AMERICAN AXLE & MANUFACTURING HOLDINGS, INC. COMPANY OVERVIEW
We are a global Tier 1 supplier to the automotive industry. We design, engineer and manufacture driveline and metal forming products that are making the next generation of vehicles smarter, lighter, safer and more efficient. We employ over 20,000 associates, operating at nearly 80 facilities in 17 countries, to support our customers on global and regional platforms with a focus on operational excellence, quality and technology leadership.
In the first quarter of 2019, we initiated a new global restructuring program (the 2019 Program) to further streamline our business by consolidating our four existing segments into three segments. The activity occurred through the disaggregation of our former Powertrain segment, with a portion moving into our Driveline segment and a portion moving into our Metal Forming segment. The primary objectives of this consolidation are to further the integration of MPG, align AAM's product and process technologies, and to achieve efficiencies within our corporate and business unit support teams to reduce cost in our business.
In the fourth quarter of 2019, we completed the sale of the
We are a primary supplier of driveline components to General Motors Company (GM)
for its full-size rear-wheel drive (RWD) light trucks, sport utility vehicles
(SUV), and crossover vehicles manufactured in
We also supply driveline system products to
INDUSTRY TRENDS
There are a number of significant trends affecting the markets in which we compete. Intense competition, volatility in the price of raw materials, including steel, other metallic materials and resources used in electronic components, and significant pricing pressures remain. At the same time, there is a focus on investing in future products that will incorporate the latest technology and meet changing customer demands. The continued advancement of technology and product innovation, as well as the capability to source programs on a global basis, are critical to attracting and retaining business in our global markets.
INCREASE IN DEMAND FOR ELECTRIFICATION AND ELECTRONIC INTEGRATION The electrification of vehicles continues to expand, driven by government regulations related to emissions, such as the Corporate Average Fuel Economy standards, as well as consumer demand for greater vehicle performance, enhanced functionality, increased electronic content and vehicle connectivity, and affordable convenience options. We are responding, in part, through the development of our e-AAM™ hybrid and electric driveline systems, and related subsystems and components, which allow us to meet our customers' needs for high performance vehicles with improved fuel economy and reduced emissions. To date, our e-AAM™ hybrid and electric driveline systems have been awarded multiple contracts, and began production during 2018.
As electronic components become an increasingly larger focus for OEMs and suppliers, the industry will likely continue to see the addition of new market entrants from non-traditional automotive companies, including increased competition from technology companies. An area of focus will be the product development cycle and bridging the gap between the shorter development cycles of IT hardware and software and the longer development cycles of traditional powertrain components. Our EcoTrac® Disconnecting AWD system, VecTrac™ Torque Vectoring Technology and TracRite® Differential Technology, are examples of AAM's enhanced capabilities in electronic integration.
20
--------------------------------------------------------------------------------
EVOLUTION OF THE AUTOMOTIVE INDUSTRY AS DEMAND FOR CAR-SHARING, RIDE-SHARING AND AUTONOMOUS VEHICLES INCREASES In addition to selling vehicles, OEMs are increasingly focused on offering their own car-sharing rental businesses and ride-sharing services. Car-sharing typically allows consumers to rent a car for a short period of time, while ride-sharing matches people to available carpools or other services that provide on-demand mobility. With continued urbanization, population growth, increased government regulations to ease congestion and generational shifts in preferences, it is expected that the markets for these services will continue to grow, which could cause a change in the type of vehicles utilized. As such, many OEMs are exploring and expanding their own car-sharing and ride-sharing efforts.
Another trend developing is the expectation that autonomous, self-driving cars will become more common with continued advancements in technology. Autonomous vehicles present many possible benefits, such as a reduction in deadly traffic collisions caused by human error and reduced traffic congestion, but there are also foreseeable challenges such as liability for damage and software safety and reliability. The increased integration of electronics and vehicle connectivity that will likely be required in autonomous vehicle developments will provide an opportunity for suppliers, such as AAM, with advanced capabilities in this area to be competitive in this expanding market.
