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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______

Commission file number 1-14303

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
(Exact name of registrant as specified in its charter)




 
Delaware
 
38-3161171
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
incorporation or organization)
 
Identification No.)
 
 
 
 
 
 
 
 
One Dauch Drive,
Detroit,
Michigan
 
 
48211-1198
 
(Address of principal executive offices)
 
(Zip Code)

313-758-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, Par Value $0.01 Per Share
AXL
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “ large accelerated filer,” “accelerated filer,” “smaller reporting company,”and “emerging growth company” in Rule 12b-2 of the Exchange Act).    
Large accelerated filer   x         Accelerated filer           Non-accelerated filer            Smaller reporting company            Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x

The closing price of the Common Stock on June 30, 2019 as reported on the New York Stock Exchange was $12.76 per share and the aggregate market value of the registrant's Common Stock held by non-affiliates was approximately $1,421.6 million. As of February 11, 2020, the number of shares of the registrant's Common Stock, $0.01 par value, outstanding was 112,544,942 shares.

Documents Incorporated by Reference
Portions of the registrant's Annual Report to Stockholders for the year ended December 31, 2019 and Proxy Statement for use in connection with its Annual Meeting of Stockholders to be held on May 7, 2020, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 2019, are incorporated by reference in Part I (Items 1, 1A, 1B, 2, 3 and 4), Part II (Items 5, 6, 7, 7A, 8, 9, 9A and 9B), Part III (Items 10, 11, 12, 13 and 14) and Part IV (Item 15) of this Report.



AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
TABLE OF CONTENTS - ANNUAL REPORT ON FORM 10-K 
Year Ended December 31, 2019
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Part I

Item 1.
Business

As used in this report, except as otherwise indicated in information incorporated by reference, references to “our Company,” "we," "our," "us" or “AAM” mean American Axle & Manufacturing Holdings, Inc. (Holdings) and its subsidiaries and predecessors, collectively.

General Development of Business

Holdings, a Delaware corporation, is a successor to American Axle & Manufacturing of Michigan, Inc., a Michigan corporation, pursuant to a migratory merger between these entities in 1999.

In 2017, Alpha SPV I, Inc., a wholly-owned subsidiary of Holdings, merged with and into Metaldyne Performance Group, Inc. (MPG), with MPG as the surviving corporation in the merger. Upon completion of the merger, MPG became a wholly-owned subsidiary of Holdings.

Narrative Description of Business

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 U.S. operations of our Casting segment (the Casting Sale). The Casting Sale did not include the entities that conduct AAM's casting operations in El Carmen, Mexico, which are now included in our Driveline segment.

Major Customers

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 North America, supplying a 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 segment. Sales to GM were approximately 37% of our consolidated net sales in 2019, 41% in 2018, and 47% in 2017.

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 our Metal Forming segment. Sales to FCA were approximately 17% of our consolidated net sales in 2019, 13% in 2018 and 14% in 2017.

Business Strategy

We have aligned our business strategy to build value for our key stakeholders. We accomplish our strategic objectives by capitalizing on our competitive strengths and continuing to diversify our customer, product and geographic sales mix, while providing exceptional value to our customers.


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Competitive Strengths

We achieve our strategic objectives by emphasizing a commitment to:

Sustaining our operational excellence and focus on cost management.

AAM received the 2018 GM Supplier of the Year Award, which is awarded to suppliers that consistently exceed GM's expectations, create outstanding value or bring new innovations to GM. This was the third consecutive year that we received this award.

We also received Ford's World Excellence Award for Sustainability in 2019, which recognizes top-performing suppliers for their contributions to Ford's success.

During 2019, we launched nearly 50 programs across our business units, supporting a variety of customers including GM, FCA, Ford, and Mercedes-AMG. In 2020, we expect to launch approximately 15 new and replacement programs across our business units.

We continue to deliver operational excellence by leveraging our global standards, policies and best practices across all disciplines through the use of the AAM Operating System. We use this system to focus on customer satisfaction, lean production and efficient cost management, which allows us to improve quality, eliminate waste, and reduce lead time and total costs globally.

We have established a cost competitive, operationally flexible global manufacturing, engineering and sourcing footprint to increase our presence in global growth markets, support global product development initiatives and establish regional cost competitiveness.

Our business is vertically integrated to reduce cost and mitigate risk in the supply chain. Retention of our El Carmen, Mexico manufacturing facility as part of the Casting Sale, as well as our acquisitions of MPG and USM Mexico Manufacturing LLC (USM Mexico) in 2017 furthered our efforts to vertically integrate the supply chain and helped ensure continuity of supply for certain parts to our largest manufacturing facility.

Maintaining our high quality standards, which are the foundation of our product durability and reliability.

AAM has an enhanced internal quality assurance system that drives continuous improvement to meet and exceed the growing expectations of our OEM customers.

In 2019, we had eleven facilities globally that were awarded the GM Supplier Quality Excellence Award for outstanding quality performance during the 2018 performance year. For our Changshu Manufacturing Facility in China, it was the fifth consecutive year that they earned this award.

Our Ramos, Mexico facility was awarded the FCA Outstanding Quality Award in 2019 for the 2018 performance year.

Several other facilities were recognized for outstanding quality performance by OEMs such as Daimler, Hino and Ashok Leyland.

