AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.26
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
Segment Adjusted EBITDA | $ | 297.7 |
| | $ | 156.7 |
| | $ | 807.0 |
| | $ | 471.3 |
|
Interest expense | (57.5 | ) | | (23.2 | ) | | (139.9 | ) | | (70.2 | ) |
Depreciation and amortization | (122.6 | ) | | (49.9 | ) | | (303.4 | ) | | (150.4 | ) |
Restructuring and acquisition-related costs | (22.8 | ) | | — |
| | (90.5 | ) | | — |
|
Pension settlement | (2.9 | ) | | — |
| | (2.9 | ) | | — |
|
Acquisition-related fair value inventory adjustment | — |
| | — |
| | (24.9 | ) | | — |
|
Impact of change in accounting principle | — |
| | — |
| | 3.7 |
| | — |
|
Debt refinancing and redemption costs | — |
| | — |
| | (2.7 | ) | | — |
|
Asset impairment charge | — |
| | (3.4 | ) | | — |
| | (3.4 | ) |
Investment gain related to the final distribution of the Reserve Yield Plus Fund | — |
| | — |
| | — |
| | 1.0 |
|
Other | 0.1 |
| | (0.7 | ) | | 0.2 |
| | (0.7 | ) |
Income before income taxes | $ | 92.0 |
| | $ | 79.5 |
| | $ | 246.6 |
| | $ | 247.6 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
| |
15. | SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
Holdings has no significant assets other than its 100% ownership in AAM, Inc. and Metaldyne Performance Group, Inc. (MPG Inc.), and no direct subsidiaries other than AAM, Inc. and MPG Inc. The 7.75% Notes, 6.625% Notes, 6.50% Notes, 6.25% Notes (due 2025), 6.25% Notes (due 2021) and 5.125% Notes are senior unsecured obligations of AAM, Inc.; all of which are fully and unconditionally guaranteed, on a joint and several basis, by Holdings and substantially all domestic subsidiaries of AAM, Inc. and, as of May 17, 2017, MPG Inc, and substantially all domestic subsidiaries of MPG Inc.
These Condensed Consolidating Financial Statements are prepared under the equity method of accounting whereby the investments in subsidiaries are recorded at cost and adjusted for the parent’s share of the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other equity changes.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statements of Income | | | | | | | | |
Three Months Ended September 30, | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2017 | | | | | | | | | | | | |
Net sales | | | | | | | | | | | | |
External | | $ | — |
| | $ | 250.0 |
| | $ | 529.0 |
| | $ | 945.4 |
| | $ | — |
| | $ | 1,724.4 |
|
Intercompany | | — |
| | 0.2 |
| | 80.0 |
| | 7.0 |
| | (87.2 | ) | | — |
|
Total net sales | | — |
| | 250.2 |
| | 609.0 |
| | 952.4 |
| | (87.2 | ) | | 1,724.4 |
|
Cost of goods sold | | — |
| | 229.6 |
| | 546.3 |
| | 738.0 |
| | (87.2 | ) | | 1,426.7 |
|
Gross profit | | — |
| | 20.6 |
| | 62.7 |
| | 214.4 |
| | — |
| | 297.7 |
|
Selling, general and administrative expenses | | — |
| | 57.8 |
| | 24.7 |
| | 19.8 |
| | — |
| | 102.3 |
|
Amortization of intangible assets | | — |
| | 1.5 |
| | 22.3 |
| | 0.6 |
| | — |
| | 24.4 |
|
Restructuring and acquisition-related costs | | — |
| | 21.6 |
| | — |
| | 1.2 |
| | — |
| | 22.8 |
|
Operating income (loss) | | — |
| | (60.3 | ) | | 15.7 |
| | 192.8 |
| | — |
| | 148.2 |
|
Non-operating income (expense), net | | — |
| | (60.8 | ) | | 5.5 |
| | (0.9 | ) | | — |
| | (56.2 | ) |
Income (loss) before income taxes | | — |
| | (121.1 | ) | | 21.2 |
| | 191.9 |
| | — |
| | 92.0 |
|
Income tax expense (benefit) | | — |
| | (29.0 | ) | | 17.8 |
| | 16.9 |
| | — |
| | 5.7 |
|
Earnings from equity in subsidiaries | | 86.2 |
| | 29.9 |
| | 25.5 |
| | — |
| | (141.6 | ) | | — |
|
Net income (loss) before royalties | | 86.2 |
| | (62.2 | ) | | 28.9 |
| | 175.0 |
| | (141.6 | ) | | 86.3 |
|
Royalties | | — |
| | 84.9 |
| | 1.3 |
| | (86.2 | ) | | — |
| | — |
|
Net income after royalties | | 86.2 |
| | 22.7 |
| | 30.2 |
| | 88.8 |
| | (141.6 | ) | | 86.3 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
Net income attributable to AAM | | $ | 86.2 |
| | $ | 22.7 |
| | $ | 30.2 |
| | $ | 88.7 |
| | $ | (141.6 | ) | | $ | 86.2 |
|
Other comprehensive income, net of tax | | 47.0 |
| | 16.7 |
| | 42.6 |
| | 51.3 |
| | (110.6 | ) | | 47.0 |
|
Comprehensive income attributable to AAM | | $ | 133.2 |
| | $ | 39.4 |
| | $ | 72.8 |
| | $ | 140.0 |
| | $ | (252.2 | ) | | $ | 133.2 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2016 | | |
| | |
| | |
| | |
| | |
| | |
|
Net sales | | |
| | |
| | |
| | |
| | |
| | |
|
External | | $ | — |
| | $ | 274.7 |
| | $ | 49.9 |
| | $ | 682.3 |
| | $ | — |
| | $ | 1,006.9 |
|
Intercompany | | — |
| | 3.7 |
| | 62.7 |
| | 4.4 |
| | (70.8 | ) | | — |
|
Total net sales | | — |
| | 278.4 |
| | 112.6 |
| | 686.7 |
| | (70.8 | ) | | 1,006.9 |
|
Cost of goods sold | | — |
| | 265.4 |
| | 94.9 |
| | 536.2 |
| | (70.8 | ) | | 825.7 |
|
Gross profit | | — |
| | 13.0 |
| | 17.7 |
| | 150.5 |
| | — |
| | 181.2 |
|
Selling, general and administrative expenses | | — |
| | 71.3 |
| | — |
| | 7.3 |
| | — |
| | 78.6 |
|
Amortization of intangible assets | | — |
| | 1.3 |
| | — |
| | — |
| | — |
| | 1.3 |
|
Operating income (loss) | | — |
| | (59.6 | ) | | 17.7 |
| | 143.2 |
| | — |
| | 101.3 |
|
Non-operating income (expense), net | | — |
| | (24.9 | ) | | 2.9 |
| | 0.2 |
| | — |
| | (21.8 | ) |
Income (loss) before income taxes | | — |
| | (84.5 | ) | | 20.6 |
| | 143.4 |
| | — |
| | 79.5 |
|
Income tax expense | | — |
| | 7.9 |
| | 0.1 |
| | 9.8 |
| | — |
| | 17.8 |
|
Earnings (loss) from equity in subsidiaries | | 61.7 |
| | 87.4 |
| | (7.1 | ) | | — |
| | (142.0 | ) | | — |
|
Net income (loss) before royalties | | 61.7 |
| | (5.0 | ) | | 13.4 |
| | 133.6 |
| | (142.0 | ) | | 61.7 |
|
Royalties | | — |
| | 66.7 |
| | — |
| | (66.7 | ) | | — |
| | — |
|
Net income after royalties | | 61.7 |
| | 61.7 |
| | 13.4 |
| | 66.9 |
| | (142.0 | ) | | 61.7 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income attributable to AAM | | $ | 61.7 |
| | $ | 61.7 |
| | $ | 13.4 |
| | $ | 66.9 |
| | $ | (142.0 | ) | | $ | 61.7 |
|
Other comprehensive income (loss), net of tax | | (4.3 | ) | | (4.3 | ) | | 1.0 |
| | (3.3 | ) | | 6.6 |
| | (4.3 | ) |
Comprehensive income attributable to AAM | | $ | 57.4 |
| | $ | 57.4 |
| | $ | 14.4 |
| | $ | 63.6 |
| | $ | (135.4 | ) | | $ | 57.4 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statements of Income | | | | | | | | |
Nine Months Ended September 30, | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2017 | | | | | | | | | | | | |
Net sales | | | | | | | | | | | | |
External | | $ | — |
| | $ | 806.9 |
| | $ | 1,139.8 |
| | $ | 2,585.4 |
| | $ | — |
| | $ | 4,532.1 |
|
Intercompany | | — |
| | 2.4 |
| | 214.7 |
| | 19.9 |
| | (237.0 | ) | | — |
|
Total net sales | | — |
| | 809.3 |
| | 1,354.5 |
| | 2,605.3 |
| | (237.0 | ) | | 4,532.1 |
|
Cost of goods sold | | — |
| | 752.2 |
| | 1,188.0 |
| | 2,004.1 |
| | (237.0 | ) | | 3,707.3 |
|
Gross profit | | — |
| | 57.1 |
| | 166.5 |
| | 601.2 |
| | — |
| | 824.8 |
|
Selling, general and administrative expenses | | — |
| | 196.0 |
| | 45.7 |
| | 47.4 |
| | — |
| | 289.1 |
|
Amortization of intangible assets | | — |
| | 4.3 |
| | 45.0 |
| | 1.5 |
| | — |
| | 50.8 |
|
Restructuring and acquisition-related costs | | — |
| | 87.0 |
| | — |
| | 3.5 |
| |
|
| | 90.5 |
|
Operating income (loss) | | — |
| | (230.2 | ) | | 75.8 |
| | 548.8 |
| | — |
| | 394.4 |
|
Non-operating income (expense), net | | — |
| | (148.7 | ) | | 14.9 |
| | (14.0 | ) | | — |
| | (147.8 | ) |
Income (loss) before income taxes | | — |
| | (378.9 | ) | | 90.7 |
| | 534.8 |
| | — |
| | 246.6 |
|
Income tax expense (benefit) | | — |
| | (62.2 | ) | | 42.0 |
| | 35.8 |
| | — |
| | 15.6 |
|
Earnings from equity in subsidiaries | | 230.8 |
| | 202.9 |
| | 41.4 |
| | — |
| | (475.1 | ) | | — |
|
Net income (loss) before royalties | | 230.8 |
| | (113.8 | ) | | 90.1 |
| | 499.0 |
| | (475.1 | ) | | 231.0 |
|
Royalties | | — |
| | 253.6 |
| | 2.6 |
| | (256.2 | ) | | — |
| | — |
|
Net income after royalties | | 230.8 |
| | 139.8 |
| | 92.7 |
| | 242.8 |
| | (475.1 | ) | | 231.0 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (0.2 | ) | | — |
| | (0.2 | ) |
Net income attributable to AAM | | $ | 230.8 |
| | $ | 139.8 |
| | $ | 92.7 |
| | $ | 242.6 |
| | $ | (475.1 | ) | | $ | 230.8 |
|
Other comprehensive income, net of tax | | 104.5 |
| | 55.3 |
| | 74.7 |
| | 94.8 |
| | (224.8 | ) | | 104.5 |
|
Comprehensive income attributable to AAM | | $ | 335.3 |
| | $ | 195.1 |
| | $ | 167.4 |
| | $ | 337.4 |
| | $ | (699.9 | ) | | $ | 335.3 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2016 | | |
| | |
| | |
| | |
| | |
| | |
|
Net sales | | |
| | |
| | |
| | |
| | |
| | |
|
External | | $ | — |
| | $ | 866.3 |
| | $ | 161.4 |
| | $ | 1,973.8 |
| | $ | — |
| | $ | 3,001.5 |
|
Intercompany | | — |
| | 8.1 |
| | 185.7 |
| | 12.2 |
| | (206.0 | ) | | — |
|
Total net sales | | — |
| | 874.4 |
| | 347.1 |
| | 1,986.0 |
| | (206.0 | ) | | 3,001.5 |
|
Cost of goods sold | | — |
| | 833.5 |
| | 284.3 |
| | 1,543.1 |
| | (206.0 | ) | | 2,454.9 |
|
Gross profit | | — |
| | 40.9 |
| | 62.8 |
| | 442.9 |
| | — |
| | 546.6 |
|
Selling, general and administrative expenses | | — |
| | 206.8 |
| | — |
| | 25.0 |
| | — |
| | 231.8 |
|
Amortization of intangible assets | | — |
| | 3.5 |
| | — |
| | 0.1 |
| | — |
| | 3.6 |
|
Operating income (loss) | | — |
| | (169.4 | ) | | 62.8 |
| | 417.8 |
| | — |
| | 311.2 |
|
Non-operating income (expense), net | | — |
| | (72.7 | ) | | 8.4 |
| | 0.7 |
| | — |
| | (63.6 | ) |
Income (loss) before income taxes | | — |
| | (242.1 | ) | | 71.2 |
| | 418.5 |
| | — |
| | 247.6 |
|
Income tax expense | | — |
| | 28.9 |
| | 0.3 |
| | 24.6 |
| | — |
| | 53.8 |
|
Earnings (loss) from equity in subsidiaries | | 193.8 |
| | 266.6 |
| | (28.0 | ) | | — |
| | (432.4 | ) | | — |
|
Net income (loss) before royalties | | 193.8 |
| | (4.4 | ) | | 42.9 |
| | 393.9 |
| | (432.4 | ) | | 193.8 |
|
Royalties | | — |
| | 198.2 |
| | — |
| | (198.2 | ) | | — |
| | — |
|
Net income after royalties | | 193.8 |
| | 193.8 |
| | 42.9 |
| | 195.7 |
| | (432.4 | ) | | 193.8 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income attributable to AAM | | $ | 193.8 |