GLOBAL AUTOMOTIVE PRODUCTION AND INDUSTRY CONSOLIDATION As our customers design their products for global markets, they will continue to require global support from their suppliers. For this reason, it is critical that suppliers maintain a global presence in these markets in order to compete for new contracts. We have engineering offices around the world to support our global locations and provide technical solutions to our customers on a regional basis.
The cyclical nature of the automotive industry, volatile commodity prices, the shifting demands of consumer preference, regulatory requirements and trade agreements require OEMs and suppliers to remain agile with regard to product development and global capability. A critical objective for OEMs and suppliers is the ability to meet these global demands while effectively managing costs. OEMs and suppliers are preparing for these challenges through merger and acquisition activity, development of strategic partnerships and reduction of vehicle platform complexity. In order to effectively drive technology development, recognize cost synergies, and increase global footprint, the industry may continue to see consolidation in the supply base as companies recognize and respond to the need for scalability. Our acquisition of MPG in 2017 was a critical step in achieving the aforementioned objectives.
INCREASED DEMAND FOR FUEL EFFICIENCY AND EMISSIONS REDUCTIONS There has been an increased demand for technologies designed to help reduce emissions, increase fuel economy and minimize the environmental impact of vehicles. As a result, OEMs and suppliers are competing to develop and market new and alternative technologies, such as electric vehicles, hybrid vehicles, fuel cells, higher speed transmissions, and downsized, fuel-efficient engines. At the same time, OEMs and suppliers are improving products to increase fuel economy and reduce emissions through lightweighting and efficiency initiatives.
We are responding with ongoing research and development (R&D) activities that focus on fuel economy, emissions reductions and environmental improvements by integrating electronics and technology. Through the development of our EcoTrac® Disconnecting AWD system, e-AAM™ hybrid and electric driveline systems, QuantumTM lightweight axle technology, high-efficiency axles, PowerLite® axles and PowerDense® gears, high strength connecting rod technology, refined vibration control systems, and forged axle tubes, we have significantly advanced our efforts to improve fuel efficiency, safety, and ride and handling performance while reducing emissions and mass. These efforts have led to new business awards and further position us to compete in the global marketplace.
In addition to AAM's organic growth in technology and processes, our
acquisitions of MPG and certain operations of
21
--------------------------------------------------------------------------------
The discussion of our Results of Operations and Liquidity and Capital Resources
for 2018, as compared to 2017, can be found within "Part II - Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 2018 Annual Report on Form 10-K filed with the
RESULTS OF OPERATIONS
NET SALES Net sales were
COST OF GOODS SOLD Cost of goods sold was
Materials costs as a percentage of total cost of goods sold were approximately 56% in 2019 and 59% in 2018.
GROSS PROFIT Gross profit was
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) SG&A (including R&D) was
AMORTIZATION OF INTANGIBLE ASSETS Amortization expense for the year ended
IMPAIRMENT CHARGES In the third quarter of 2019, we entered into a definitive
agreement to sell the
As a result of our annual goodwill impairment test in the fourth quarter of
2019, we determined that the carrying value of our Metal Forming segment was
greater than its fair value. As such, we recorded a goodwill impairment charge
of
RESTRUCTURING AND ACQUISITION-RELATED COSTS Restructuring and
acquisition-related costs were
22
--------------------------------------------------------------------------------
approximately
In 2019, we initiated a new global restructuring program (the 2019 Program) to
further streamline our business by consolidating our four existing segments into
three segments. This activity occurred through the disaggregation of our former
Powertrain segment, with a portion moving into our Driveline segment and a
portion moving into our Metal Forming segment. The primary objectives of this
consolidation are to further the integration of MPG, align AAM's product and
process technologies, and to achieve efficiencies within our corporate and
business unit support teams to reduce cost in our business. We incurred
approximately
During 2018, we initiated actions to exit operations at manufacturing facilities
in our Driveline, Metal Forming and former Powertrain segments. As a result of
these actions, we were required to assess the associated long-lived assets for
impairment. Based on our analysis, assets that were not to be redeployed to
other AAM facilities were determined to be fully impaired resulting in total
charges of
In 2019, we completed the acquisition of Mitec, and in 2017, we completed our
acquisitions of MPG and USM Mexico. During 2019, we incurred
Acquisition-related costs primarily consist of advisory, legal, accounting,
valuation and certain other professional or consulting fees incurred.