Achieving technology leadership by delivering innovative products which improve the diversification of our product portfolio while increasing our total global served market.

AAM's significant investment in research and development (R&D) has resulted in the development of advanced technology products designed to assist our customers in meeting the market demands for advanced, sophisticated electronic controls; improved fuel efficiency; lower emissions; enhanced power density; improved safety, ride and handling performance; and enhanced reliability and durability.

Located at our Trollhättan Technical Center (TTC) in Sweden, our e-AAM subsidiary designs and commercializes battery electric and hybrid driveline systems designed to improve fuel efficiency, reduce CO2 emissions and provide AWD capability. To date, our e-AAM hybrid and electric driveline systems have been awarded multiple contracts. During 2018, e-AAM's front and rear eDrive units began production on the Jaguar I-Pace AWD Crossover, which was named the World Car of the Year and World

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Green Car in 2019. For this vehicle content, AAM was named as a finalist for the 2020 Automotive News PACE Award, which recognizes supplier advances in automotive technologies and processes that have reached the market. Another e-AAM program is for a premium European OEM and is expected to launch in 2020.

AAM's EcoTrac® Disconnecting AWD system (EcoTrac® ) is a fuel-efficient driveline system that provides OEMs the option of an all-wheel-drive system that disconnects when not needed to improve fuel efficiency and reduce CO2 emissions compared to conventional AWD systems. In 2018, AAM launched the next generation of our EcoTrac® Disconnecting AWD system (EcoTrac® Gen II), which is smaller, lighter in weight and more efficient. AAM's EcoTrac® and EcoTrac® Gen II are featured on several global crossover platforms, including GM's Chevrolet Equinox and GMC Terrain, FCA's AWD Jeep Cherokee and its derivatives, as well as the Cadillac XT4 and the Ford Edge and Escape.

AAM has established a high-efficiency product portfolio that is designed to improve axle efficiency and fuel economy through innovative product design technologies. As our customers focus on reducing weight through the use of aluminum and other lightweighting alternatives, AAM is well positioned to offer innovative, industry leading solutions. Our portfolio includes high-efficiency axles, aluminum axles and AWD applications. AAM's QuantumTM lightweight axle technology features a revolutionary design, which offers significant mass reduction and increased fuel economy and efficiency that is scalable across multiple applications without loss of performance or power.

In our Metal Forming segment, we have developed forged axle tubes, which deliver significant weight and cost reductions as compared to the traditional welded axle tubes. These forged axle tubes entered production on a program for a major OEM customer in 2019.

AAM's Advanced Technology Development Center (ATDC) at our Detroit campus, allows us to accelerate technological advancements. This state-of-the-art facility is our center for technology benchmarking, prototype development, advanced technology development, supplier collaboration, customer showcasing and associate training on our future products, processes, and systems. Our Rochester Hills Technical Center (RHTC) works with the ATDC to test and validate new and advanced technologies focused on lightweighting, efficiency and vehicle performance using enhanced diagnostic and hardware assessment capabilities. Additionally, our hybrid and electric driveline center of excellence at our TTC is key to assisting our customers in meeting demand for technology advancement, as well as fuel efficiency and emission standards.

Diversification of Customer, Product and Geographic Sales Mix

Another element of building value for our key stakeholders is the diversification of our business through the growth of new and existing customer relationships and expansion of our product portfolio.

In addition to maintaining and building upon our longstanding relationships with GM and FCA, we are focused on generating profitable growth with new and existing global customers. New business launches in 2019 included key customers such as Ford, Mercedes-AMG and Geely Auto Group.

We continue to evaluate and consider strategic opportunities that will complement our core strengths and supplement our diversification strategies while providing future, profitable growth prospects. Our acquisition of MPG in 2017 was a key step in achieving our goals of customer, product and geographic diversification.


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We are focused on increasing our presence in global markets to support our customers' platforms.

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 we maintain a global presence in these markets in order to remain competitive for new contracts. In an effort to expand our global capabilities, we opened an updated and expanded manufacturing facility in Barcelona, Spain, and began construction on a new European headquarters and engineering center in Langen, Germany during 2019.

In 2019, we invested approximately $10 million in our joint venture (JV) that was formed in 2018 with Liuzhou Wuling Automobile Industry Co., Ltd. (Liuzhou AAM), a subsidiary of Guangxi Automotive Group Co., Ltd. This is in addition to our existing JV with Hefei Automobile Axle Co., Ltd. (HAAC), a subsidiary of the JAC Group (Anhui Jianghuai Automotive Group Co., Ltd.), which includes 100% of HAAC's light commercial axle business. Liuzhou AAM manufactures independent rear axles and driveheads to be used on crossovers, including SUVs, minivans and multi-purpose vehicles, and was awarded a customer contract in 2019 for its hybrid and electric driveline systems technology. HAAC supplies front and rear beam axles to several leading Chinese light truck manufacturers, including JAC and Foton (Beiqi Foton Motor Co., Ltd.). These joint ventures continue to be a strong advantage for building relationships with leading Chinese manufacturers.

Competition
 
We compete with a variety of independent suppliers and distributors, as well as with the in-house operations of certain vertically integrated OEMs. Technology, design, quality and cost are the primary elements of competition in our industry segments. In addition to traditional competitors in the automotive sector, the trend toward electrification and advanced electronic integration has increased the level of new market entrants.