| | $ | 193.8 |
| | $ | 42.9 |
| | $ | 195.7 |
| | $ | (432.4 | ) | | $ | 193.8 |
|
Other comprehensive income, net of tax | | 13.9 |
| | 13.9 |
| | 23.2 |
| | 16.9 |
| | (54.0 | ) | | 13.9 |
|
Comprehensive income attributable to AAM | | $ | 207.7 |
| | $ | 207.7 |
| | $ | 66.1 |
| | $ | 212.6 |
| | $ | (486.4 | ) | | $ | 207.7 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Balance Sheets | | | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims/Reclassifications | | Consolidated |
September 30, 2017 | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 188.5 |
| | $ | 0.1 |
| | $ | 361.0 |
| | $ | — |
| | $ | 549.6 |
|
Accounts receivable, net | | — |
| | 134.4 |
| | 320.2 |
| | 667.4 |
| | — |
| | 1,122.0 |
|
Intercompany receivables | | — |
| | 3,559.1 |
| | 465.9 |
| | 8.0 |
| | (4,033.0 | ) | | — |
|
Inventories, net | | — |
| | 34.0 |
| | 151.2 |
| | 211.4 |
| | — |
| | 396.6 |
|
Prepaid expenses and other | | — |
| | 27.4 |
| | 12.1 |
| | 105.0 |
| | — |
| | 144.5 |
|
Total current assets | | — |
| | 3,943.4 |
| | 949.5 |
| | 1,352.8 |
| | (4,033.0 | ) | | 2,212.7 |
|
Property, plant and equipment, net | | — |
| | 234.1 |
| | 788.5 |
| | 1,280.1 |
| | — |
| | 2,302.7 |
|
Goodwill | | — |
| | — |
| | 1,220.2 |
| | 434.4 |
| | — |
| | 1,654.6 |
|
Intangible assets, net | | — |
| | 21.9 |
| | 1,178.1 |
| | 36.6 |
| | — |
| | 1,236.6 |
|
Intercompany notes and accounts receivable | | 14.6 |
| | — |
| | 260.9 |
| | — |
| | (275.5 | ) | | — |
|
Other assets and deferred charges | | — |
| | 717.4 |
| | 137.2 |
| | 129.8 |
| | (332.7 | ) | | 651.7 |
|
Investment in subsidiaries | | 2,735.0 |
| | 1,917.2 |
| | 708.9 |
| | — |
| | (5,361.1 | ) | | — |
|
Total assets | | $ | 2,749.6 |
| | $ | 6,834.0 |
| | $ | 5,243.3 |
| | $ | 3,233.7 |
| | $ | (10,002.3 | ) | | $ | 8,058.3 |
|
Liabilities and Stockholders’ Equity | | |
| | |
| | |
| | |
| | |
| | |
|
Current liabilities | | |
| | |
| | |
| | |
| | |
| | |
|
Current portion of long-term debt | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6.8 |
| | $ | — |
| | $ | 6.8 |
|
Accounts payable | | — |
| | 130.2 |
| | 238.2 |
| | 488.0 |
| | — |
| | 856.4 |
|
Intercompany payables | | 1,313.0 |
| | 499.7 |
| | 2,010.2 |
| | 210.1 |
| | (4,033.0 | ) | | — |
|
Accrued expenses and other | | — |
| | 183.0 |
| | 56.3 |
| | 182.5 |
| | — |
| | 421.8 |
|
Total current liabilities | | 1,313.0 |
| | 812.9 |
| | 2,304.7 |
| | 887.4 |
| | (4,033.0 | ) | | 1,285.0 |
|
Intercompany notes and accounts payable | | — |
| | 76.9 |
| | — |
| | 198.6 |
| | (275.5 | ) | | — |
|
Long-term debt, net | | — |
| | 4,096.3 |
| | 4.6 |
| | 68.4 |
| | — |
| | 4,169.3 |
|
Other long-term liabilities | | — |
| | 742.2 |
| | 594.0 |
| | 163.9 |
| | (332.7 | ) | | 1,167.4 |
|
Total liabilities | | 1,313.0 |
| | 5,728.3 |
| | 2,903.3 |
| | 1,318.3 |
| | (4,641.2 | ) | | 6,621.7 |
|
Total AAM Stockholders’ equity | | 1,432.8 |
| | 1,105.7 |
| | 2,340.0 |
| | 1,911.6 |
| | (5,357.3 | ) | | 1,432.8 |
|
Noncontrolling interests in subsidiaries | | 3.8 |
| | — |
| | — |
| | 3.8 |
| | (3.8 | ) | | 3.8 |
|
Total stockholders’ equity | | 1,436.6 |
| | 1,105.7 |
| | 2,340.0 |
| | 1,915.4 |
| | (5,361.1 | ) | | 1,436.6 |
|
Total liabilities and stockholders’ equity | | $ | 2,749.6 |
| | $ | 6,834.0 |
| | $ | 5,243.3 |
| | $ | 3,233.7 |
| | $ | (10,002.3 | ) | | $ | 8,058.3 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
December 31, 2016 | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 84.3 |
| | $ | 1.6 |
| | $ | 395.3 |
| | $ | — |
| | $ | 481.2 |
|
Accounts receivable, net | | — |
| | 126.7 |
| | 21.9 |
| | 411.4 |
| | — |
| | 560.0 |
|
Intercompany receivables | | — |
| | 442.6 |
| | 326.0 |
| | 9.1 |
| | (777.7 | ) | | — |
|
Inventories, net | | — |
| | 31.3 |
| | 21.5 |
| | 129.5 |
| | — |
| | 182.3 |
|
Prepaid expenses and other | | — |
| | 29.4 |
| | 0.5 |
| | 45.9 |
| | — |
| | 75.8 |
|
Total current assets | | — |
| | 714.3 |
| | 371.5 |
| | 991.2 |
| | (777.7 | ) | | 1,299.3 |
|
Property, plant and equipment, net | | — |
| | 213.7 |
| | 102.9 |
| | 777.1 |
| | — |
| | 1,093.7 |
|
Goodwill | | — |
| | — |
| | 147.8 |
| | 6.2 |
| | — |
| | 154.0 |
|
Intangible assets, net | | — |
| | 22.8 |
| | — |
| | 5.7 |
| | — |
| | 28.5 |
|
Intercompany notes and accounts receivable | | — |
| | 343.9 |
| | 242.2 |
| | — |
| | (586.1 | ) | | — |
|
Other assets and deferred charges | | — |
| | 644.9 |
| | 39.8 |
| | 163.7 |
| | — |
| | 848.4 |
|
Investment in subsidiaries | | 827.6 |
| | 1,544.4 |
| | — |
| | — |
| | (2,372.0 | ) | | — |
|
Total assets | | $ | 827.6 |
| | $ | 3,484.0 |
| | $ | 904.2 |
| | $ | 1,943.9 |
| | $ | (3,735.8 | ) | | $ | 3,423.9 |
|
Liabilities and Stockholders’ Equity | | |
| | |
| | |
| | |
| | |
| | |
|
Current liabilities | | |
| | |
| | |
| | |
| | |
| | |
|
Current portion of long-term debt | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3.3 |
| | $ | — |
| | $ | 3.3 |
|
Accounts payable | | — |
| | 80.6 |
| | 35.8 |
| | 265.9 |
| | — |
| | 382.3 |
|
Intercompany payables | | — |
| | 324.8 |
| | 153.4 |
| | 299.5 |
| | (777.7 | ) | | — |
|
Accrued expenses and other | | — |
| | 142.2 |
| | 4.3 |
| | 119.4 |
| | — |
| | 265.9 |
|
Total current liabilities | | — |
| | 547.6 |
| | 193.5 |
| | 688.1 |
| | (777.7 | ) | | 651.5 |
|
Intercompany notes and accounts payable | | 321.8 |
| | 14.6 |
| | 7.5 |
| | 242.2 |
| | (586.1 | ) | | — |
|
Long-term debt, net | | — |
| | 1,339.7 |
| | 4.1 |
| | 57.1 |
| | — |
| | 1,400.9 |
|
Investment in subsidiaries obligation | | — |
| | — |
| | 124.7 |
| | — |
| | (124.7 | ) | | — |
|
Other long-term liabilities | | — |
| | 754.5 |
| | 0.6 |
| | 110.6 |
| | — |
| | 865.7 |
|
Total liabilities | | 321.8 |
| | 2,656.4 |
| | 330.4 |
| | 1,098.0 |
| | (1,488.5 | ) | | 2,918.1 |
|
Total stockholders’ equity | | 505.8 |
| | 827.6 |
| | 573.8 |
| | 845.9 |
| | (2,247.3 | ) | | 505.8 |
|
Total liabilities and stockholders’ equity | | $ | 827.6 |
| | $ | 3,484.0 |
| | $ | 904.2 |
| | $ | 1,943.9 |
| | $ | (3,735.8 | ) | | $ | 3,423.9 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statements of Cash Flows | | | | | | | | |
Nine Months Ended September 30, | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2017 | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | — |
| | $ | 276.4 |
| | $ | 9.0 |
| | $ | 135.3 |
| | $ | — |
| | $ | 420.7 |
|
Investing activities | | |
| | |
| | |
| | |
| | |
| | |
|
Purchases of property, plant and equipment | | — |
| | (43.1 | ) | | (73.3 | ) | | (162.3 | ) | | — |
| | (278.7 | ) |
Proceeds from sale of property, plant and equipment | | — |
| | 0.3 |
| | 0.3 |
| | 1.1 |
| | — |
| | 1.7 |
|
Purchase buyouts of leased equipment | | — |
| | (12.6 | ) | | — |
| | — |
| | — |
| | (12.6 | ) |
Proceeds from sale of business, net | | — |
| | 7.5 |
| | (1.6 | ) | | — |
| | — |
| | 5.9 |
|
Acquisition of business, net of cash acquired | | — |
| | (953.5 | ) | | 64.6 |
| | (6.6 | ) | | — |
| | (895.5 | ) |
Net cash used in investing activities | | — |
| | (1,001.4 | ) | | (10.0 | ) | | (167.8 | ) | | — |
| | (1,179.2 | ) |
Financing activities | | |
| | |
| | |
| | |
| | |
| | |
|
Net debt activity | | — |
| | 926.1 |
| | (0.5 | ) | | (12.1 | ) | | — |
| | 913.5 |
|
Debt issuance costs | | — |
| | (90.8 | ) | | — |
| | — |
| | — |
| | (90.8 | ) |
Employee stock option exercises | | — |
| | 0.9 |
| | — |
| | — |
| | — |
| | 0.9 |
|
Purchase of treasury stock | | (7.0 | ) | | — |
| | — |
| | — |
| | — |
| | (7.0 | ) |
Intercompany activity | | 7.0 |
|
| (7.0 | ) | | — |
| | — |
| | — |
| | — |
|
Net cash provided by (used in) financing activities | | — |
| | 829.2 |
| | (0.5 | ) | | (12.1 | ) | | — |
| | 816.6 |
|
Effect of exchange rate changes on cash | | — |
| | — |
| | — |
| | 10.3 |
| | — |
| | 10.3 |
|
Net increase (decrease) in cash and cash equivalents | | — |
| | 104.2 |
| | (1.5 | ) | | (34.3 | ) | | — |
| | 68.4 |
|
Cash and cash equivalents at beginning of period | | — |
| | 84.3 |
| | 1.6 |
| | 395.3 |
| | — |
| | 481.2 |
|
Cash and cash equivalents at end of period | | $ | — |
| | $ | 188.5 |
| | $ | 0.1 |
| | $ | 361.0 |
| | $ | — |
| | $ | 549.6 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2016 | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | — |
| | $ | 114.8 |
| | $ | 20.9 |
| | $ | 155.3 |
| | $ | — |
| | $ | 291.0 |
|
Investing activities | | | | | | | | | | |
| | |
|
Purchases of property, plant and equipment | | — |
| | (25.9 | ) | | (12.0 | ) | | (120.8 | ) | | — |
| | (158.7 | ) |
Proceeds from sale of property, plant and equipment | | — |
| | — |
| | 0.3 |
| | 0.4 |
| | — |
| | 0.7 |
|
Proceeds from government grants | | — |
| | — |
| | — |
| | 2.8 |
| | — |
| | 2.8 |
|
Final distribution of Reserve Yield Plus Fund | | — |
| | 1.0 |
| | — |
| | — |
| | — |
| | 1.0 |
|
Acquisition of business, net of cash acquired | | — |
| | — |
| | (5.6 | ) | | — |
| | — |
| | (5.6 | ) |
Intercompany activity | | — |
| | — |
| | (2.0 | ) | | — |
| | 2.0 |
| | — |
|
Net cash used in investing activities | | — |
| | (24.9 | ) | | (19.3 | ) | | (117.6 | ) | | 2.0 |
| | (159.8 | ) |
Financing activities | | |
| | |
| | |
| | |
| | |
| | |
|
Net debt activity | | — |
| | (0.4 | ) | | (0.3 | ) | | 23.3 |
| | — |
| | 22.6 |
|
Employee stock option exercises | | — |
| | 0.3 |
| | — |
| | — |
| | — |
| | 0.3 |
|
Purchase of treasury stock | | (5.3 | ) | | — |
| | — |
| | — |
| | — |
| | (5.3 | ) |
Intercompany activity | | 5.3 |
| | (5.3 | ) | | — |
| | 2.0 |
| | (2.0 | ) | | — |
|
Net cash provided by (used in) financing activities | | — |
| | (5.4 | ) | | (0.3 | ) | | 25.3 |
| | (2.0 | ) | | 17.6 |
|
Effect of exchange rate changes on cash | | — |
| | — |
| | — |
| | 2.6 |
| | — |
| | 2.6 |
|
Net increase in cash and cash equivalents | | — |
| | 84.5 |
| | 1.3 |
| | 65.6 |
| | — |
| | 151.4 |
|
Cash and cash equivalents at beginning of period | | — |
| | 52.0 |
| | — |
| | 230.5 |
| | — |
| | 282.5 |
|
Cash and cash equivalents at end of period | | $ | — |
| | $ | 136.5 |
| | $ | 1.3 |
| | $ | 296.1 |
| | $ | — |
