | Germany | 1 | 5 | 1 | | Total | 26 | 42 | 13 | Risk Factors The company faces significant operational, industry, financial, and regulatory risks, including supply chain disruptions and substantial indebtedness Risk Factors AAM faces significant risks from operations, industry dynamics, and financial structure, including supply chain issues, customer concentration, and substantial debt Operational Risks Key operational risks include supply chain disruptions, high customer concentration, and challenges in the transition to electric vehicles - The business is susceptible to supply chain disruptions, including volatility in material costs, logistical constraints, and labor shortages, which can negatively impact production and financial condition[58][60][61] - AAM has a high concentration of sales with GM (39%), Stellantis (16%), and Ford (12%) in 2023, making it vulnerable to production reductions or market share losses by these key customers[64] - A significant portion of the company's business is supported by its Guanajuato Manufacturing Complex in Mexico, exposing it to risks related to trade, tariffs, and labor in that region[66] - The industry's shift to EVs presents risks related to significant capital investment, uncertain consumer adoption rates, and potential differences between actual and forecasted revenues for EV programs[68] Industry and Market Risks The company faces continuous customer price pressure, intense market competition, and vulnerability to shifts in consumer demand for light trucks - The company is under continuous pressure from customers to implement annual price reductions, which could adversely affect results if not offset by cost-saving initiatives[86] - The automotive supply market is highly competitive, with pressure from other suppliers, OEM in-house operations, and new technology entrants[87] - A substantial portion of revenue is derived from products for ICE light truck, SUV, and CUV platforms, making the company vulnerable to shifts in consumer demand away from these segments[91] Financial and Legal Risks Significant financial risks include substantial indebtedness and potential material losses from product recalls or asset impairment - The company has incurred substantial indebtedness, which could reduce operational flexibility, limit access to capital, and contains covenants that restrict certain corporate actions[94][95] - AAM is exposed to potentially material losses and costs from product recalls, field actions, and warranty claims[77][78] - Goodwill and other long-lived assets are at risk of impairment, with the fair value of the Driveline reporting unit exceeding its carrying value by approximately 13% during the Q4 2023 impairment test[84][85][233] Regulatory and International Risks Global operations are subject to risks from tariffs, changing trade agreements, new tax laws, and ongoing geopolitical conflicts - Global operations are subject to risks including tariffs, changes in trade agreements, tax laws (such as the OECD/G20 Pillar Two framework), and geopolitical conflicts[101][110] - AAM is in litigation with the IRS over a tax dispute concerning foreign base company sales income (FBCSI), with a potential additional income tax expense for years 2015-2023 estimated to be between $300 million and $350 million if unsuccessful[224][398] Financial Information and Performance This section details AAM's financial results, liquidity, and critical accounting estimates, highlighting a net loss in 2023 Management's Discussion and Analysis (MD&A) In 2023, net sales grew 4.8% to $6.08 billion, but gross profit and net income declined due to increased costs and the UAW strike Results of Operations (2023 vs. 2022) AAM's 2023 financial results show increased net sales but decreased gross profit, operating income, and a net loss, impacted by the UAW strike Key Financial Results (in millions, except EPS) | Metric | 2023 | 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $6,079.5 | $5,802.4 | $277.1 | 4.8% | | Gross Profit | $624.3 | $704.9 | $(80.6) | (11.4)% | | Operating Income | $146.6 | $243.9 | $(97.3) | (39.9)% | | Net Income (Loss) | $(33.6) | $64.3 | $(97.9) | N/A | | Diluted EPS | $(0.29) | $0.53 | $(0.82) | N/A | - The 2023 UAW strike had an estimated negative impact of $99 million on sales and $27 million on pre-tax income[134] - The increase in net sales was primarily driven by the acquisition of Tekfor (contributing $193 million) and higher production volumes, partially offset by unfavorable metal market pass-throughs and foreign exchange effects ($107 million)[155] - Gross margin decreased from 12.1% in 2022 to 10.3% in 2023, primarily due to increased manufacturing costs (especially labor) and production inefficiencies[156][157] - Interest expense increased to $201.7 million from $174.5 million in 2022, mainly due to higher interest rates on variable-rate debt[162] Segment Performance Driveline segment Adjusted EBITDA increased due to higher volumes, while Metal Forming's declined significantly due to increased costs and inefficiencies Segment Sales and Adjusted EBITDA (in millions) | Segment | Measure | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | :--- | | Driveline | Net External Sales | $4,176.5 | $4,063.5 | $3,695.1 | | | Segment Adj. EBITDA | $543.6 | $510.9 | $541.8 | | Metal Forming | Net External Sales | $1,903.0 | $1,738.9 | $1,461.5 | | | Segment Adj. EBITDA | $149.7 | $236.4 | $291.5 | - Driveline Segment Adjusted EBITDA increased primarily due to higher production volumes, partially offset by increased labor and program launch costs[181] - Metal Forming Segment Adjusted EBITDA decreased due to increased manufacturing costs (primarily labor), production inefficiencies, unfavorable metal/FX impact, and a $7 million expense for a field action with a major customer[182] Liquidity and Capital Resources AAM maintained strong liquidity of $1.5 billion at year-end 2023, with reduced total debt and no significant maturities before 2026 - At December 31, 2023, total liquidity was approximately $1.5 billion, consisting of ~$520 million in cash and ~$977 million in available borrowings under credit facilities[188] - Net cash provided by operating activities was $396.1 million in 2023, a decrease from $448.9 million in 