Industry Trends

See Item 7, “Management's Discussion and Analysis - Industry Trends.”
    
Productive Materials

We believe that we have adequate sources of supply of productive materials and components for our manufacturing needs.  Most raw materials (such as steel) and semi-processed or finished items are available within the geographical regions of our operating facilities from qualified sources in quantities sufficient for our needs.  We currently have contracts with our steel suppliers that ensure continuity of supply to our principal operating facilities.  We also have validation and testing capabilities that enable us to strategically qualify steel sources on a global basis. As we continue to expand our global manufacturing footprint, we may need to rely on suppliers in local markets that have not yet proven their ability to meet our requirements. 

Backlog

We typically enter into agreements to provide our products for the life of our customers' vehicle programs. Our new and incremental business includes awarded programs and incremental content and volume including customer requested engineering changes. Our backlog may be impacted by various assumptions, many of which are provided by our customers based on their long range production plans. These assumptions include future production volume estimates, changes in program launch timing and fluctuation in foreign currency exchange rates.

Our gross new and incremental business backlog is approximately $750 million for programs launching from 2020 to 2022. In 2018, our gross new and incremental business backlog was approximately $1.25 billion for programs launching from 2019 to 2021.

Of this $750 million gross new and incremental business backlog, approximately 45% is for end-use markets outside of North America, approximately 70% relates to light trucks, including crossover vehicles and SUVs, and approximately 10% relates to our e-AAMhybrid and electric driveline systems technology.


5




Patents and Trademarks

We maintain and have pending various U.S. and foreign patents, trademarks and other rights to intellectual property relating to our business, which we believe are appropriate to protect our interest in existing products, new inventions, manufacturing processes and product developments. We do not believe that any single patent or trademark is material to our business, nor would expiration or invalidity of any patent or trademark have a material adverse effect on our business or our ability to compete.

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.

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 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.

Associates

We employ over 20,000 associates on a global basis (including our joint venture affiliates) of which approximately 7,000 are employed in the U.S. and approximately 13,000 are employed at our foreign locations. Approximately 5,000 are salaried associates and approximately 15,000 are hourly associates. Of the 15,000 hourly associates, approximately 72% are covered under collective bargaining agreements with various labor unions.

Executive Officers of the Registrant    
Name
 
Age
 
Position
David C. Dauch
 
55
 
Chairman of the Board & Chief Executive Officer
Michael K. Simonte
 
56
 
President
David E. Barnes
 
61
 
Vice President & General Counsel
Gregory S. Deveson
 
58
 
President - Driveline
Terri M. Kemp
 
54
 
Vice President - Human Resources
Michael J. Lynch
 
55
 
Vice President - Finance & Controller
Christopher J. May
 
50
 
Vice President & Chief Financial Officer
Norman Willemse
 
63
 
President - Metal Forming


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David C. Dauch, age 55, has been AAM's Chief Executive Officer since September 2012. Mr. Dauch has served on AAM's Board of Directors since April 2009 and was appointed Chairman of the Board in August 2013. From September 2012 through August 2015, Mr. Dauch served as AAM’s President & CEO. Prior to that, Mr. Dauch served as President & Chief Operating Officer (2008 - 2012) and held several other positions of increasing responsibility from the time he joined AAM in 1995. Presently, he serves on the boards of Business Leaders for Michigan, the Detroit Economic Club, the Detroit Regional Chamber, the Great Lakes Council Boy Scouts of America, the Boys & Girls Club of Southeast Michigan, the National Association of Manufacturers (NAM), the Original Equipment Suppliers Association (OESA), Amerisure Mutual Holdings, Inc. and the Amerisure Companies (since December 2014). Mr. Dauch also serves on the Miami University Business Advisory Council, the General Motors Supplier Council and the FCA NAFTA Supplier Advisory Council.

Michael K. Simonte, age 56, has been President since August 2015. Mr. Simonte previously served as Executive Vice President & Chief Financial Officer (since February 2009); Group Vice President - Finance & Chief Financial Officer (since December 2007); Vice President - Finance & Chief Financial Officer (since January 2006); Vice President & Treasurer (since May 2004); and Treasurer (since September 2002). Mr. Simonte joined AAM in December 1998 as Director, Corporate Finance. Prior to joining AAM, Mr. Simonte served as Senior Manager at the Detroit office of Ernst & Young LLP. Mr. Simonte is a certified public accountant.

David E. Barnes, age 61, has been General Counsel and Corporate Secretary since joining AAM in 2012, and became a Vice President in 2017. In addition to his responsibilities as General Counsel and Corporate Secretary, he also serves as the Chief Compliance Officer of AAM. Prior to joining AAM, Mr. Barnes served as Executive Vice President, General Counsel and Secretary for Atlas Oil Company. He has held various positions during his career at Ford Motor Company, Dykema Gossett and Venture Holdings LLC, after beginning his career at Honigman, Miller, Schwartz and Cohn. Mr. Barnes holds a juris doctor degree.