| | $ | 433.9 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis (MD&A) should be read in conjunction with the unaudited condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Unless the context otherwise requires, references to "we," "our," "us" or "AAM" shall mean collectively (i) American Axle & Manufacturing Holdings, Inc. (Holdings), a Delaware corporation, (ii) American Axle & Manufacturing, Inc. (AAM, Inc.), a Delaware corporation, and its direct and indirect subsidiaries, and, as of April 6, 2017, (iii) Metaldyne Performance Group, Inc. (MPG) and its direct and indirect subsidiaries. AAM Inc. and MPG are wholly-owned subsidiaries of Holdings.
COMPANY OVERVIEW
On April 6, 2017, Alpha SPV I, Inc., a wholly-owned subsidiary of Holdings, merged with and into MPG, with MPG as the surviving corporation in the merger. Upon completion of the merger, MPG became a wholly-owned subsidiary of Holdings. As a result, weWe are now a global Tier I1 supplier to the automotive commercial and industrial markets.industry. We design, engineer validate and manufacture driveline and metal forming powertrainproducts that are making the next generation of vehicles smarter, lighter, safer and casting products, employingmore efficient. We employ over 25,00020,000 associates, operating at more than 90nearly 80 facilities in 17 countries, to support our customers on global and regional platforms with a continued focus on deliveringquality, operational excellence and technology leadership and quality.leadership.
Major Customers
We are the principala primary supplier of driveline components to General Motors Company (GM) for its full-size rear-wheel drive (RWD) light trucks, sport utility vehicles (SUVs), and SUVscrossover vehicles manufactured in North America, supplying substantially alla significant portion of GM’s rear axle and four-wheel drive and all-wheel drive (4WD/AWD) axle requirements for these vehicle platforms. We also supply GM with various products from our Metal Forming and Powertrain segments.segment. Sales to GM were approximately 49%41% of our consolidated net sales in the first ninethree months of 2017, 68% of our consolidated net sales2020, 39% in the first ninethree months of 20162019, and 67% of our consolidated net sales37% for the full year of 2016.2019.
We are the sole-source supplier to GM for certain axles and other driveline products for the life of each GM vehicle program covered by Lifetime Program Contracts and Long Term Program Contracts (collectively, LPCs). Substantially all of our sales to GM are made pursuant to the LPCs. The LPCs have terms equal to the lives of the relevant vehicle programs or their respective derivatives, which typically run five to seven years, and require us to remain competitive with respect to technology, design, quality and cost.
We also supply driveline system products to FCA US LLC (FCA) for heavy-duty Ram full-size pickup trucks and its derivatives, the AWD Jeep Cherokee, and a passenger car driveshaft program. In addition, we sell various products to FCA from each of our Metal Forming Powertrain and Casting segments.segment. Sales to FCA were approximately 14%16% of our consolidated net sales in the first ninethree months of 2017, 19%2020, 12% in the first three months of 2019, and 17% for the full year 2019.
We are also a supplier to Ford Motor Company (Ford) for driveline system products on certain vehicle programs, and we sell various products to Ford from our Metal Forming segment. Sales to Ford were approximately 12% of our consolidated net sales in the first ninethree months of 20162020, and 18%approximately 9% for both the first three months and full year of our2019.
No other customer represented 10% or more of consolidated net sales during these periods.
Impact of Novel Coronavirus (COVID-19)
COVID-19 Operational Impact and AAM Actions
In March of 2020, COVID-19 was designated by the World Health Organization as a pandemic illness and began to significantly disrupt global automotive production. In an effort to mitigate the spread of COVID-19, many governmental and public health agencies in locations in which we operate implemented shelter-in-place orders or similar measures. Substantially all of our customers ceased or significantly reduced production, and the decline in production volumes has continued into the second quarter of 2020. As a result, substantially all of our manufacturing facilities have either temporarily suspended production or experienced significant reductions in volumes during this period. By the end of the first quarter of 2020, our manufacturing locations in Asia were beginning to stabilize and return to more normalized levels of production.
At AAM, safety is our top responsibility and that includes the health and wellness of our associates globally. In response to COVID-19, we instituted several operational measures to ensure the safety of our associates, which included the following:
•Assembled a COVID-19 Task Force comprised of AAM's senior leadership working closely with associates across several functions and regions to coordinate decision making and communication related to actions taken by AAM to mitigate the impact of COVID-19;
•Suspended or reduced production at manufacturing facilities and directed associates who could do so to work remotely;
•Maintained communication with customers, including planning for business resumption and monitoring announcements regarding new program deferrals or other changes;
•Initiated thorough cleaning and decontamination procedures at many of our manufacturing facilities in preparation for resuming production; and
•Designed additional safety measures to further protect associates once production is restored and our associates resume working in our global facilities.
We are currently planning for a staged re-opening of our manufacturing facilities in North America and Europe in May 2020, though the full yearultimate timing of 2016.re-opening these facilities will depend on future developments, including the potential extension of shelter-in-place orders and the timing of resumption of production by our customers, which are outside of our control. We are also monitoring the impact of COVID-19 on our suppliers, as well as on our customers and their suppliers. As production resumes and volumes begin to ramp-up, we cannot be sure that the supply chain will be adequately prepared and this could adversely impact the timing of a return to increased levels of production.
In addition to GM and FCA, we are a supplier to several major automotive Original Equipment Manufacturers (OEMs) and Tier 1 suppliers. Our consolidatedFinancial Impact of COVID-19
We estimate that the impact of COVID-19 on net sales to customers other than GM increased to $2,327.5 million in the first nine monthsquarter of 20172020 was approximately $169 million, and that the impact to gross profit of this reduction in net sales was approximately $47 million. The significant reduction in global automotive production volumes resulting from the impact of COVID-19 has continued into the second quarter of 2020 and we expect the impact on net sales and operating income to be greater in the second quarter of 2020 as compared to $964.8 million in the first nine monthsquarter of 2016.2020. Due to the significant uncertainty associated with the extent of the impact of COVID-19 and the timing of resuming more normalized levels of production, we cannot estimate the impact of COVID-19 on our 2020 results of operations and financial condition.
In order to mitigate the financial impact of COVID-19, we have continued our emphasis on cost management, and have implemented additional measures to adjust to our customers’ revised production schedules, including:
•Continuing to flex our variable cost structure;
•Continuing to manage our controllable expenses;
•Reducing the annual cash retainer for each non-employee director by 40%;
•Reducing salaries for executive officers by 30% and for certain other associates by various percentages depending on level;
•Reducing our projected capital expenditures for the year; and
•Pursuing options to defer and reduce tax payments through the CARES Act and similar global initiatives.
The additional measures we are taking to address the impact of COVID-19 are expected to remain in place until further clarity can be achieved regarding the recovery and stabilization of the global economy, as well as the resulting impact of COVID-19 on the global automotive industry.
RESULTS OF OPERATIONS –– THREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2020 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2016MARCH 31, 2019
Net Sales Net sales increased to $1,724.4were $1,343.5 million in the thirdfirst quarter of 20172020, as compared to $1,006.9$1,719.2 million in the thirdfirst quarter of 2016. The impact of the MPG acquisition on net sales for the third quarter 2017 was approximately $667 million. Excluding the impact of the MPG acquisition, our2019. Our change in sales in the thirdfirst quarter of 2017,2020, as compared to the thirdfirst quarter of 2016, reflect2019, primarily reflects a reduction of approximately $169 million associated with the impactdecline in global automotive production as a result of program launches fromCOVID-19, and a reduction of $182 million as a result of the sale of the U.S. operations of our newCasting business backlog,that was completed in the fourth quarter of 2019 (the Casting Sale). Net sales in the first quarter of 2020, as well as an increase incompared to the first quarter of 2019, also decreased by approximately $42 million associated with the effect of metal market pass-throughs to our customers partially offset by lower production volumes on a light truck program that we currently support.and the impact of foreign exchange related to translation adjustments.
Cost of Goods Sold Cost of goods sold was $1,426.7$1,148.2 million in the thirdfirst quarter of 20172020, as compared to $825.7 million in the third quarter of 2016. The impact on cost of goods sold of the MPG acquisition was approximately $583$1,497.0 million in the thirdfirst quarter 2017.