Integration expenses primarily reflect costs incurred for information technology
infrastructure and enterprise resource planning (ERP) systems, and consulting
fees incurred in conjunction with the acquisitions. We expect to incur
additional integration charges of approximately
In
OPERATING INCOME (LOSS) Operating loss was
INTEREST EXPENSE Interest expense was
INTEREST INCOME Interest income was
OTHER INCOME (EXPENSE) Following are the components of Other Income (Expense) for 2019 and 2018:
Debt refinancing and redemption costs In
23
--------------------------------------------------------------------------------
established
In
In
In
In
In
Gain on bargain purchase of a business In the fourth quarter of 2019, we
completed the acquisition of Mitec, under which we acquired
Gain on settlement of capital lease In the second quarter of 2018, we reached a
settlement agreement related to a capital lease obligation that we had
recognized as a result of the acquisition of MPG. This settlement resulted in a
gain of
Pension settlement charge In 2019, we offered a voluntary one-time lump sum
payment option to certain eligible terminated vested participants in our
Other, net Other, net, which includes the net effect of foreign exchange gains
and losses, our proportionate share of earnings from equity in unconsolidated
subsidiaries, and all components of net periodic pension and postretirement
benefit costs other than service costs and certain settlement charges, was
expense of
24
--------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT) Income tax was a benefit of
In 2019, our income tax benefit varied from the tax benefit computed at the
In 2018, our income tax benefit is higher than the tax benefit computed at the
NET INCOME (LOSS) ATTRIBUTABLE TO AAM AND EARNINGS (LOSS) PER SHARE (EPS) Net
income (loss) attributable to AAM was a loss of
25
--------------------------------------------------------------------------------
SEGMENT REPORTING
In the first quarter of 2019, we reorganized our business to disaggregate our
former Powertrain segment, with a portion moving to our Driveline segment and a
portion moving to our Metal Forming segment. The Powertrain amounts previously
reported for the years ended
Additionally, in the fourth quarter of 2019, we completed the Casting Sale. The
Casting Sale did not include the entities that conduct AAM's casting operations
in
As a result of these activities, our business is now organized into Driveline and Metal Forming segments, with each representing a reportable segment under ASC 280 Segment Reporting. The results of each segment are regularly reviewed by the chief operating decision maker to assess the performance of the segment and make decisions regarding the allocation of resources.
Our product offerings by segment are as follows:
• Driveline products consist primarily of front and rear axles, driveshafts,
differential assemblies, clutch modules, balance shaft systems,
disconnecting driveline technology, and electric and hybrid driveline
products and systems for light trucks, sport utility vehicles (SUVs),
crossover vehicles, passenger cars and commercial vehicles;
• Metal Forming products consist primarily of axle and transmission shafts,
ring and pinion gears, differential gears and assemblies, connecting rods
and variable valve timing products for Original Equipment Manufacturers
and Tier 1 automotive suppliers; and
• Prior to the Casting Sale, the Casting segment produced both thin wall
castings and high strength ductile iron castings, as well as transmission
pump bodies, steering knuckles, control arms, brake anchors and calipers,
and ball joint housings for the global light vehicle, commercial and
industrial markets.