Gregory S. Deveson, age 58, has been President - Driveline since January 2019. Prior to that, he served as President - Powertrain since joining AAM in April 2017. Prior to joining AAM, Mr. Deveson served as Senior Vice President of the Driveline Systems Group at Magna Powertrain from 2008 to 2016. Over his 25-year automotive and manufacturing career, Mr. Deveson has managed business operations, strategic opportunities, product engineering, purchasing and quality for multiple organizations.

Terri M. Kemp, age 54, has been Vice President - Human Resources since September 2012. Prior to that, she served as Executive Director - Human Resources & Labor Relations (since November 2010), Executive Director - Human Resources (since September 2009), Director - Human Resources Operations (since October 2008), and served in various plant and program management roles since joining AAM in July 1996. Prior to joining AAM, Mrs. Kemp served for nine years at Corning Incorporated, where she progressed through a series of manufacturing positions with increasing responsibility, including Industrial Engineer, Department Head and Operations Manager.

Michael J. Lynch, age 55, has been Vice President - Finance & Controller since February 2017. Prior to that, he served as Vice President - Driveline Business Performance & Cost Management (since May 2015); Vice President - Finance & Controller (since September 2012); Executive Director & Controller (since October 2008); Director - Commercial Analysis (since July 2006); Director - Finance, Driveline Americas (since March 2006); Director - Investment & Commercial Analysis (since November 2005); Director - Finance, Driveline (since October 2005); Director - Finance Operations, U.S. (since April 2005); Manager - Finance (since June 2003); Manager - Finance, Forging Division (since September 2001); Finance Manager - Albion Automotive (since October 1998); Supervisor - Cost Estimating (since February 1998) and Financial Analyst at the Detroit Manufacturing Facility since joining AAM in September 1996. Prior to joining AAM, Mr. Lynch served at Stellar Engineering for nine years in various capacities.

Christopher J. May, age 50, has been Vice President & Chief Financial Officer since August 2015. Prior to that, he served as Treasurer (since December 2011); Assistant Treasurer (since September 2008); Director of Internal Audit (since September 2005); Divisional Finance Manager - Metal Formed Products (since June 2003); Finance Manager - Three Rivers Manufacturing Facility (since August 2000); Manager, Financial Reporting (since November 1998) and Financial Analyst since joining AAM in 1994. Prior to joining AAM, Mr. May served as a Senior Accountant for Ernst & Young. Mr. May is a certified public accountant.


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Norman Willemse, age 63, has been President - Metal Forming since August 2015. Prior to that, he served as Vice President - Metal Formed Product Business Unit (since December 2011); Vice President - Global Metal Formed Product Business Unit (since October 2008); Vice President - Global Metal Formed Product Operations (since December 2007); General Manager - Metal Formed Products Division (since July 2006) and Managing Director - Albion Automotive (since joining AAM in August 2001). Prior to joining AAM, Mr. Willemse served at AS Transmissions & Steering (ASTAS) for seven years as Executive Director Engineering Group Manager Projects and Engineering and John Deere for over 17 years in various engineering positions of increasing responsibility. Mr. Willemse is a professional certified mechanical engineer.

Internet Website Access to Reports

The website for American Axle & Manufacturing Holdings, Inc. is www.aam.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (SEC). The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The information contained in the Company's website is not included, or incorporated by reference, in this Annual Report on Form 10-K.



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Item 1A.
Risk Factors

The following risk factors and other information included in this Annual Report on Form 10-K should be considered as our business, financial condition, operating results and cash flows could be materially adversely affected if any of the following risks occur.

Our business is significantly dependent on sales to GM and FCA.

Sales to GM were approximately 37% of our consolidated net sales in 2019, 41% in 2018, and 47% in 2017. A reduction in our sales to GM, or a reduction by GM of its production of light truck, SUV or crossover vehicle programs that we support, as a result of market share losses of GM or otherwise, could have a material adverse effect on our results of operations and financial condition.

Sales to FCA accounted for approximately 17% of our consolidated net sales in 2019, 13% in 2018 and 14% in 2017. A reduction in our sales to FCA or a reduction by FCA of its production of the programs we support, as a result of market share losses of FCA or otherwise, could have a material adverse effect on our results of operations and financial condition.

Our business may also be adversely affected by reduced demand for the product programs we currently support, or anticipate supporting in the future, or if we do not obtain sales orders for successor programs that replace our current product programs.

We are under continuing pressure from our customers to reduce our prices.

Annual price reductions are a common practice in the automotive industry. Many of our contracts require us to reduce our prices in subsequent years and most of our contracts allow us to adjust prices for engineering changes requested by our customers. If we accommodate a customer's demand for higher annual price reductions and are unable to offset the impact of any such price reductions through continued technology improvements, cost reductions or other productivity initiatives, our results of operations and financial condition could be adversely affected.

Our business faces substantial competition.

The markets in which we compete are highly competitive. Our competitors include manufacturing facilities controlled by OEMs, as well as many other domestic and foreign companies possessing the capability to produce some or all of the products we supply. In addition to traditional competitors in the automotive sector, the trend towards advanced electronic integration and electrification has increased the level of new market entrants, including technology companies. Some of our competitors are affiliated with OEMs and others could have economic advantages as compared to our business, such as patents, existing underutilized capacity and lower wage and benefit costs. Technology, design, quality, delivery and cost are the primary elements of competition in our markets. As a result of these competitive pressures and other industry trends, OEMs and suppliers are developing strategies to reduce costs. These strategies include supply base consolidation, OEM in-sourcing and global sourcing. Our business may be adversely affected by increased competition from suppliers benefiting from OEM affiliate relationships or financial and other resources that we do not possess. Our business may also be adversely affected if we do not sustain our ability to meet customer requirements relative to technology, design, quality, delivery and cost.