Excluding the impact of the MPG acquisition, the2019. The change in cost of goods sold principally reflects approximately $10 million related to increased production volumes and an increasea reduction of approximately $15$122 million associated with the decline in global automotive production as a result of COVID-19, and a reduction of $175 million as a result of the Casting Sale. Cost of goods sold was also impacted by a decrease of approximately $42 million related to metal market pass-through costs partially offset by approximately $7 million associated with lower net manufacturing costs, includingand the impact of foreign exchange, as well as the impact of improved operating performance and productivity initiatives. lower launch costs.
For both the three months ended September 30, 2017,March 31, 2020 and March 31, 2019, material costs were approximately 60%57% of total costs of goods soldsold.
Gross Profit Gross profit was $195.3 million in the first quarter of 2020, as compared to approximately 68% for the three months ended September 30, 2016.
Gross Profit Gross profit increased to $297.7$222.2 million in the thirdfirst quarter of 20172019. Gross margin was 14.5% in the first quarter of 2020, as compared to $181.2 million12.9% in the thirdfirst quarter of 2016. Gross margin was 17.3% in the third quarter of 2017 as compared to 18.0% in the third quarter of 2016. The impact on gross profit of the MPG acquisition was approximately $84 million in the third quarter 2017.2019. Gross profit and gross margin were also impacted by the other factors discussed in Net Sales and Cost of Goods Sold above.
Selling, General and Administrative Expenses (SG&A) SG&A (including research and development (R&D)) was $102.3$90.3 million or 5.9%6.7% of net sales in the thirdfirst quarter of 20172020, as compared to $78.6$90.7 million or 7.8%5.3% of net sales in the thirdfirst quarter of 2016.2019. R&D spending was approximately $41.0$36.6 million in the thirdfirst quarter of 20172020, as compared to $36.2$34.3 million in the thirdfirst quarter of 2016. The change in SG&A in the third quarter of 2017, as compared to the third quarter of 2016, reflects an increase of approximately $30 million associated with the acquisition of MPG, which was partially offset by the achievement of synergies as a result of the acquisition of MPG.2019.
Amortization of Intangible Assets As a result of the USM Mexico acquisition on March 1, 2017 and the MPG acquisition on April 6, 2017, we recognized $1,254.8 million of intangible assets. Amortization expense for the three months ended September 30, 2017related to intangible assets was $24.4 million as compared to $1.3$21.8 million for the three months ended September 30, 2016.March 31, 2020 and $25.0 million for the three months ended March 31, 2019. The increasereduction in amortization expense was attributablerelated to the increase in intangible assets asreflects the Casting Sale and the disposal of the intangible assets associated with this business.
Impairment Charge In the first quarter of 2020, the reduction in global automotive production volumes caused by the impact of COVID-19 represented an indicator to test our goodwill for impairment. As a result of these acquisitions.this goodwill impairment test, we determined that the carrying values of our Driveline and Metal Forming reporting units were greater than their respective fair values. As such, we recorded a total goodwill impairment charge of $510.0 million in the first quarter of 2020. See Note 3 - Goodwill and Other Intangible Assets for further detail.
Restructuring and Acquisition-Related Costs Restructuring and acquisition-related costs were $22.8$17.6 million in the thirdfirst quarter of 20172020 and we did not incur any such costs$12.1 million in the thirdfirst quarter of 2016. In the fourth quarter of 2016, AAM initiated actions under a global restructuring program focused on creating a more streamlined organization in addition to reducing our cost structure and preparing for upcoming acquisition integration activities.2019. As part of our restructuring actions, we incurred severance charges of approximately $0.2$2.2 million, as well as implementation costs including professional expenses, of approximately $6.5$12.5 million during the three months ended September 30, 2017.March 31, 2020. This compares to severance charges of $4.1 million and implementation charges of $4.3 million for the three months ended March 31, 2019. We expect to incur approximately $45 million to $55 million of total restructuring charges in 2020. See Note 2 - Restructuring and Acquisition-Related Costs for additional detail regarding our restructuring activity.
On March 1, 2017, we completed the acquisition of 100% of USM Mexico Manufacturing LLC (USM Mexico) and on April 6, 2017, we completed the acquisition of 100% of the equity interests of MPG. During the three months ended September 30, 2017,March 31, 2020, we incurred $1.0 million of acquisition-related costs, $1.4 million of acquisition-related severance charges and $13.7$2.9 million of integration expenses primarily associated with these acquisitions. Acquisition-related costs primarily consistthe ongoing integration of advisory, legal, accounting, valuation and certain other professional or consulting fees incurred.MPG. This compares to $3.7 million of integration expenses incurred during the three months ended March 31, 2019. Integration expenses primarily reflect costs incurred for information technology infrastructure and enterprise resource planning (ERP) systems, ongoing operational activities, and consulting fees incurred in conjunction with acquisitions. We expect to incur additional integration charges of $10 million to $15 million in 2020 as we finalize the acquisitions.integration of ERP systems at legacy MPG locations.
Loss on Sale of Business In the first quarter of 2020, we finalized certain customary post-closing calculations associated with the Casting Sale, resulting in an additional loss on sale of $1.0 million.
Operating Income (Loss) Operating income increased to $148.2loss was $445.4 million in the thirdfirst quarter of 20172020, as compared to $101.3operating income of $94.4 million in the thirdfirst quarter of 2016.2019. Operating margin was 8.6%(33.2)% in the thirdfirst quarter of 20172020, as compared to 10.1%5.5% in the thirdfirst quarter of 2016.2019. The changes in operating income (loss) and operating margin were primarily due to factors discussed in Net Sales, Cost of Goods Sold, SG&A, Amortization of Intangible Assets and Restructuring and Acquisition-Related CostsImpairment Charge above.
Interest Expense and InvestmentInterest Income Interest expense was $57.5 million in the third quarter of 2017 as compared to $23.2 million in the third quarter of 2016. Investment income was $0.8 million in the third quarter of 2017 as compared to $0.5 million in the third quarter of 2016.
The change in interest expense in the third quarter of 2017, as compared to the third quarter of 2016, primarily reflects interest expense incurred on borrowings under our New Senior Secured Credit Facilities on April 6, 2017 (as defined and described in Liquidity and Capital Resources in this MD&A), as well as on $700.0 million in aggregate principal amount of 6.25% senior notes and $500.0 million in aggregate principal amount of 6.50% senior notes (the Notes), which were issued on March 23, 2017.
The weighted-average interest rate of our long-term debt outstanding was 5.6% in the third quarter of 2017 and 6.7% in the third quarter of 2016.
Other Income (Expense), Net Other income (expense), net, which includes the net effect of foreign exchange gains and losses and our proportionate share of earnings from equity in unconsolidated subsidiaries, was income of $0.5 million in the third quarter of 2017 as compared to income of $0.9 million in the third quarter of 2016.
Income Tax Expense Income tax expense was $5.7 million in the three months ended September 30, 2017 as compared to $17.8 million in the three months ended September 30, 2016. Our effective income tax rate was 6.2% in the third quarter of 2017 as compared to 22.4% in the third quarter of 2016. Our effective income tax rate for the three months ended September 30, 2017 is lower than our effective income tax rate for the three months ended September 30, 2016 as a result of an increase in the proportionate share of income attributable to lower tax rate jurisdictions. In addition, subsequent to the acquisition of MPG, we re-evaluated our valuation allowance position with regard to jurisdictions in which consolidated state tax returns are filed and recorded an income tax benefit for the three months ended September 30, 2017. Our income tax expense and effective tax rate for the three months ended September 30, 2017, and September 30, 2016, reflect the impact of favorable foreign tax rates, partially offset by our inability to realize a tax benefit for current foreign losses.
Net Income Attributable to AAM and Earnings Per Share (EPS) Net income attributable to AAM increased to $86.2 million in the third quarter of 2017 as compared to $61.7 million in the third quarter of 2016. Diluted EPS was $0.75 per share in the third quarter of 2017 as compared to $0.78 per share in the third quarter of 2016. As a result of the issuance of AAM common shares in conjunction with the acquisition of MPG, our EPS denominator was greater by approximately 35 million shares in the third quarter of 2017 as compared to the third quarter of 2016.
Net income attributable to AAM and EPS for the third quarters of 2017 and 2016 were primarily impacted by the factors discussed in Net Sales, Cost of Goods Sold, SG&A, Amortization of Intangible Assets, Restructuring and Acquisition-Related Costs and Income Tax Expense above, as well as the issuance of the additional shares as a result of the acquisition of MPG.
RESULTS OF OPERATIONS –– NINE MONTHS ENDED SEPTEMBER 30, 2017 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2016
Net Sales Net sales increased to $4,532.1$51.5 million in the first nine monthsquarter of 20172020, as compared to $3,001.5$53.4 million in the first nine monthsquarter of 2016. The impact of the MPG acquisition on net sales in the first nine months of 20172019. Interest income was approximately $1,351 million. Excluding the impact of the MPG acquisition, our sales in the first nine months of 2017, as compared to the first nine months of 2016, reflect an increase in production volumes for the light truck and SUV programs we currently support, as well as the impact of program launches from our new business backlog and an increase in metal market pass-throughs to our customers, partially offset by the impact of annual productivity price-downs for certain programs.
Cost of Goods Sold Cost of goods sold was $3,707.3$2.8 million in the first nine monthsquarter of 20172020, as compared to $2,454.9$0.7 million in the first nine monthsquarter of 2016. The impact on cost of goods sold of the MPG acquisition was approximately $1,177 million in the first nine months of 2017, which includes $24.9 million for the step-up of inventory to fair value as a result of purchase accounting.2019.
Excluding the impact of the MPG acquisition, the change in cost of goods sold principally reflects approximately $60 million related to increased production volumes and an increase of approximately $55 million related to metal market pass-through costs, partially offset by approximately $30 million associated with lower net manufacturing costs, including the impact of foreign exchange, and productivity initiatives. For the nine months ended September 30, 2017, material costs were approximately 63% of total costs of goods sold as compared to approximately 69% for the nine months ended September 30, 2016.
Gross Profit Gross profit increased to $824.8 million in the first nine months of 2017 as compared to $546.6 million in the first nine months of 2016. Gross margin was 18.2% in the first nine months of 2017 and the first nine months of 2016. The impact of the MPG acquisition on gross profit in the first nine months of 2017 was approximately $174 million. Excluding the impact of the MPG acquisition, the change in gross profit in the first nine months of 2017, as compared to the first nine months of 2016, reflects the benefit of increased contribution margin on higher production volumes for the light truck and SUV programs that we support. Gross profit and gross margin were also impacted by the other factors discussed in Net Sales and Cost of Goods Sold above.
Selling, General and Administrative Expenses (SG&A) SG&A (including research and development (R&D)) was $289.1 million or 6.4% of net sales in the first nine months of 2017 as compared to $231.8 million or 7.7% of net sales in the first nine months of 2016. R&D spending was approximately $123.0 million in the first nine months of 2017 as compared to $102.3 million in the first nine months of 2016. The change in SG&A for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, reflects an increase of approximately $60 million associated with the acquisition of MPG. SG&A expense also reflects the increase in R&D spending in the first nine months of 2017, as compared to the first nine months of 2016, which was partially offset by the achievement of synergies as a result of the acquisition of MPG.
Amortization of Intangible Assets As a result of the USM Mexico acquisition on March 1, 2017 and the MPG acquisition on April 6, 2017, we recognized $1,254.8 million of intangible assets. Amortization expense for the nine months ended September 30, 2017 was $50.8 million as compared to $3.6 million for the nine months ended September 30, 2016. The increase in amortization expense was attributable to the increase in intangible assets as a result of these acquisitions.
Restructuring and Acquisition-Related Costs Restructuring and acquisition-related costs were $90.5 million in the first nine months of 2017 and we did not incur any such costs in the first nine months of 2016. We incurred severance charges of approximately $1.7 million, as well as implementation costs, including professional expenses, of approximately $13.5 million during the nine months ended September 30, 2017. Since inception of the global restructuring program, we have incurred severance charges totaling $2.3 million and implementation costs totaling $23.7 million. We expect to incur up to $5 million of additional charges under our global restructuring program in 2017.