26
--------------------------------------------------------------------------------
The following tables outline our sales and Segment Adjusted EBITDA for each of our reportable segments for the years endedDecember 31, 2019 , 2018 and 2017 (in millions): Year Ended December 31, 2019 Driveline Metal Forming Casting Total Sales$ 4,550.2 $ 1,845.2 $ 669.2 $ 7,064.6 Less: Intersegment sales 100.5 391.7 41.5 533.7 Net external sales$ 4,449.7 $ 1,453.5 $ 627.7 $ 6,530.9 Segment adjusted EBITDA$ 610.8 $ 316.5$ 43.0 $ 970.3 Year Ended December 31, 2018 Driveline Metal Forming Casting Total Sales$ 5,001.2 $ 2,046.0 $ 780.6 $ 7,827.8 Less: Intersegment sales 89.8 428.3 39.3 557.4 Net external sales$ 4,911.4 $ 1,617.7 $ 741.3 $ 7,270.4 Segment adjusted EBITDA$ 754.5 $ 376.5$ 52.9 $ 1,183.9 Year Ended December 31, 2017 Driveline Metal Forming Casting Total Sales$ 4,567.8 $ 1,634.9 $ 576.1 $ 6,778.8 Less: Intersegment sales 65.9 417.7 29.2 512.8 Net external sales$ 4,501.9 $ 1,217.2 $ 546.9 $ 6,266.0 Segment adjusted EBITDA$ 762.3 $ 305.7$ 34.7 $ 1,102.7
The change in Driveline sales for the year ended
The increase in Driveline sales for the year ended
27
--------------------------------------------------------------------------------
ended
The change in sales in our Metal Forming segment for the year ended
The increase in sales in our Metal Forming segment for the year ended
The change in sales in our Casting segment for the year ended
The increase in sales in our Casting segment for the year ended
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. 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.
For the year ended
For the year ended
The change in Metal Forming Segment Adjusted EBITDA for the year ended
The change in Casting Segment Adjusted EBITDA for the year ended
28
--------------------------------------------------------------------------------
Reconciliation of Non-GAAP and GAAP Information
In addition to results reported in accordance with accounting principles
generally accepted in
We define EBITDA to be earnings before interest expense, income taxes, depreciation and amortization. Total Segment Adjusted EBITDA is defined as EBITDA 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 and Total Segment Adjusted EBITDA are meaningful measures of performance as they are commonly utilized by management and investors to analyze operating performance and entity valuation. Our management, the investment community and the banking institutions routinely use EBITDA and Total Segment Adjusted EBITDA, together with other measures, to measure our operating performance relative to other Tier 1 automotive suppliers and to assess the relative mix of Adjusted EBITDA by segment. We also believe that Total Segment Adjusted EBITDA is a meaningful measure as it is used for operational planning and decision-making purposes. These non-GAAP financial measures are not and should not be considered a substitute for any GAAP measure. Additionally, non-GAAP financial measures as presented by AAM may not be comparable to similarly titled measures reported by other companies.
Year Ended December 31,
2019 2018 2017
Net income (loss) $ (484.1 ) $ (56.8 ) $ 337.5
Interest expense 217.3 216.3 195.6
Income tax expense (benefit) (48.9 ) (57.1 ) 2.5
Depreciation and amortization 536.9 528.8 428.5
EBITDA $ 221.2 $ 631.2 $ 964.1
Restructuring and acquisition-related costs 57.8 78.9 110.7
Debt refinancing and redemption costs 8.4 19.4 3.5
(Gain) loss on sale of business 21.3 (15.5 ) -
Impairment charges 665.0 485.5 -
Pension settlement 9.8 - 3.2
Non-recurring items:
Gain on bargain purchase of business (10.8 ) -
Gain on settlement of capital lease - (15.6 ) -
Acquisition-related fair value inventory adjustment - - 24.9
Impact of change in accounting principle - - (3.7 )
Other non-recurring items (2.4 ) - -
Total Segment Adjusted EBITDA $ 970.3 $ 1,183.9 $ 1,102.7
29
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund debt service obligations, capital expenditures and working capital requirements, in addition to advancing our strategic initiatives. We believe that operating cash flow, available cash and cash equivalent balances and available committed borrowing capacity under our Senior Secured Credit Facilities will be sufficient to meet these needs.
OPERATING ACTIVITIES Net cash provided by operating activities was
Inventories We experienced an increase in cash flow from operating activities of
Accounts payable and accrued expenses We experienced a decrease in cash flow
from operating activities of
Restructuring and acquisition-related costs We incurred
Pension and other postretirement benefits (OPEB) Our cash payments for OPEB, net
of
Due to the availability of our pre-funded pension balances (previous
contributions in excess of prior required pension contributions) related to
certain of our
Interest paid Interest paid in 2019 was
Income taxes Income taxes paid in 2019 totaled
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 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 other communications with tax authorities, and will adjust our estimated liability as necessary.