If we are unable to respond timely to changes in technology and market innovation, we risk not being able to develop our intellectual property into commercially viable products.

Our results of operations and financial condition are impacted, in part, by our competitive advantage in developing, engineering, and manufacturing innovative products. Our ability to anticipate changes in technology, successfully develop, engineer, and bring to market new and innovative proprietary products, or successfully respond to evolving business models (including electric vehicle advances), may have a significant impact on our market competitiveness. If we are unable to maintain our competitive advantage through innovation, or if we do not sustain our ability to meet customer requirements relative to technology, there could be a material adverse effect on our results of operations and financial condition.

9




Our business is dependent on certain global automotive market segments.

A substantial portion of our revenue is derived from products supporting RWD light truck and SUV platforms and AWD crossover vehicle platforms in North America, Europe and Asia. Sales and production levels of these vehicle platforms can be affected by many factors, including changes in consumer demand; product mix shifts favoring other types of light vehicles, such as front-wheel drive based crossover vehicles and passenger cars; fuel prices; vehicle electricification; and government regulations. Reduced demand in the market segments we currently supply could have a material adverse impact on our results of operations and financial condition.

Our company's global operations are subject to risks and uncertainties, including tariffs and trade relations.

As U.S. companies continue to expand globally, increased complexity exists due to recent changes to corporate tax codes, potential revisions to international tax law treaties, renegotiated trade agreements, including the ratification of the United States-Mexico-Canada trade agreement (USMCA) or other potential changes to the North American Free Trade Agreement (NAFTA), and the United Kingdom's exit from the European Union. These uncertainties, as well as the potential impacts of these agreements, could have a material adverse effect on our business and our results of operations and financial condition. As we continue to expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks.

We have business and technical offices and manufacturing facilities in multiple countries outside the United States. International operations are subject to certain risks inherent in conducting business outside the U.S., such as changes in currency exchange rates, tax laws, price and currency exchange controls, tariffs or import restrictions, nationalization, immigration policies, expropriation and other governmental action. Our global operations also may be adversely affected by political events, domestic or international terrorist events and hostilities, natural disasters and significant weather events, disruptions in the global financial markets, or public health crises, such as pandemic or epidemic illness.

Our business is dependent on our Guanajuato Manufacturing Complex.

A high concentration of our global business is supported by our Guanajuato Manufacturing Complex (GMC) in Mexico. GMC represents a significant portion of our net sales, profitability and cash flow from operations and we expect GMC to continue to represent a substantial portion of these metrics for the foreseeable future. A significant disruption to our GMC operations, as a result of changes in trade agreements between Mexico and the U.S. (including USMCA or NAFTA), tariffs, labor disputes, natural disaster or otherwise, could have a material adverse impact on our results of operations and financial condition.

Negative or unexpected tax consequences, as well as possible changes in foreign and domestic tax laws could adversely affect our results of operations and financial condition.
There have been recent global proposals brought forward by the Organisation for Economic Co-operation and Development (OECD) alongside the Group of Twenty (G-20), for tax jurisdictions to evaluate the potential reform of longstanding corporate tax law principles and treaties that could adversely affect multi-national companies. Although the OECD does not enact tax law, proposals like this or others that lead to substantial changes in enacted tax laws and treaties, such as the 2020 Mexican Tax Reform and the Tax Cuts and Jobs Act signed into law in the United States in 2017, could have a material adverse impact on our results of operations and financial condition.
We file income tax returns in the U.S. federal jurisdiction, as well as various states and foreign jurisdictions. We are also subject to examinations of these income tax returns by the relevant tax authorities. Based on the status of these 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. Any negative or unexpected outcomes of these examinations and audits could have a material adverse impact on our results of operations and financial condition.

10




A failure of our information technology (IT) networks and systems could adversely impact our business and operations.

We rely upon information technology networks and systems to process, transmit and store electronic information, and to manage or support a variety of business processes or activities. Additionally, we and certain of our third-party vendors collect and store personal or confidential information in connection with human resources operations and other aspects of our business. The secure operation of these information technology networks and systems and the proper processing and maintenance of this information are critical to our business operations. We cannot be certain that the security measures we have in place to protect these systems and data will be successful or sufficient to protect our IT systems from current and emerging technology threats and damage from computer viruses, unauthorized access, cyber attack and other similar disruptions. The occurrence of any of these events could compromise our networks, and the information stored there could be accessed, publicly disclosed or lost. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, the disruption of our operations or damage to our reputation. We may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

Our business could be adversely affected by the cyclical nature of the automotive industry.

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, such as credit availability, interest rates, fuel prices, consumer preference and confidence. Our business may be adversely affected by an economic decline or fiscal crisis that results in a reduction of automotive production and sales by our customers.

Our goodwill, other intangible assets, and long-lived assets are at risk of impairment if our business or market conditions indicate that the carrying value of those assets exceeds their fair value.