On March 1, 2017, we completed the acquisition of 100% of USM Mexico Manufacturing LLC (USM Mexico) and on April 6, 2017, we completed the acquisition of 100% of the equity interests of MPG. During the nine months ended September 30, 2017, we incurred $40.7 million of acquisition-related costs, acquisition-related severance charges of $5.6 million and $29.0 million of integration expenses associated with these acquisitions. Acquisition-related costs primarily consist of advisory, legal, accounting, valuation and certain other professional or consulting fees incurred. Also included in acquisition-related costs is a one-time charge of approximately $20 million for MPG stock-based compensation that was accelerated and settled as a result of the acquisition. Integration expenses reflect costs incurred for information technology systems, ongoing operational activities, and consulting fees incurred in conjunction with the acquisitions. We expect to incur additional integration charges of approximately $20 to $25 million in 2017.
Operating Income Operating income increased to $394.4 million in the first nine months of 2017 as compared to $311.2 million in the first nine months of 2016. Operating margin was 8.7% in the first nine months of 2017 as compared to 10.4% in the first nine months of 2016. The changes in operating income and operating margin were due to factors discussed in Net Sales, Cost of Goods Sold, SG&A, Amortization of Intangible Assets and Restructuring and Acquisition-Related Costs above.
Interest Expense and Investment Income Interest expense was $139.9 million in the first nine months of 2017 as compared to $70.2 million in the first nine months of 2016. Investment income was $2.2 million in the first nine months of 2017 as compared to $2.6 million in the first nine months of 2016.
The change in interest expense in the first nine months of 2017, as compared to the first nine months of 2016, primarily reflects interest expense incurred on borrowings under our New Senior Secured Credit Facilities on April 6, 2017 (as defined and described in Liquidity and Capital Resources in this MD&A), as well as on $700.0 million in aggregate principal amount of 6.25% senior notes and $500.0 million in aggregate principal amount of 6.50% senior notes (the Notes), which were issued on March 23, 2017. We expect our interest expense, after considering the borrowings under our New Senior Secured Credit Facilities and the issuance of the Notes, to be approximately $235.0 million on an annual basis.
The weighted-average interest rate of our long-term debt outstanding was 5.8% in the first quarter of 2020 and 5.9% in the first quarter of 2019. We expect our interest expense for the first nine months of 2017 and 6.7% for the first nine months of 2016.full year 2020 to be $205 million to $215 million.
Debt Refinancing and Redemption Costs In the first nine monthsquarter of 2017,2020, we voluntarily redeemed $100 million of our 6.625% Notes due 2022. As a result, we expensed $2.7approximately $0.4 million for the write-off of prepayment premiums related to the extinguishmentunamortized debt issuance costs that we had been amortizing over the expected life of MPG's existing debt at the dateborrowing, and approximately $1.1 million for the payment of acquisition.an early redemption premium.
Other Income (Expense),Expense, Net Other income (expense),expense, net which includes the net effect of foreign exchange gains and losses, and our proportionate share of earnings from equity in unconsolidated subsidiaries, and all components of net periodic pension and postretirement benefit costs other than service cost. Other expense, net was expense of $7.4$2.3 million in the first nine monthsquarter of 20172020, as compared to income of $4.0$3.0 million in the first nine monthsquarter of 2016. The change in other income (expense), net in2019.
Income Tax Expense Income tax was expense of $3.3 million for the ninethree months ended September 30, 2017,March 31, 2020, as compared to a benefit of $3.0 million for the ninethree months ended September 30, 2016, primarily relates to foreign exchange remeasurement losses as a result of the U.S. dollar weakening against the Mexican Peso and Euro.
Income Tax Expense Income tax expense was $15.6 million in the nine months ended September 30, 2017 as compared to $53.8 million in the nine months ended September 30, 2016.March 31, 2019. Our effective income tax rate was 6.3%(0.7)% in the first nine monthsquarter of 20172020, as compared to 21.7%(7.8)% in the first nine monthsquarter of 2016. 2019.
Our effective income tax rate for the ninethree months ended September 30, 2017 is lower thanMarch 31, 2020 varies from our effective income tax rate for the ninethree months ended September 30, 2016March 31, 2019 primarily as a result of an increasethe impact of the goodwill impairment charge recorded during the first quarter of 2020, which had no corresponding income tax benefit, and as a result of a net income tax benefit of $7.5 million recognized under the CARES Act (see Note 1 - Organization and Basis of Presentation for additional detail regarding the CARES Act). In addition, in the proportionate sharefirst quarter of income attributable to lower tax rate jurisdictions. In addition, subsequent to the acquisition of MPG,2019, we re-evaluated our valuation allowance position with regard to jurisdictions in which consolidated state tax returns are filed and recordedrecognized an income tax benefit of $9.3 million related to final regulations issued by the Department of Treasury and Internal Revenue Service in the first quarter of 2019. The final regulations changed the manner in which we were required to compute the one-time transition tax under the Tax Cuts and Jobs Act of 2017 that was imposed on certain foreign earnings for which U.S. income tax was previously deferred.
For the ninethree months ended September 30, 2017. This was partially offset by a discrete tax adjustment related to certain non-deductible transactionMarch 31, 2020 and acquisition-related costs. Our2019, our effective income tax expense and effective taxrates vary from the U.S. federal statutory rate for the nine months ended September 30, 2017, and September 30, 2016, reflect the impact of 21% primarily due to favorable foreign tax rates, partially offset byas well as the impact of tax credits and the effect of the discrete items described above.
We review the likelihood that we will realize the benefit of deferred tax assets and estimate whether recoverability of our inabilitydeferred tax assets is "more likely than not." If, based upon available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded. Due to realizethe uncertainty associated with the extent and ultimate impact of COVID-19 on global automotive production volumes, we may experience lower than projected earnings in certain jurisdictions in future periods, and we believe that it is reasonably possible that additional valuation allowances could be recognized in the next twelve months as a tax benefit for current foreign losses.result.
Net Income (Loss) Attributable to AAM and Earnings (Loss) Per Share (EPS) Net income (loss) attributable to AAM increased to $230.8was a loss of $501.3 million in the first nine monthsquarter of 20172020, as compared to $193.8income of $41.6 million in the first nine monthsquarter of 2016.2019. Diluted EPSloss per share was $2.27 per share$4.45 in the first nine monthsquarter of 20172020, as compared to $2.47diluted earnings per share of $0.36 in the first nine monthsquarter of 2016. As a result of the issuance of AAM common shares in conjunction with the acquisition of MPG, our EPS denominator was greater by approximately 23 million shares for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
2019. Net income (loss) attributable to AAM and EPS for the nine months ended 2017first quarters of 2020 and 20162019 were primarily impacted by the factors discussed in Net Sales, Cost of Goods Sold, SG&A, Amortization of Intangible Assets, Restructuring and Acquisition-Related Costs, Other Income (Expense), Net and Income Tax Expense above, as well as the issuance of the additional shares as a result of the acquisition of MPG.above.
SEGMENT REPORTING
Prior to the acquisition of MPG on April 6, 2017, we operated in one reportable segment: the manufacture, engineer, design and validation of driveline systems and related components and chassis modules for light trucks, sport utility vehicles (SUVs), crossover vehicles, passenger cars and commercial vehicles. Subsequent to the acquisition of MPG, ourOur business wasis organized into four operatingDriveline and Metal Forming segments, with each representing a reportable segment under ASC 280 Segment Reporting. In the fourth quarter of 2019, we completed the Casting Sale. The four segmentsCasting Sale did not include the entities that conduct AAM's casting operations in El Carmen, Mexico, which are now included in our Driveline Metal Forming, Powertrainsegment. The Casting Sale did not qualify for classification as discontinued operations, as it did not represent a strategic shift in our business that has had, or will have, a major effect on our operations and Casting. financial results. As such, we continue to present Casting as a segment in the tables below for the periods prior to the sale, and the reported amounts are now comprised entirely of the U.S. casting operations that were included in the sale. The amounts previously reported in our Casting segment for the retained operations in El Carmen, Mexico have been reclassified to our Driveline segment for the periods presented.
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.resources to the segments.
Our product offerings by segment are as follows:
•Driveline products consist primarily of front and rear axles, driveshafts, power transfer units, rear drivedifferential assemblies, clutch modules, balance shaft systems, disconnecting driveline technology, and electric and hybrid driveline products and systems for light trucks, SUVs, crossover vehicles, passenger cars and commercial vehicles; and
•Metal Forming products consist primarily of axle and transmission shafts, ring and pinion gears, differential gears transmission gears and shafts and suspension components for Original Equipment Manufacturers and Tier 1 automotive suppliers;
The Powertrain segment products consist primarily of transmission module and differential assemblies, transmission valve bodies, connecting rod forging and assemblies, torsional vibration dampers,connecting rods and variable valve timing products for Original Equipment Manufacturers and Tier I1 automotive suppliers; andsuppliers.
The Casting segment produces both thin wall castings and high strength ductile iron castings, as well as differential cases, steering knuckles, control arms, and turbo charger housings for the global light, commercial and industrial markets.
The following table represents sales by reportable segment for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | | | | | |
| | | | | 2020 | | 2019 | | | | |
Driveline | | | | | $ | 1,031.7 | | | $ | 1,166.3 | | | | | |
Metal Forming | | | | | 422.3 | | | 483.3 | | | | | |
Casting | | | | | — | | | 193.7 | | | | | |
Eliminations | | | | | (110.5) | | | (124.1) | | | | | |
Net Sales | | | | | $ | 1,343.5 | | | $ | 1,719.2 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Driveline | $ | 1,007.9 |
| | $ | 956.1 |
| | $ | 3,028.7 |
| | $ | 2,840.4 |
|
Metal Forming | 368.2 |
| | 137.2 |
| | 887.5 |
| | 414.4 |
|
Powertrain | 260.9 |
| | — |
| | 544.5 |
| | — |
|
Casting | 226.6 |
| | — |
| | 452.2 |
| | — |
|
Eliminations | (139.2 | ) | | (86.4 | ) | | (380.8 | ) | | (253.3 | ) |
Net Sales | $ | 1,724.4 |
| | $ | 1,006.9 |
| | $ | 4,532.1 |
| | $ | 3,001.5 |
|
The increasechange in Driveline sales for the three and nine months ended September 30, 2017,March 31, 2020, as compared to the three and nine months ended September 30, 2016,March 31, 2019, primarily reflectreflects approximately $137 million associated with the impact of program launches from our new business backlog,the decline in global automotive production as well as an increase ina result of COVID-19, and a reduction of approximately $20 million associated with the effect of metal market pass-throughs to our customers which was partially offset byand the impact of annual productivity price-downs for certain programs. Driveline sales for the nine months ended September 30, 2017 was also positively impacted by increased production volumes on the light truck and SUV programs we currently support.foreign exchange related to translation adjustments.
The increasechange in net sales in our Metal Forming segment in both the three months and nine months ended September 30, 2017,March 31, 2020, as compared to the three and nine months ended September 30, 2016, wasMarch 31, 2019, primarily attributable toreflects approximately $32 million associated with the purchaseimpact of MPG.
For boththe decline in global automotive production as a result of COVID-19. Also for the three and nine months ended September 30, 2017, the increase in sales in both the Powertrain and Casting segments,March 31, 2020, as compared to the three and nine months ended September 30, 2016, was entirely attributableMarch 31, 2019, Metal Forming sales were impacted by a reduction of approximately $22 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments.
The change in net sales in our Casting segment in the three months ended March 31, 2020, as compared to the acquisitionthree months ended March 31, 2019, is the result of MPGthe Casting Sale that was completed in the fourth quarter of 2019 as AAM did not operateno longer operates in these segments prior to the acquisition.this business.
We use Segment Adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. We define EBITDA to be earnings before interest expense, income taxes, depreciation and amortization. Segment Adjusted EBITDA is defined as EBITDA for our reportable segments excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, gain (loss) on the sale of a business, impairment charges, pension settlements, and non-recurring items.