INVESTING ACTIVITIES Capital expenditures were
30
--------------------------------------------------------------------------------
program launches in 2020 and 2021 within our new and incremental business backlog, as well as program capacity increases and future launches of replacement programs.
In the fourth quarter of 2019, we completed the sale of our
Also in 2019, we completed the acquisition of Mitec for approximately
In 2018, we completed the sale of the aftermarket business associated with our
former Powertrain segment. As a result of this sale, we received net proceeds of
approximately
FINANCING ACTIVITIES Net cash used in financing activities was
Senior Secured Credit Facilities In
In
At
The 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 Senior Secured Credit Facilities to refinance any current maturities related to such debt agreements that are not otherwise refinanced on a long-term basis in their local markets, except where otherwise reclassified to Current portion of long-term debt on our Consolidated Balance Sheet.
Redemption of 7.75% Notes Due 2019 In the second quarter of 2019, we voluntarily
redeemed the remaining balance outstanding under our 7.75% Notes due 2019. This
resulted in a principal payment of
In the fourth quarter of 2018, we voluntarily redeemed a portion of our 7.75%
Notes due 2019. This resulted in a principal payment of
31
--------------------------------------------------------------------------------
Redemption of 6.625% Notes Due 2022 In the second quarter of 2018, we
voluntarily redeemed a portion of our 6.625% Notes due 2022. This resulted in a
principal payment of
6.25% Notes Due 2026 In the first quarter of 2018, we issued
Tender Offer of 6.25% Notes Due 2021 Also during the first quarter of 2018, we
made a tender offer for our 6.25% Notes due 2021. Under this tender offer, we
retired the
Settlement of Capital Lease Obligation In the second quarter of 2018, we reached
a settlement agreement related to a capital lease obligation that we had
recognized as a result of the acquisition of MPG. In the third quarter of 2018,
we paid
Foreign Credit Facilities We utilize local currency credit facilities to finance
the operations of certain foreign subsidiaries. At
Subsequent Event In
Credit ratings To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to our securities as an indicator of credit quality for fixed income investors. A credit rating agency may change or withdraw its ratings based on its assessment of our current and future ability to meet interest and principal repayment obligations. Credit ratings affect our cost of borrowing under our Revolving Credit Facility and may affect our access to debt capital markets and other costs to fund our business. The credit ratings and outlook currently assigned to our securities by the rating agencies are as follows:
Corporate Senior Senior
Family Unsecured Secured
Rating Notes Rating Notes Rating Outlook
Standard & Poor's BB- B BB Stable
Moody's Investors Services B1 B2 Ba2 Stable
Dividend program We have not declared or paid any cash dividends on our common stock in 2019 or 2018.
32
--------------------------------------------------------------------------------
Contractual obligations The following table summarizes payments due on our
contractual obligations as of
Payments due by period
Total <1yr 1-3 yrs 3-5 yrs >5 yrs
(in millions)
Current and long-term debt
1,020.0 205.8 388.6 309.3 116.3
Finance lease obligations 7.8 3.2 4.4 0.2 -
Operating leases (1) 151.4 28.2 39.8 24.1 59.3
Purchase obligations (2) 131.9 118.7 13.2 - -
Other long-term liabilities (3) 568.7 57.9 111.0 111.4 288.4
Total $ 5,572.0 $ 467.0 $ 1,105.4 $ 1,935.6 $ 2,064.0
(1) Operating leases include all lease payments through the end of the
contractual lease terms, which includes elections for repurchase options
which we are reasonably certain to exercise. These commitments include
machinery and equipment, commercial office and production facilities,
vehicles and other assets.
(2) Purchase obligations represent our obligated purchase commitments for
capital expenditures and related project expense.
(3) Other long-term liabilities primarily represent our estimated pension and
other postretirement benefit obligations, net of GM cost sharing, that were
actuarially determined through 2029.