2022[189] - Capital expenditures were $194.6 million in 2023, with the company forecasting capital spending to be between 4.0% and 4.5% of sales in 2024[195] - Total debt, net of issuance costs, was reduced to $2,768.9 million at year-end 2023 from $2,921.0 million at year-end 2022, with no significant debt maturities before 2026[188][196] Critical Accounting Estimates Key estimates include deferred tax asset valuation, potential IRS tax litigation, goodwill impairment, and product warranty liabilities - Deferred Tax Assets: A valuation allowance of $267.1 million was recorded against deferred tax assets as of December 31, 2023, due to uncertainty about their future realization[219][220] - Pending Tax Litigation: An ongoing dispute with the IRS regarding foreign base company sales income could result in a potential additional income tax expense of approximately $300 million to $350 million if AAM is not successful[224][398] - Goodwill: The annual impairment test for the Driveline reporting unit, which holds all of the company's goodwill, indicated that its fair value exceeded its carrying value by approximately 13% as of Q4 2023[233] - Product Warranty: The warranty accrual was $66.3 million as of December 31, 2023, up from $54.1 million in 2022, and in 2023, the company recorded a $7 million expense related to a specific field action[236][237] Market Risk Disclosures AAM manages currency and interest rate risks using derivatives, with potential impacts from adverse market changes quantified - Currency Risk: The company uses foreign currency forward contracts (notional amount of $206.9 million) and a fixed-to-fixed cross-currency swap (notional amount of €200.0 million) to mitigate foreign exchange risk[243][244] - Interest Rate Risk: AAM utilizes variable-to-fixed interest rate swaps with a notional amount of $700.0 million to manage exposure to interest rate fluctuations on its variable-rate debt[246][247] - A one-percentage-point increase in interest rates would result in an estimated negative impact of $4.4 million to annualized pre-tax earnings and cash flow[247] Financial Statements and Supplementary Data This section presents AAM's audited consolidated financial statements and the independent auditor's unqualified opinion, highlighting critical audit matters Consolidated Financial Statements This section provides a summary of AAM's consolidated statements of operations, balance sheets, and cash flows for recent fiscal years Consolidated Statement of Operations Highlights (in millions) | Line Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Sales | $6,079.5 | $5,802.4 | $5,156.6 | | Gross Profit | $624.3 | $704.9 | $722.7 | | Operating Income | $146.6 | $243.9 | $240.6 | | Net Income (Loss) | $(33.6) | $64.3 | $5.9 | Consolidated Balance Sheet Highlights (in millions) | Line Item | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $2,006.6 | $1,993.4 | | Total Assets | $5,356.3 | $5,469.4 | | Total Current Liabilities | $1,201.6 | $1,199.3 | | Long-term Debt, net | $2,751.9 | $2,845.1 | | Total Liabilities | $4,751.4 | $4,842.1 | | Total Stockholders' Equity | $604.9 | $627.3 | Consolidated Statement of Cash Flows Highlights (in millions) | Line Item | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $396.1 | $448.9 | $538.4 | | Net cash used in investing activities | $(184.5) | $(243.0) | $(161.1) | | Net cash used in financing activities | $(205.5) | $(217.2) | $(401.4) | | Net increase (decrease) in cash | $8.4 | $(18.7) | $(26.8) | Notes to Consolidated Financial Statements Detailed notes explain accounting policies, debt, pension obligations, the Tekfor acquisition, and the ongoing IRS tax litigation - Note 2 (Restructuring): The company incurred $25.2 million in restructuring and acquisition-related costs in 2023, primarily for severance, plant exit costs, and integration of the Tekfor acquisition[294][299] - Note 4 (Debt): Total debt outstanding was $2.81 billion at year-end 2023, with the company having no significant maturities until 2026[307][317] - Note 7 (Pensions): At year-end 2023, the net liability for pension benefits was $78.8 million and for OPEB was $287.8 million[348] - Note 16 (Acquisitions): The acquisition of Tekfor Group on June 1, 2022, resulted in a gain on bargain purchase of $13.6 million, primarily due to macroeconomic factors at the time of the deal[450][452] Report of Independent Registered Public Accounting Firm This section presents the independent auditor's unqualified opinion on AAM's financial statements and internal controls, highlighting critical audit matters - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[478] - The audit identified two Critical Audit Matters (CAMs): 1. Income Taxes: Due to the complexity and judgment involved in assessing the realizability of deferred tax assets and uncertain tax positions[485][486] 2. Goodwill Impairment Analysis: Due to the subjective assumptions required to estimate the fair value of the Driveline reporting unit[488] Governance and Controls This section outlines AAM's effective disclosure controls and internal control over financial reporting, with no material changes identified Controls and Procedures Management affirmed the effectiveness of AAM's disclosure controls and internal control over financial reporting as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[492] - Management's assessment, based on the COSO framework, concluded that internal control over financial reporting was effective as of December 31, 2023[493] - There were no changes in internal control over financial reporting during Q4 2023 that materially affected, or are reasonably likely to materially affect, internal controls[495] Other Information (Part III & IV) Part III information is incorporated by reference from the Proxy Statement, while Part IV lists financial statements and exhibits - Information required by Items 10 (Directors, Executive Officers and Corporate Governance), 11 (Executive Compensation), 12 (Security Ownership), 13 (Certain Relationships), and 14 (Principal Accounting Fees) is incorporated by reference from the company's Proxy Statement[497][498][499] - Item 15 lists the financial statements, financial statement schedules, and exhibits that are filed as part of the 10-K report[501]