The amounts for Segment Adjusted EBITDA for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 are as follows:follows (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | | | | | |
| | | | | 2020 | | 2019 | | | | |
Driveline | | | | | $ | 139.3 | | | $ | 142.8 | | | | | |
Metal Forming | | | | | 74.0 | | | 84.4 | | | | | |
Casting | | | | | — | | | 17.8 | | | | | |
Total segment adjusted EBITDA | | | | | $ | 213.3 | | | $ | 245.0 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Driveline | $ | 181.4 |
| | $ | 134.4 |
| | $ | 513.5 |
| | $ | 391.9 |
|
Metal Forming | 70.7 |
| | 22.3 |
| | 170.5 |
| | 79.4 |
|
Powertrain | 36.8 |
| | — |
| | 88.7 |
| | — |
|
Casting | 8.8 |
| | — |
| | 34.3 |
| | — |
|
Segment adjusted EBITDA | $ | 297.7 |
| | $ | 156.7 |
| | $ | 807.0 |
| | $ | 471.3 |
|
Segment Adjusted EBITDA in the Driveline segment forFor the three months ended September 30, 2017,March 31, 2020, as compared to the three months ended September 30, 2016, was positively impacted by productivity initiatives andMarch 31, 2019, the reorganization to four reportable segments subsequent to the acquisition of MPG. The positive impact of these factors was partially offset by an increase in metal market pass-through costs.
For the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, the increasechange in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to contribution margin on increasedlower net global automotive production volumes for light truck and SUV programs we currently support, as well asa result of the impact of productivity initiatives and the reorganization to four reportable segments subsequent to the acquisition of MPG. The positive impact of these factorsCOVID-19, which was partially offset by an increaseimproved operating performance, lower launch costs and a reduction in metal market pass-throughnet manufacturing costs.
The change in Metal Forming experienced an increaseSegment Adjusted EBITDA for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, was primarily attributable to the impact of the decline in global automotive production as a result of the impact of COVID-19.
The change in Segment Adjusted EBITDA for bothour Casting segment in the three and nine months ended September 30, 2017,March 31, 2020, as compared to the three and nine months ended September 30, 2016, primarily attributable toMarch 31, 2019, was the MPG acquisition.
For bothresult of the three and nine months ended September 30, 2017,Casting Sale that was completed in the increase in Segment Adjusted EBITDA in both the Powertrain and Casting segments, as compared to the three and nine months ended September 30, 2016, was entirely attributable to the acquisitionfourth quarter of MPG2019 as AAM did not operateno longer operates in these segments prior to the acquisition.this business.
Reconciliation of Non-GAAP and GAAP Information
In addition to results reported in accordance with accounting principles generally accepted in the United States of America (GAAP) in this MD&A, we have provided certain non-GAAP financial measures such as EBITDA and Total Segment Adjusted EBITDA. Such information is reconciled to its closest GAAP measure in accordance with Securities and Exchange Commission rules below.
We define EBITDA to be earnings before interest expense, income taxes, depreciation and amortization. Total Segment Adjusted EBITDA is defined as EBITDA for our reportable segments excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, gain (loss) on the sale of a business, impairment charges, pension settlements, and non-recurring items. We believe that EBITDA is aand Total Segment Adjusted EBITDA are meaningful measuremeasures of performance as it isthey 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.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 to assess business and operating performance of the segments, and for operational planning and decision-making purposes. Non-GAAPThese 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.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | | | | | |
| | | | | 2020 | | 2019 | | | | |
Net income (loss) | | | | | $ | (501.2) | | | $ | 41.7 | | | | | |
Interest expense | | | | | 51.5 | | | 53.4 | | | | | |
Income tax expense (benefit) | | | | | 3.3 | | | (3.0) | | | | | |
Depreciation and amortization | | | | | 129.6 | | | 140.8 | | | | | |
EBITDA | | | | | $ | (316.8) | | | $ | 232.9 | | | | | |
Restructuring and acquisition-related costs | | | | | 17.6 | | | 12.1 | | | | | |
Debt refinancing and redemption costs | | | | | 1.5 | | | — | | | | | |
Impairment charge | | | | | 510.0 | | | — | | | | | |
Loss on sale of business | | | | | 1.0 | | | — | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total segment adjusted EBITDA | | | | | $ | 213.3 | | | $ | 245.0 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income attributable to AAM | $ | 86.2 |
| | $ | 61.7 |
| | $ | 230.8 |
| | $ | 193.8 |
|
Interest expense | 57.5 |
| | 23.2 |
| | 139.9 |
| | 70.2 |
|
Income tax expense | 5.7 |
| | 17.8 |
| | 15.6 |
| | 53.8 |
|
Depreciation and amortization | 122.6 |
| | 49.9 |
| | 303.4 |
| | 150.4 |
|
EBITDA | $ | 272.0 |
| | $ | 152.6 |
| | $ | 689.7 |
| | $ | 468.2 |
|
Restructuring and acquisition-related costs | 22.8 |
| | — |
| | 90.5 |
| | — |
|
Debt refinancing and redemption costs | — |
| | — |
| | 2.7 |
| | — |
|
Asset impairment | — |
| | 3.4 |
| | — |
| | 3.4 |
|
Non-recurring items: | | | | | | | |
Pension settlement | 2.9 |
| | — |
| | 2.9 |
| | — |
|
Acquisition-related fair value inventory adjustment | — |
| | — |
| | 24.9 |
| | — |
|
Impact of change in accounting principle | — |
| | — |
| | (3.7 | ) | | — |
|
Other non-recurring items | — |
| | 0.7 |
| | — |
| | (0.3 | ) |
Segment Adjusted EBITDA | $ | 297.7 |
| | $ | 156.7 |
| | $ | 807.0 |
| | $ | 471.3 |
|
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund debt service obligations, capital expenditures and working capital requirements.requirements, in addition to advancing our strategic initiatives. We believe that operating cash flow, available cash and cash equivalent balances and available committed borrowing capacity under our New Senior Secured Credit Facilities (as defined below)and foreign credit facilities will be sufficient to meet these needs.
COVID-19 Considerations Related to Liquidity and Capital Resources
In order to mitigate the financial impact of COVID-19, we have implemented measures to conserve cash and protect our liquidity position, including:
•Continuing to flex our variable cost structure;
•Continuing to manage our controllable expenses;
•Reducing the annual cash retainer for each non-employee director by 40%;
•Reducing salaries for executive officers by 30% and for certain other associates by various percentages depending on level;
•Reducing our projected capital expenditures for the year; and
•Pursuing options to defer and reduce tax payments through the CARES Act and similar global initiatives.
At March 31, 2020, we had over $1.4 billion of liquidity consisting of approximately $683 million of cash and cash equivalents, approximately $691 million of available borrowings under our Revolving Credit Facility and approximately $86 million of available borrowings under foreign credit facilities. Further, we have no significant debt maturities before October 2022. Based on our liquidity profile and no significant debt maturities in 2020, as well as the measures that we are taking to conserve cash, we believe that we will have sufficient funds available to continue operating with no significant changes to our capital structure until such time as production returns to more normalized levels.
Operating Activities In the first ninethree months of 2017,2020, net cash provided by operating activities increased to $420.7was $139.4 million as compared to $291.0net cash used in operating activities of $80.2 million in the first ninethree months of 2016.2019. The following factors impacted cash provided byfrom operating activities in the first ninethree months of 20172020, as compared to the first ninethree months of 2016:2019:
Net income Net income was $231.0 millionAccounts receivable For the three months ended March 31, 2020, we experienced an increase in the first nine months of 2017 as compared to $193.8 million in the first nine months of 2016. The change in net income in the first nine months of 2017, as compared to the first nine months of 2016, was the result of the factors discussed in the Results of Operations - Nine Months Ended September 30, 2017 as Compared to Nine Months Ended September 30, 2016 section of this MD&A.
Accounts payable As a result of the USM Mexico and MPG acquisitions, we settled accounts payable balances with USM Mexico and MPG totaling approximately $35 million, which was reflected as a reduction of cash flow from operating activities of approximately $246 million related to the change in our Condensed Consolidated Statementaccounts receivable balance from December 31, 2019 to March 31, 2020, as compared to the change in our accounts receivable balance from December 31, 2018 to March 31, 2019. This change was primarily attributable to the timing of Cash Flows forreceipts related to customer receivables, as well as the nineimpact of a reduction in sales at the end of the first quarter of 2020 due to the onset of COVID-19.
Inventories For the three months ended September 30, 2017. See Note 3 - Business Combinations for further detail.March 31, 2020, we experienced a decrease in cash flow from operating activities of approximately $34 million related to the change in our inventories balance from December 31, 2019 to March 31, 2020, as compared to the change in our inventories balance from December 31, 2018 to March 31, 2019. This change was primarily attributable to increased finished goods inventory at March 31, 2020 as a result of a sharp reduction in sales at the end of the first quarter of 2020 due to the onset of COVID-19.
Accounts payable and accrued expenses For the three months ended March 31, 2020, we experienced a decrease in cash flow from operating activities of approximately $28 million related to the change in our accounts payable and accrued expenses balance from December 31, 2019 to March 31, 2020, as compared to the change from December 31, 2018 to March 31, 2019. This change was primarily attributable to the timing of payments to suppliers, as well as the impact of reduced sales and purchasing activity at the end of the first quarter of 2020 due to the onset of COVID-19.
Restructuring and acquisition-related costs For the remainder of 2017,full year 2020, we expect restructuring and acquisition-related payments in cash flows from operating activities to incur cash charges under our global restructuring program, as well as acquisitionbe between $55 million and integration related cash charges, totaling approximately $25 to $30 million.
Income taxes Based on the status of audits outside the U.S.,$70 million, and the protocol of finalizing audits by the relevant tax authorities, it is not possible to estimatewe expect the timing or impact of changes, if any,cash payments to previously recorded uncertain tax positions. Asapproximate the timing of September 30, 2017 and December 31, 2016, we have recorded a liability for unrecognized income tax benefits and related interest and penalties of $54.4 million and $30.7 million, respectively. In January 2016, we completed negotiations with the Mexican tax authorities to settle transfer pricing audits. Including these settlements, we made payments of $26.1 million in the first nine months of 2016 to the Mexican tax authorities related to transfer pricing matters.charges incurred.
Although it is difficult to estimate with certainty the amount of our tax liabilities for the years that remain subject to audit, we do not expect the settlements will be materially different from what we have recorded in unrecognized tax benefits. We will continue to monitor the progress and conclusions of current and future audits and will adjust our estimated liability as necessary.
Pension and Other Postretirement Benefits (OPEB)other postretirement benefitsDue to the availability of our pre-funded pension balances (previous contributions in excess of prior required pension contributions) related to certain of our U.S. pension plans, as well as contributions we madeexpect our regulatory pension funding requirements in 2015 for one of our U.K. pension plans, the cash payments2020 to our pension trusts will be insignificant in 2017.approximately $1.5 million. We expect our cash payments for other postretirement benefit obligations in 2017,2020, net of GM cost sharing, to be approximately $16$17 million.
Income taxes Based on the status of ongoing tax audits, and the protocol of finalizing audits by the relevant tax authorities, it is not possible to estimate the impact of changes, if any, to previously recorded uncertain tax positions. As of March 31, 2020 and December 31, 2019, we have recorded a liability for unrecognized income tax benefits and related interest and penalties of $47.5 million and $52.6 million, respectively.
During the next 12 months, we may finalize an advance pricing agreement in a foreign jurisdiction, which would result in a cash payment to the relevant tax authorities and a reduction of our liability for unrecognized tax benefits and related interest and penalties. Although it is difficult to estimate with certainty the amount of any audit settlement, we do not expect any potential settlement to be materially different from what we have recorded in unrecognized tax benefits.
In the first ninequarter of 2020, we recognized a refundable income tax asset of approximately $35 million related to income tax for which we expect to receive a refund based on the utilization of net operating losses under the provisions of the CARES Act. This amount is presented in Prepaid expenses and other in our Condensed Consolidated Balance Sheet as of March 31, 2020. See Note 1 - Organization and Basis of Presentation for additional detail regarding the CARES Act.