33
--------------------------------------------------------------------------------
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 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 6 weeks) for program changeovers. Accordingly, our quarterly results may reflect these trends.
LEGAL PROCEEDINGS
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 closely monitor our environmental conditions to ensure that we are in compliance with applicable laws, regulations and ordinances. We have made, and anticipate continuing to make, capital and other expenditures (including recurring administrative costs) to comply with environmental requirements at our current and former facilities. Such expenditures were not significant in 2019, 2018 and 2017.
EFFECT OF NEW ACCOUNTING STANDARDS
See Note 1 - Organization and Summary of Significant Accounting Policies in Item 8, "Financial Statements and Supplementary Data" for discussion of new accounting standards and the effect on AAM.
CRITICAL ACCOUNTING ESTIMATES
In order to prepare consolidated financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts and disclosures in our consolidated financial statements. These estimates are subject to an inherent degree of uncertainty and actual results could differ from our estimates.
Other items in our consolidated financial statements require estimation. In our judgment, they are not as critical as those disclosed below. We have discussed and reviewed our critical accounting estimates disclosure with the Audit Committee of our Board of Directors.
GOODWILL We record goodwill when the purchase price of acquired businesses exceeds the value of their identifiable net tangible and intangible assets acquired. We periodically evaluate goodwill for impairment in accordance with the accounting guidance for goodwill and other indefinite-lived intangibles that are not amortized. We review our goodwill for impairment annually during the fourth quarter. In addition, we review goodwill for impairment whenever adverse events or changes in circumstances indicate a possible impairment.
This review is performed at the reporting unit level, and involves a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess carrying value over fair value.
In performing goodwill impairment testing, we utilize a third-party valuation specialist to assist management in determining the fair value of our reporting units. Fair value of each reporting unit is estimated based on a combination of discounted cash flows and the use of pricing multiples derived from an analysis of comparable public companies multiplied against historical and/or anticipated financial metrics of each reporting unit. These calculations contain uncertainties as they require management to make assumptions including, but not limited to, market comparables, future cash flows of the reporting units, and appropriate discount and long-term growth rates.
34
--------------------------------------------------------------------------------
Subsequent to our acquisition of MPG in 2017, our business was organized into four segments: Driveline, Metal Forming, Powertrain, and Casting. Under the goodwill guidance, we determined that each of our segments represented a reporting unit. The determination of our reporting units and impairment indicators also require us to make significant judgments.
In the first quarter of 2019, we initiated a global restructuring program (the 2019 Program) to further streamline our business by consolidating our four existing segments into three segments. Under this program, the goodwill that was previously attributable to our former Powertrain reporting unit was reallocated to the Driveline and Metal Forming reporting units based on the relative fair value of the respective portions that became attributable to those reporting units. The initiation of the 2019 Program and the reorganization of our business represented a triggering event in the first quarter of 2019 to test goodwill for impairment prior to reallocating the former Powertrain goodwill to Driveline and Metal Forming. No impairment was identified as a result of completing this goodwill impairment test.
Additionally, in the fourth quarter of 2019, we completed the sale of the
As a result of these activities, as of
Also during our annual goodwill impairment test in the fourth quarter of 2019, we determined that the fair value of our Driveline reporting unit exceeded its carrying value by approximately 7% and the carrying value of our Metal Forming reporting unit approximated fair value after the impairment charge. A decline in the actual cash flows of Driveline or Metal Forming in future periods, as compared to the projected cash flows used in the valuation, could result in the carrying value of the reporting units exceeding their respective fair values. Further, a change in market comparables, discount rate or long-term growth rate, as a result of a change in economic conditions or otherwise, could result in the carrying values of the reporting units exceeding their respective fair values.