Accounting principles generally accepted in the United States of America (GAAP) require that companies evaluate the carrying value of goodwill, other intangible assets, and long-lived assets routinely in order to assess whether any indication of asset impairment exists. Goodwill and other indefinite-lived intangible assets are required to be evaluated on an annual basis, while finite-lived intangible assets and long-lived assets should be evaluated only when events and circumstances exist that indicate an asset or group of assets may be impaired.

Our acquisitions of MPG and USM Mexico in 2017 significantly increased the carrying value of our goodwill and other intangible assets, and resulted in a change to our organizational structure from one reporting unit to multiple reporting units. As such, the threshold for analyzing impairment of goodwill has been reduced from an evaluation of the carrying value of our consolidated operations and its related fair value, to an analysis performed across multiple reporting units. This could potentially provide greater risk that goodwill becomes impaired in future operating periods. Further, changes in market comparables, discount rates or long-term growth rates, as a result of a change in economic conditions or otherwise, could result in goodwill impairment in future operating periods. The increase to goodwill and other intangible asset balances in connection with these acquisitions provides a greater chance that an impairment of these assets would have a material adverse effect on our results of operations and financial condition.

We may incur material losses and costs as a result of product recall or field action, product liability and warranty claims, litigation and other disputes and claims.

We are exposed to warranty, product recall or field action and product liability claims in the event that our products fail to perform as expected, and we may be required to participate in a recall of such products. We are not responsible for certain warranty claims that may be incurred by our customers, which include returned components for which no defect was found upon inspection, discretionary acts of dealer goodwill, defects related to certain directed buy components, and build-to-print design issues. We review warranty claim activity in detail, and we may have disagreements with our customers as to responsibility for these types of costs incurred by our customers. In addition, as we continue to diversify our customer base, we expect our obligation to share in the cost of providing warranties as part of our agreements with new customers will increase. Costs and expenses associated with warranties, field actions, product recalls and product liability claims could have a material adverse impact on our results of operations and financial condition and may differ materially from the estimated liabilities that we have recorded in our consolidated financial statements.


11




In addition to warranty claims relating directly to products we produce, potential product recalls for our customers and their other suppliers, and the potential reputational harm that may result from such product recalls, could have a material adverse impact on our results of operations and financial condition.

We are also involved in various legal proceedings incidental to our business. Although we believe that none of these matters are likely to have a material adverse effect on our results of operations or financial condition, there can be no assurance as to the ultimate outcome of any such legal proceeding or any future legal proceedings.

Our company or our customers may not be able to successfully and efficiently manage the timing and costs of new product program launches.

Certain of our customers are preparing to launch new product programs for which we will supply newly developed products and related components.  There can be no assurance that we will successfully complete the transition of our manufacturing facilities and resources to support these new product programs or other future product programs on a timely and cost efficient basis.  Accordingly, the launch of new product programs may adversely affect production rates or other operational efficiency and profitability measures at our facilities.  We may also experience difficulties with the performance of our supply chain on program launches, which could result in our inability to meet our contractual obligations to key customers. Production shortfalls or production delays, if any, could result in our failure to effectively manage our manufacturing costs relating to these program launches. In addition, our customers may delay the launch or fail to successfully execute the launch of these new product programs, or any additional future product program for which we will supply products. Our revenues, operating results and financial condition could be adversely impacted if our customers fail to timely launch such programs or if we are unable to manage the timing requirements and costs of new product program launches.

Our business could be adversely affected if we, our customers, or our suppliers fail to maintain satisfactory labor relations.

A significant portion of our hourly associates worldwide, as well as the workforces of our customers and suppliers, are members of industrial trade unions employed under the terms of collective bargaining agreements. There can be no assurance that future negotiations with labor unions will be resolved favorably or that we, our customers or suppliers will not experience a work stoppage or disruption that could have a material adverse impact on our results of operations and financial condition. In addition, there can be no assurance that such future negotiations will not result in labor cost increases or other terms and conditions that could adversely affect our results of operations and financial condition or our ability to compete for future business.

Our business could be adversely affected by disruptions in our supply chain and our customers' supply chain.

We depend on a limited number of suppliers for certain key components and materials needed for our products. We rely upon, and expect to continue to rely upon, certain suppliers for critical components and materials that are not readily available in sufficient volume from other sources. As we continue to expand our global manufacturing footprint, we may need to rely on suppliers in local markets that have not yet proven their ability to meet our requirements. These supply chain characteristics make us susceptible to supply shortages and price increases. If production volumes increase rapidly, there can be no assurance that the suppliers of critical components and materials will be able or willing to meet our future needs on a timely basis.

Our supply chain, as well as our customers' supply chain, is also at risk of unanticipated events such as natural disasters, changes in governmental regulations and trade agreements (including USMCA or NAFTA), or financial or operational instability of suppliers that could cause a disruption in the supply of critical components to us and our customers. A significant disruption in the supply of these materials could have a material adverse effect on our results of operations and financial condition.


12




Our restructuring initiatives may not achieve their intended outcomes.

We have initiated restructuring actions in recent years to reduce cost and realign certain areas of our business and could initiate further restructuring actions in future periods. There can be no assurance that such restructuring initiatives will successfully achieve the intended outcomes, or that the charges related to such initiatives will not have a material adverse effect on our results of operations and financial condition.