Investing Activities In the first three months of 2017, we completed our acquisitions of MPG and USM Mexico. The purchase price2020, net cash used in investing activities was $69.2 million as compared to $123.9 million for MPG was approximately $1.5 billion, which included a cash portion of approximately $750 million, net of cash acquired. We acquired USM Mexico for a purchase price of $144.1 million, net of cash acquired, which was funded entirely with available cash.
the three months ended March 31, 2019. Capital expenditures were $278.7$69.7 million in the first ninethree months of 20172020 as compared to $158.7$124.2 million in the first ninethree months of 2016.2019. We expect our capital spending inclusive of the impact of the MPG acquisition,in 2020 to be approximately 8% of sales in 2017, which includes support for our global program launches within our new and incremental business backlog.$250 million.
Financing Activities In the first ninethree months of 2017,2020, net cash provided by financing activities was $816.6$87.7 million, as compared to $17.6net cash used in financing activities of $21.4 million in the first ninethree months of 2016.2019. The following factors impacted cash provided byfrom financing activities in the first ninethree months of 20172020 as compared to the first ninethree months of 2016:2019:
New Senior Secured Credit Facilities In connection with our acquisition of MPG (the Acquisition) on April 6, 2017,2019, Holdings, and American Axle & Manufacturing, Inc. (AAM, Inc.) entered into a credit agreement (the Credit Agreement), among AAM, Inc., as borrower, Holdings, each financial institution party thereto as a lender (the Lenders) and administrative agent, pursuant to which Holdings and certain of its restricted subsidiaries (including certain subsidiaries of MPG acquired as part of the Acquisition) are required to guarantee the borrowings of AAM, Inc. thereunder and Holdings AAM, Inc. and certain
of their restricted subsidiaries are required to pledge their assets (including, without limitation, after-acquired assets), subject to certain exceptions and limitations. In connection with the Credit Agreement, Holdings, AAM, Inc. and certain of their restricted subsidiaries entered into a Collateral Agreement and Guarantee Agreement with the financial institutions party thereto as collateral agent and administrative agent.
PursuantFirst Amendment (First Amendment) to the Credit Agreement (as amended by the Lenders agreed to provide a $100.0First Amendment, the Amended Credit Agreement). The First Amendment, among other things, established $340 million in incremental term loan A facility (the Termcommitments under the Amended Credit Agreement with a maturity date of July 29, 2024 (Term Loan A Facility)Facility due 2024), a $1.55 billion term loan B facility (the Term Loan B Facility) and a $900 million multi-currency revolving credit facility (thereduced the availability under the Revolving Credit Facility from $932 million to $925 million and together withextended the Term Loan A Facility and the Term Loan B Facility, the New Senior Secured Credit Facilities). The proceeds of the Term Loan A Facility and the Term Loan B Facility were used to finance a portion of the consideration for the Acquisition, pay transaction costs, redeem in full MPG Holdco I Inc.’s 7.375% Senior Notes due 2022, and repay the existing indebtedness of AAM, Inc. under its Amended and Restated Credit Agreement, dated as of January 9, 2004, amended and restated as of September 13, 2013 and as further amended, among AAM, Inc., as borrower, Holdings, and each financial institution party thereto as a lender and administrative agent, as well as repay existing indebtedness of MPG under its Credit Agreement, dated as of October 20, 2014 and as amended as of May 8, 2015, among MPG Holdco I Inc., as guarantor, MPG, the subsidiary guarantors party thereto, and each financial institution party thereto as a lender and administrative agent. The proceedsmaturity date of the Revolving Credit Facility will be used for general corporate purposes. We paid debt issuance costs of $53.9 million in the first nine months of 2017 related to the New Senior Secured Credit Facilities.
The Term Loan A Facility and the Revolving Credit Facility will mature onfrom April 6, 2022 to July 29, 2024, and the Term Loan B Facility will mature on April 6, 2024. Borrowings under the New Senior Secured Credit Facilities bear interest at rates based onmodified the applicable Eurodollar rate or alternate base rate, as AAM may elect, in each case plus an applicable margin determined based on AAM’s total net leverage ratio. The alternate base rate is the greatest of (a) the prime rate of a major United States financial institution, (b) the Federal Reserve Bank of New York rate plus 0.50% and (c) the adjusted Eurodollar rate plus 1.00%. The applicable margin for Eurodollar-based loans under the New Senior Secured Credit Facilities will be between 1.25% and 2.25% with respect to any loaninterest rates under the Term Loan A Facility 2.25% with respect to any loan under the Term Loan B Facility,due 2024 and between 2.00%interest rates and 3.00% with respect to any loancommitment fees under the Revolving Credit Facility. The applicable margin and the maturity date for loans subjectthe Term Loan B Facility remained unchanged. The proceeds of $340 million were used to alternate base rate will be between 0.25% and 1.25% with respect to any loanrepay all of the outstanding loans under the existing Term Loan A Facility 1.25% with respect to any loanand a portion of the outstanding Term Loan B Facility, resulting in no additional indebtedness. This also satisfies all payment requirements under the Term Loan B Facility and between 1.00% and 2.00% with respect to any loan under the Revolving Credit Facility. until maturity in 2024.
The Credit Agreement requires certain mandatory prepayments of outstanding loans under the Term Loan A Facility and the Term Loan B Facility, subject to certain exceptions, based on a percentage of the annual excess cash flow of Holdings and its restricted subsidiaries (with step-downs to 0% based upon the total net leverage ratio, and with no prepayment required if annual excess cash flow is under a specified minimum threshold), the net cash proceeds of certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions, and the net cash proceeds of any issuance of debt not otherwise permitted under the Credit Agreement.
The Credit Agreement permits AAM, Inc. to incur incremental term loan borrowings and/or increase commitments under the Revolving Credit Facility, subject to certain limitations and the satisfaction of certain conditions, in an aggregate amount not to exceed (i) $600 million, plus (ii) certain voluntary prepayments, plus (iii) additional amounts subject to pro forma compliance with a first lien net leverage ratio for Holdings and its restricted subsidiaries.
The Credit Agreement contains customary affirmative and negative covenants, including, among others, financial covenants based on total net leverage and cash interest expense coverage ratios and limitations on the ability of Holdings, AAM, Inc. or their restricted subsidiaries to make certain investments, declare or pay dividends or distributions on capital stock, redeem or repurchase capital stock and certain debt obligations, incur liens, incur indebtedness, or merge, make certain acquisitions or certain sales of assets. The Credit Agreement includes customary events of default, the occurrence of which would permit the lenders to, among other things, declare the principal, accrued interest and other obligations to be immediately due and payable. Upon such default, the lenders may also seek customary remedies with respect to the collateral under the Collateral Agreement.
As of September 30, 2017, we have prepaid $5.0 million of the outstanding principal on our Term Loan A Facility and $15.5 million of the outstanding principal on our Term Loan B Facility. These payments satisfy our obligation for principal payments under the Term Loan A Facility and Term Loan B Facility for the next four quarters. As a result, there are no amounts related to the Term Loan A Facility or Term Loan B Facility in the Current portion of long-term debt line item in our Condensed Consolidated Balance Sheet as of September 30, 2017.
At September 30, 2017, we had $869.1 million available under the Revolving Credit Facility. This availability reflects a reduction of $30.9 million for standby letters of credit issued against the facility.
The New Senior Secured Credit Facilities provide back-up liquidity for our foreign credit facilities. We intend to use the availability of long-term financing under the New 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 currentCurrent portion of long-term debt on our Condensed Consolidated Balance Sheet.
6.50% Notes due 2027 and 6.25% Notes due 2025 OnAt March 23, 2017,31, 2020, we issued $700.0had $691.4 million in aggregate principal amount of 6.25% senior notes due 2025 and $500.0available under the Revolving Credit Facility. This availability reflects $200.0 million in aggregate principal amount of 6.50% senior notes due 2027 (the Notes). Proceeds fromassociated with a draw on the Notes were used primarily to fund the cash consideration related to AAM's acquisition of MPG, related fees and expenses, refinancing certain existing indebtedness of MPG and borrowings under our previous revolving credit facility, which has been replaced by our new Revolving Credit Facility together withthat occurred in March 2020, and $33.6 million for standby letters of credit issued against the facility. Further, in April 2020, we drew an additional $150.0 million on the Revolving Credit Facility. The borrowings under the NewRevolving Credit Facility are used for general corporate purposes.
Subsequent Event Related to Senior Secured Credit Facilities.Facilities
In April 2020, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the Second Amendment (Second Amendment) to the Credit Agreement (as amended, the Second Amended Credit Agreement). For the period from April 1, 2020 through March 31, 2022 (the Amendment Period), the Second Amendment, among other things, replaced the total net leverage ratio covenant with a new senior secured net leverage ratio covenant, reduced the minimum levels of the cash interest expense coverage ratio covenant, and modified certain covenants restricting the ability of Holdings, AAM and certain subsidiaries of Holdings to create, incur, assume or permit to exist certain additional indebtedness and liens and to make certain restricted payments, voluntary payments and distributions. The Second Amendment also increased the maximum levels of the total net leverage ratio covenant after the Amendment Period, modified the applicable margin with respect to interest rates under the Term Loan A Facility due 2024 and interest rates and commitment fees under the Revolving Credit Facility, and increased the minimum adjusted London Interbank Offered Rate for Eurodollar-based loans under the Term Loan A Facility due 2024 and Revolving Credit Facility. The applicable margin for the Term Loan B Facility remains unchanged.
Redemption of 6.625% Notes due 2022 In the first quarter of 2020, we voluntarily redeemed a portion of our 6.625% Notes due 2022. This resulted in a principal payment of $100.0 million and $2.0 million in accrued interest. We paidexpensed approximately $0.4 million for the write-off of the unamortized debt issuance costs that we had been amortizing over the expected life of $36.9 million in the first nine months of 2017 related to the Notes.
Repayment of MPG Indebtedness Upon the acquisition of MPG, we assumed approximately $1.9 billion of existing MPG indebtedness, which we repaid in its entirety on the date of acquisition. This indebtedness was comprised of approximately $0.2 billion of a Euro denominated term loan, approximately $1.0 billion of a U.S. dollar denominated term loanborrowing, and approximately $0.7 billion$1.1 million for the payment of outstanding MPG bonds. Upon settlement of the debt, we paid approximately $24.6 million of accrued interest. In addition, we also incurred and paid approximately $2.7 million of fees, which have been presented in the Debt refinancing andan early redemption costs line item within our condensed consolidated statements of income for both the three and nine months ended September 30, 2017.premium.
Foreign credit facilities We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries. At September 30, 2017, $52.3March 31, 2020, $102.7 million was outstanding under our foreign credit facilities, andas compared to $106.0 million at December 31, 2019. At March 31, 2020, an additional $99.9$86.0 million was available.available under our foreign credit facilities.
Treasury stock Treasury stock increased by $7.0$2.4 million in the first ninethree months of 20172020 to $198.1$211.7 million as compared to $191.1$209.3 million at year-end 2016,2019, due to the withholding and repurchase of shares of AAM stock to satisfy employee tax withholding obligations as part of the merger consideration paid for the acquisition of Metaldyne Performance Group, Inc. as well as tax withholding obligations due upon the vesting of performance shares and restricted stock units.
Subsidiary Guarantees of Registered Debt Securities Our 6.625% Notes, 6.50% Notes, 6.25% Notes (due 2026), and 6.25% Notes (due 2025) (collectively, the Notes) are senior unsecured obligations of AAM, Inc. (Issuer); all of which are fully and unconditionally guaranteed, on a joint and several basis, by Holdings and substantially all domestic subsidiaries of AAM, Inc. and MPG Inc (Subsidiary Guarantors). Holdings has no significant assets other than its 100% ownership in AAM, Inc. and MPG Inc., and no direct subsidiaries other than AAM, Inc. and MPG 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;
•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's Ratings Group, Inc, and Moody's Investors Service, Inc.
The following represents summarized financial information of AAM Holdings, AAM Inc. and the Subsidiary Guarantors (collectively, the Combined Entities). The information has been prepared on a combined basis and excludes any investments of AAM Holdings, AAM Inc., or the Subsidiary Guarantors in non-guarantor subsidiaries. Intercompany transactions and amounts between Combined Entities have been eliminated.