As a result of our annual goodwill impairment test in the fourth quarter of
2018, we determined that the carrying values of our Casting and former
Powertrain reporting units were greater than their respective fair values. As
such, we recorded non-cash goodwill impairment charges of
IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, excluding goodwill, to be held and used are reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. Recoverability of each "held for use" asset group affected by impairment indicators is determined by comparing the forecasted undiscounted cash flows of the operations to which the assets relate to their carrying amount. If the carrying amount of an asset group exceeds the undiscounted cash flows and is therefore not recoverable, the assets in this group are written down to their estimated fair value. We estimate fair value based on market prices, when available, or on a discounted cash flow analysis. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Significant judgments and estimates used by management when evaluating long-lived assets for impairment include:
• An assessment as to whether an adverse event or circumstance has triggered
the need for an impairment review;
• Determination of asset groups, the primary asset within each group, and the
primary asset's average estimated useful life;
• Undiscounted future cash flows generated by the assets; and
• Determination of fair value when an impairment is deemed to exist, which may
require assumptions related to future general economic conditions, future
expected production volumes, product pricing and cost estimates, working
capital and capital investment requirements, discount rates and estimated
liquidation values.
Upon reclassification of the
35
--------------------------------------------------------------------------------
The goodwill impairment charges recognized in 2019 and 2018 as described above represented triggering events for testing the recoverability of other long-lived assets, including property, plant and equipment and amortizable intangible assets associated with our Metal Forming segment in 2019 and our Casting and former Powertrain segments in 2018. No impairments of long-lived assets were identified as a result of these recoverability tests.
PENSION AND OTHER POSTRETIREMENT BENEFITS In calculating our assets, liabilities and expenses related to pension and OPEB, key assumptions include the discount rate, expected long-term rates of return on plan assets, mortality projections and rates of increase in health care costs.
The discount rates used in the valuation of our
We developed these rates of return assumptions based on future capital market
expectations for the asset classes represented within our portfolio and a review
of long-term historical returns. The asset allocation for our plans was
developed in consideration of the demographics of the plan participants and
expected payment stream of the liability. Our investment policy allocates
approximately 30-55% of the
All of our assumptions were developed in consultation with our actuarial service providers. While we believe that we have selected reasonable assumptions for the valuation of our pension and OPEB obligations at year-end 2019, actual trends could result in materially different valuations.
The effect on our pension plans of a 0.5% decrease in both the discount rate and expected return on assets is shown below as ofDecember 31, 2019 , our valuation date. Expected Discount Return on Rate Assets (in millions) Decline in funded status$ 50.9 N/A Increase in 2019 expense$ 0.8 $ 3.0
No changes in benefit levels or in the amortization of gains or losses have been assumed.
For 2020, we assumed a weighted-average annual increase in the per-capita cost
of covered health care benefits of 6.50% for OPEB. The rate is assumed to
decrease gradually to 5.0% by 2026 and remain at that level thereafter. A 0.5%
decrease in the discount rate for our OPEB would have decreased total expense in
2019 and increased the postretirement obligation, net of
AAM and
36
--------------------------------------------------------------------------------
PRODUCT WARRANTY We record a liability and related charge to cost of goods sold for estimated warranty obligations at the dates our products are sold or when specific warranty issues are identified. Product warranties not expected to be paid within one year are recorded as a noncurrent liability on our Consolidated Balance Sheet. Our estimated warranty obligations for products sold are based on significant management estimates, with input from our warranty, sales, engineering, quality and legal departments. For products and customers with actual warranty payment experience, we estimate warranty costs principally based on past claims history. For certain products and customers, actual warranty payment experience does not exist or is not mature. In these cases, we estimate our costs based on the contractual arrangements with our customers, existing customers' warranty program terms and internal and external warranty data, which includes a determination of our responsibility for potential warranty issues or claims and estimates of repair costs. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. We continuously evaluate these estimates and our customers' administration of their warranty programs. We closely monitor actual warranty claim data and adjust the liability, as necessary, on a quarterly basis.
In addition to our ordinary warranty provisions with our customers, we may be responsible for certain costs associated with product recalls and field actions, which are recorded at the time our obligation is probable and can be reasonably estimated.