As part of our strategic initiatives, we are actively assessing our product portfolio. As a result, we have divested certain operations and may pursue additional plans to divest certain operations in future periods. Our results of operations or financial condition could be adversely affected if we initiate a divestiture and it is not completed in accordance with our expected timeline, or at all, or if we do not realize the expected benefits of the divestiture.

Our company may not realize all of the revenue expected from our new and incremental business backlog.

The realization of incremental revenues from awarded business is inherently subject to a number of risks and uncertainties, including the accuracy of customer estimates relating to the number of vehicles to be produced in new and existing product programs and the timing of such production, as well as the fluctuation in exchange rates for programs sourced in currencies other than our reporting currency. It is also possible that our customers may delay or cancel a product program that has been awarded to us. Our revenues, operating results and financial condition could be adversely affected relative to our current financial plans if we do not realize substantially all the revenue from our new and incremental business backlog.

Exchange rate fluctuations could adversely affect our company's global results of operations and financial condition.

As a result of our international operations, we are exposed to foreign currency risks that arise from our normal business operations, including risks associated with transactions that are denominated in currencies other than our local functional currencies. Gains and losses resulting from the remeasurement of assets and liabilities in a currency other than the functional currency of our foreign subsidiaries are reported in current period income. In the future, unfavorable changes in exchange rate relationships between the functional currencies of our subsidiaries and their non-functional currency denominated assets and liabilities could have an adverse impact on our results of operations and financial condition. While we use, from time to time, foreign currency forward contracts to help mitigate certain of these risks and reduce the effects of fluctuations in exchange rates, our efforts to manage these risks may not be successful.

We are also subject to currency translation risk as we are required to translate the financial statements of our foreign subsidiaries to U.S. dollars. We report the effect of translation for our foreign subsidiaries with a functional currency other than the U.S. dollar as a separate component of stockholders' equity. Unfavorable changes in the exchange rate relationship between the U.S. dollar and the functional currencies of our foreign subsidiaries could have an adverse impact on our results of operations and financial condition.

Our business could be adversely affected by volatility in the price or availability of raw materials, utilities and natural resources.

We may experience volatility in the cost or availability of raw materials used in production, including steel and other metallic materials, and resources used in electronic components, or in the cost or availability of utilities and natural resources used in our operations, such as electricity, water and natural gas. If we are unable to pass such cost increases on to our customers, or are otherwise unable to mitigate these cost increases, or if we are unable to obtain adequate supply of raw materials, utilities and natural resources, this could have a material adverse effect on our results of operations and financial condition.





13




We may be unable to consummate and successfully integrate acquisitions and joint ventures.

Engaging in acquisitions and joint ventures involves potential risks, including financial risks, risks related to integrating enterprise resource planning systems, and failure to successfully integrate and fully realize the expected benefits of such acquisitions and joint ventures. Integrating acquired operations is a significant challenge and there is no assurance that we will be able to manage integrations successfully. As we continue to expand globally and accelerate our diversification efforts, we may pursue strategic growth initiatives, including through acquisitions and joint ventures. An inability to successfully achieve the levels of organic and inorganic growth from our strategic initiatives could adversely impact our results of operations and financial condition.

We use important intellectual property in our business. If we are unable to protect our intellectual property, or if a third party makes assertions against us or our customers relating to intellectual property rights, our business could be adversely affected.

We own important intellectual property, including patents, trademarks, copyrights and trade secrets. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve. Our competitors may develop technologies that are similar to our proprietary technologies or design around the patents we own or license. Further, as we expand our operations in jurisdictions where the protection of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them. Developments or assertions by or against us relating to intellectual property rights, and any inability to protect these rights, could materially adversely affect our business and our competitive position.

We have incurred substantial indebtedness.

We have incurred substantial indebtedness and related debt service obligations, which could have important consequences, including:

reduced flexibility in planning for, or reacting to, changes in our business, the competitive environment and the markets in which we operate, and to technological and other changes;
reduced access to capital and increasing borrowing costs generally or for any additional indebtedness to finance future operating and capital expenditures and for general corporate purposes;
lowered credit ratings;
reduced funds available for operations, capital expenditures and other activities; and
competitive disadvantages relative to other companies with lower debt levels.

Our Senior Secured Credit Facilities, comprised of our Revolving Credit Facility, as well as our Term Loan A Facility due 2024 and Term Loan B Facility (secured on a first priority basis by all or substantially all of the assets of AAM, Inc., the assets of Holdings and each guarantor's assets), and our senior unsecured notes, contain customary affirmative and negative covenants. Some, or with respect to certain covenants, all of these agreements include financial covenants based on total net leverage and cash interest expense coverage ratios and limitations on Holdings, AAM Inc, and 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 sales of assets. A violation of any of these covenants or agreements could result in a default under these contracts, which could permit the lenders or note holders, as applicable, to accelerate repayment of any borrowings or notes outstanding at that time and levy on the collateral granted in connection with the senior secured credit facilities.  A default or acceleration under the senior secured credit facilities or the indentures governing the senior unsecured notes may result in increased capital costs and defaults under our other debt agreements and may adversely affect our ability to operate our business, our subsidiaries' and guarantors' ability to operate their respective businesses and our results of operations and financial condition.