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Statement of Operations Information | (in millions) | | |
| Three Months Ended March 31, 2020 | | Year Ended December 31, 2019 |
Net sales | $ | 1,054.4 | | | $ | 3,043.3 | |
Gross profit | 92.1 | | | 192.0 | |
Loss from operations | (380.8) | | | (793.3) | |
Net loss | (401.7) | | | (718.0) | |
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Balance Sheet Information | (in millions) | | |
| March 31, 2020 | | December 31, 2019 |
Current assets | $ | 1,245.2 | | | $ | 699.5 | |
Noncurrent assets | 2,853.6 | | | 3,120.4 | |
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Current liabilities | 1,162.4 | | | 551.9 | |
Noncurrent liabilities | 4,226.8 | | | 4,281.3 | |
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Redeemable preferred stock | — | | | — | |
Noncontrolling interest | — | | | — | |
At March 31, 2020 and December 31, 2019, amounts owed by the Combined Entities to non-guarantor entities totaled approximately $510 million and $125 million, respectively, and amounts owed to the Combined Entities from non-guarantor entities totaled approximately $725 million and $630 million, respectively.
CRITICAL ACCOUNTING ESTIMATES
Subsequent to the goodwill impairment charge that was recorded for our Driveline reporting unit in the first quarter of 2020, the fair value of this reporting unit approximated its carrying value. Fair value of the 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 the 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 unit, and appropriate discount and long-term growth rates.
A decline in the actual cash flows of the Driveline reporting unit in future periods, as compared to the projected cash flows used in the valuation, could result in the carrying value of this reporting unit exceeding its fair value. Further, a change in market comparables, discount rate or long-term growth rate, as a result of a change in economic conditions or otherwise, including those resulting from the impact of COVID-19, could result in the carrying value of this reporting unit exceeding its fair value, which would result in an additional impairment charge.
AAM's critical accounting estimates are included in our Annual Report on Form 10-K for the year ended December 31, 2019 and did not materially change during the three months ended March 31, 2020.
CYCLICALITY AND SEASONALITY
Our operations are cyclical because they are directly related to worldwide automotive production, which is itself cyclical and dependent on general economic conditions and other factors. Our business is also moderately seasonal as our major OEM customers historically have an extended shutdown of operations (typically 1-2 weeks) in conjunction with their model year changeover and an approximate one-week shutdown in December. Our major OEM customers also occasionally have longer shutdowns of operations (up to six weeks) for program changeovers. Accordingly, our quarterly results may reflect these trends.
LITIGATION AND ENVIRONMENTAL MATTERS
We are involved in, or potentially subject to, various legal proceedings or claims incidental to our business. These include, but are not limited to, matters arising out of product warranties, tax or contractual matters, and environmental obligations. Although the outcome of these matters cannot be predicted with certainty, we do not believe that any of these matters, individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.
We are subject to various federal, state, local and foreign environmental and occupational safety and health laws, regulations and ordinances, including those regulating air emissions, water discharge, waste management and environmental cleanup. We will continue to closely monitor our environmental conditions to ensure that we are in compliance with all laws, regulations and ordinances. We have made, and will continueanticipate continuing to make, capital and other expenditures (including recurring administrative costs) to comply with environmental requirements.requirements at our current and former facilities. Such expenditures were not significant in the thirdfirst quarter of 2017.2020.
On April 6, 2017, we completed our acquisition of MPG. A subsidiary of MPG, Grede Wisconsin Subsidiaries LLC (Grede Wisconsin), had been under investigation by the U.S. Department of Justice and the Environmental Protection Agency for alleged Clean Air Act violations and alleged obstruction of justice relating to the January 2012 removal of debris from the roof of a heat treat oven that was purported to contain asbestos at a now closed Grede facility in Berlin, Wisconsin. The United States Attorney, Eastern District of Wisconsin, indicted Grede LLC and Grede II LLC, the parent company of Grede Wisconsin, in connection with this matter. We are defending this matter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Our business and financial results are affected by fluctuations in worldglobal financial markets, including interestcurrency exchange rates and currency exchangeinterest rates. Our hedging policy has been developed to manage these risks to an acceptable level based on management’s judgment of the appropriate trade-off between risk, opportunity and cost. We do not hold financial instruments for trading or speculative purposes.
Currency Exchange Risk From time to time, we use foreign currency forward and option contracts to reduce the effects of fluctuations in exchange rates relating to the Mexican Peso, Euro, Brazilian Real, British Pound Sterling, Thai Baht, Swedish Krona, Chinese Yuan, Polish Zloty and Indian Rupee.certain foreign currencies. At September 30, 2017,March 31, 2020, we had currency forward and option contracts with a notional amount of $218.1$169.5 million outstanding. The potential decrease in fair value of foreign exchange contracts, assuming a 10% adverse change in the foreign currency exchange rates, would be approximately $19.9$15.5 million at September 30, 2017March 31, 2020 and was approximately $14.2$16.5 million at December 31, 2016.2019.
In 2019, we entered into a fixed-to-fixed cross-currency swap to reduce the variability of functional currency equivalent cash flows associated with changes in exchange rates on certain Euro-based intercompany loans. In the first quarter of 2020, we discontinued this cross-currency swap, which was in an asset position of $9.8 million on the date that it was discontinued. Also in the first quarter of 2020, we entered into a new fixed-to-fixed cross-currency swap to reduce the variability of functional currency equivalent cash flows associated with changes in exchange rates on certain Euro-based intercompany loans. At March 31, 2020, the notional amount of the fixed-to-fixed cross-currency swap was $220.5 million. The potential decrease in fair value of the fixed-to-fixed cross-currency swap, assuming a 10% adverse change in the foreign currency exchange rates, would be approximately $22.0 million at March 31, 2020 and was approximately $22.4 million at December 31, 2019.
Future business operations and opportunities, including the expansion of our business outside North America, may further increase the risk that cash flows resulting from these global operations may be adversely affected by changes in currency exchange rates. If and when appropriate, we intend to manage these risks by creating natural hedges in the structure of our global operations, utilizing local currency funding of these expansions and various types of foreign exchange contracts.
Interest Rate Risk We are exposed to variable interest rates on certain credit facilities. From time to time, we have used interest rate hedging to reduce the effects of fluctuations in market interest rates. In the second quarter of 2017,2019, we entered into a variable-to-fixed interest rate swap to reduce the variability of cash flows associated with interest payments on our variable rate debt. As of September 30, 2017, weWe have the following notional amounts hedged in relation to our variable-to-fixed interest rate swap: $1.0 billion through May 2020, $900.0 million through May 2021, $750.0 million through May 2018,2022, $600.0 million through May 2019, $450.02023 and $500.0 million through May 2020 and $200.0 million through May 2021. 2024.
The pre-tax earnings and cash flow impact of a one-percentage-point increase in interest rates (approximately 18% of our weighted-average interest rate at September 30, 2017)March 31, 2020) on our long-term debt outstanding, would be approximately $9.3$8.3 million at September 30, 2017March 31, 2020 and was approximately $0.6$6.3 million at December 31, 2016,2019, on an annualized basis.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) were effective as of September 30, 2017.March 31, 2020.
Changes in Internal Control over Financial Reporting
In conjunction withOn January 1, 2019, we began the implementation of our recent acquisition activity,global enterprise resource planning (ERP) systems at certain of the locations that were acquired as part of the MPG acquisition. As part of these implementations, we completedhave modified the design and implementationdocumentation of our internal controls over financial reporting specific to business combinations. The implemented controls address the various elements of a business combination, including but not limited to: 1) calculation of the consideration transferred; 2) identifying and properly accounting for transactions that are separate from the business combination; 3) use and oversight of competent and qualified personnel in performing the valuation of assets acquired and liabilities assumed; 4) review of inputs and outputs to the valuation models; 5) identifying and disclosing provisional amounts; and 6) tracking measurement period adjustments.
Our acquisition of MPG was completed on April 6, 2017. We are currently integrating policies, processes and operations for the combined company andprocedures, where appropriate. We will continue to evaluateimplement these ERP systems at certain locations throughout the remainder of 2020.
As a result of temporarily closing many of our global facilities due to the impact of COVID-19, a significant number of our associates began to work remotely in March 2020. This did not have a material effect on our internal control over financial reporting as we developmaintained our existing controls and executeprocedures over financial reporting during this period.
Except as described above with regard to implementation of ERP systems at certain legacy MPG locations, there were no changes in our integration plans. Until such time asinternal control over financial reporting during the companiesquarter ended March 31, 2020 that have materially affected, or are fully integrated, we will maintain the operational integrity of each company's legacyreasonably likely to materially affect, our internal controlscontrol over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There were no material changes fromIn addition to the risk factors previouslythat are included in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019, the following was identified as a significant risk to AAM during the three months ended March 31, 2020.
Our business and financial condition have been, and may continue to be, adversely affected by the impact of COVID-19.
Our business is subject to risks associated with public health issues, including pandemics such as COVID-19. COVID-19 has disrupted global economic markets and has led to significant reductions in global automotive production volumes. As a result of COVID-19, governmental and public health officials in substantially all of the locations in which we operate have mandated certain precautions to mitigate the spread of the disease, including shelter-in-place orders or similar measures. As such, we have temporarily suspended production, or experienced a significant reduction in production volumes, in substantially all of our manufacturing facilities.
Our results of operations and financial condition have been, and may continue to be, adversely impacted by the actions taken to contain the impact of COVID-19, and the ultimate extent of such impact will depend on future developments, such as the duration and extent of the pandemic, its impact on: consumers and sales of the vehicles we support, our customers and our and their suppliers, how quickly normal economic conditions and our and our customers’ operations can resume, and whether the pandemic leads to recessionary conditions. In addition, government sponsored economic stimulus programs in response to the pandemic may not be available to our customers, our suppliers or us or achieve their economic goals. Our supply chain also may be disrupted due to supplier closures or bankruptcies. Our operations may also be impacted by interruptions due to the direct impact of, or precautionary measures associated with, COVID-19 at our locations or those of our customers or suppliers.
Further, COVID-19 could exacerbate other risks disclosed in Item 1A. "Risk Factors" as included in our Annual Report on Form 10-K for the year ended December 31, 2016 Form 10-K.2019. These risks include, but are not limited to, dependency on certain customers, dependency on certain global automotive market segments, risks and uncertainties associated with our company’s global operations, dependency on certain key manufacturing facilities, cyclicality in the automotive industry, and disruptions in our supply chain and our customers’ supply chain.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In 2016, AAM's Board of Directors authorized a share repurchase program of up to $100 million of AAM's common shares through December 31, 2018 as part of AAM's overall capital allocation strategy. The repurchase of shares may be made in the open market or in privately negotiated transactions and will be funded through available cash balances and cash flow from operations. The timing and amount of any share repurchases will be determined based on market and economic conditions, share price, alternative uses of capital and other factors. There were no repurchases under the authorized share repurchase program during the third quarter of 2017 and there is approximately $98.5 million available for repurchase.
In the third quarter of 2017, we withheld and repurchased shares of AAM stock to satisfy employee tax withholding obligations due upon the vesting of restricted stock units. The following table provides information about our equity security purchases during the quarter ended September 30, 2017:March 31, 2020:
ISSUER PURCHASES OF EQUITY SECURITIES
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Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
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January 1 - January 31, 2020 | | 22,442 | | | $ | 10.66 | | | — | | | $ | — | |
February 1 - February 29, 2020 | | 329,283 | | | 6.33 | | | — | | | — | |
March 1 - March 31, 2020 | | — | | | — | | | — | | | — | |
Total | | 351,725 | | | $ | 6.61 | | | — | | | $ | — | |
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Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |
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July 1 - July 31, 2017 | | 2,845 |
| | $ | 15.61 |
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August 1 - August 31, 2017 | | — |
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September 1 - September 30, 2017 | | — |
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Total | | 2,845 |
| | $ | 15.61 |
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Item 6. Exhibits
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** | Submitted electronically with this Report. | | | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
(Registrant)
/s/ Christopher J. MayJames G. Zaliwski
Christopher J. MayJames G. Zaliwski
Vice President & Chief FinancialAccounting Officer
(also in the capacity of Chief Accounting Officer)May 8, 2020
November 3, 2017