Our warranty accrual was
VALUATION OF DEFERRED TAX ASSETS AND OTHER TAX LIABILITIES Because we operate in many different geographic locations, including several foreign, state and local tax jurisdictions, the evaluation of our ability to use all recognized deferred tax assets is complex. In accordance with the accounting guidance for income taxes, we review the likelihood that we will realize the benefit of deferred tax assets and estimate whether recoverability of our deferred tax assets is "more likely than not," based on forecasts of taxable income in the related tax jurisdictions. In determining the requirement for a valuation allowance, the historical results, projected future operating results based upon approved business plans, eligible carry forward periods, and tax planning opportunities are considered, along with other relevant positive and negative evidence. If, based upon available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded.
As of
37
--------------------------------------------------------------------------------
As of
38
--------------------------------------------------------------------------------
Forward-Looking Statements
In this MD&A and elsewhere in this Form 10-K (Annual Report), we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 and relate to trends and events that may affect our future financial position and operating results. The terms such as "will," "may," "could," "would," "plan," "believe," "expect," "anticipate," "intend," "project," "target," and similar words or expressions, as well as statements in future tense, are intended to identify forward-looking statements.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management's good faith belief as of that time with respect to future events and are subject to risks and may differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
• reduced purchases of our products by General Motors Company (GM),FCA US LLC (FCA), or other customers; • our ability to respond to changes in technology, increased competition or pricing pressures;
• our ability to develop and produce new products that reflect market demand;
• lower-than-anticipated market acceptance of new or existing products;
• our ability to attract new customers and programs for new products;
• reduced demand for our customers' products (particularly light trucks and
sport utility vehicles (SUVs) produced by GM and FCA );
• risks inherent in our global operations (including tariffs and the
potential consequences thereof to us, our suppliers, and our customers and
their suppliers, adverse changes in trade agreements, such as NAFTA or
USMCA, immigration policies, political stability, taxes and other law
changes, currency rate fluctuations, and potential disruptions of
production and supply, including those as a result of public health
crises, such as pandemic or epidemic illness, or otherwise);
• a significant disruption in operations at one or more of our key
manufacturing facilities;
• negative or unexpected tax consequences;
• risks related to a failure of our information technology systems and
networks, and risks associated with current and emerging technology
threats and damage from computer viruses, unauthorized access, cyber
attack and other similar disruptions;
• global economic conditions;
• an impairment of our goodwill, other intangible assets, or long-lived
assets if our business or market conditions indicate that the carrying
values of those assets exceed their fair values;
• liabilities arising from warranty claims, product recall or field actions,
product liability and legal proceedings to which we are or may become a
party, or the impact of product recall or field actions on our customers;
• our ability or our customers' and suppliers' ability to successfully
launch new product programs on a timely basis;
• our ability to maintain satisfactory labor relations and avoid work stoppages;
• our suppliers', our customers' and their suppliers' ability to maintain
satisfactory labor relations and avoid work stoppages;
• supply shortages or price increases in raw material and/or freight,
utilities or other operating supplies for us or our customers as a result
of natural disasters or otherwise;
• our ability to achieve the level of cost reductions required to sustain
global cost competitiveness;
• our ability to realize the expected revenues from our new and incremental
business backlog;
• price volatility in, or reduced availability of, fuel;
• our ability to protect our intellectual property and successfully defend
against assertions made against us;
• availability of financing for working capital, capital expenditures,
research and development (R&D) or other general corporate purposes
including acquisitions, as well as our ability to comply with financial
covenants;
• our customers' and suppliers' availability of financing for working
capital, capital expenditures, R&D or other general corporate purposes;
• risks of noncompliance with environmental laws and regulations or risks of
environmental issues that could result in unforeseen costs at our
facilities or reputational damage;
• adverse changes in laws, government regulations or market conditions
affecting our products or our customers' products;
• our ability or our customers' and suppliers' ability to comply with
regulatory requirements and the potential costs of such compliance;
• changes in liabilities arising from pension and other postretirement
benefit obligations;
• our ability to attract and retain key associates; and
• other unanticipated events and conditions that may hinder our ability to
compete.
It is not possible to foresee or identify all such factors and we make no commitment to update any forward-looking statement or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement.
39
--------------------------------------------------------------------------------
© Edgar Online, source