The available capacity under our Revolving Credit Facility could be limited by our total net leverage ratio under certain conditions. An increase in net leverage ratio, as a result of decreased earnings or otherwise, could result in reduced access to capital under our Revolving Credit Facility.

The interest rates included in the agreements that govern our Senior Secured Credit Facilities and certain of our derivative financial instruments are based primarily on the London Interbank Offered Rate (LIBOR). In the future, use of LIBOR is expected to be discontinued and we cannot be certain how long LIBOR will continue to be a viable benchmark interest rate. Use of alternative interest rates could result in increased borrowing costs, volatility

14




in the markets and interest rates. As a result, our ability to obtain cost effective financing associated with our Senior Secured Credit Facilities or otherwise could be adversely affected.

Our business is subject to costs associated with environmental, health and safety regulations.

Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our current and former operations and facilities have been, and are being, operated in compliance, in all material respects, with such laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. The operation of our manufacturing facilities entails risks in these areas, however, and there can be no assurance that we will not incur material costs or liabilities. In addition, potentially significant expenditures could be required in order to comply with evolving environmental, health and safety laws, regulations or other pertinent requirements that may be adopted or imposed in the future by governmental authorities.

Our company faces substantial pension and other postretirement benefit obligations.

We have significant pension and other postretirement benefit obligations to certain of our associates and retirees. Our ability to satisfy the funding requirements associated with these obligations will depend on our cash flow from operations and our ability to access credit and the capital markets. The funding requirements of these benefit plans, and the related expense reflected in our financial statements, are affected by several factors that are subject to an inherent degree of uncertainty and volatility, including governmental regulation. Key assumptions used to value these benefit obligations and the cost of providing such benefits, funding requirements and expense recognition include the discount rate, the expected long-term rate of return on pension assets, mortality rates and the health care cost trend rate. If the actual trends in these factors are less favorable than our assumptions, this could have an adverse effect on our results of operations and financial condition.

Our company's ability to operate effectively could be impaired if we lose key personnel.

Our success depends, in part, on the efforts of our executive officers and other key associates, such as engineers and global operational leadership. In addition, our future success will depend on, among other factors, our ability to continue to attract and retain qualified personnel, particularly engineers and other associates with critical expertise and skills that support key customers and products. The loss of the services of our executive officers or other key associates, unexpected turnover, or the failure to attract or retain associates, could have a material adverse effect on our results of operations and financial condition.

Item 1B.
Unresolved Staff Comments

None.


15




Item 2.
Properties

The table below summarizes our global manufacturing locations and administrative, engineering or technical locations:
North America
Europe
Asia
South America
United States
Czech Republic
Luxembourg
China
Brazil
     Paris, AR (b)
     Litchfield, MI (a)
     Oslavany (b)
     Steinfort (c)
     Changshu (a)
     Araucária (a)
     Subiaco, AR (b)
     Oxford, MI (b)
     Zbysov (b)
Poland
     Hefei (JV) (a)
     Indaiatuba (b)
     Bolingbrook, IL (b)
     Rochester Hills, MI (c)
England
     Świdnica (a)
     Huzhou City (JV) (b)
 
     Chicago, IL (b)
     Royal Oak, MI (b)
     Halifax (a)
Scotland
     Shanghai (c)
 
     Bluffton, IN (a)
     Southfield, MI (b), (c)
France
     Glasgow (a)
     Suzhou (a), (b)
 
     Columbus, IN (b)
     Three Rivers, MI (a)
     Decines (a)
Spain
India
 
     Fort Wayne, IN (b)
     Troy, MI (b)
     Lyon (a)
     Barcelona (a)
     Chennai (a)
 
     Fremont, IN (a)
     Warren, MI (b)
Germany
     Valencia (b)
     Jamshedpur (JV) (a)
 
     North Vernon, IN (b)
     Malvern, OH (b)
     Bad Homburg (c)
Sweden
     Pune (a), (c)
 
     Remington, IN (b)
     Minerva, OH (b)
     Dieburg (c)
     Arjeplog (c)
Japan
 
     Rochester, IN (a)
     Twinsburg, OH (b)
     Eisenach (a)
     Trollhättan (c)
     Tokyo (c)
 
     Auburn Hills, MI (b)
     Ridgway, PA (b)
     Nurnberg (b)
 
South Korea
 
     Detroit, MI (a), (c)
     St. Mary's, PA (b)
     Zell (b)
 
     Pyeongtaek (a)
 
     Fraser, MI (b)
     Charleston, SC (a)
 
 
Thailand
 
Mexico
 
 
     Rayong (a)
 
     El Carmen (a)
     Silao (a), (b)
 
 
 
 
     Ramos Arizpe (a), (b)
 
 
 
 
 
(a) Location supports the Driveline segment. (b) Location supports the Metal Forming segment. (c) Administrative, engineering or technical location.

We believe that our property and equipment is properly maintained and in good operating condition. We will continue to evaluate capacity requirements in light of current and projected market conditions. We also intend to continue redeploying assets in order to increase our capacity utilization and reduce future capital expenditures to support program launches.

Item 3.
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 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.

Item 4.
Mine Safety Disclosures
    
Not applicable.


16




Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information
        
Our common stock, par value $0.01 per share, is listed for trading on the New York Stock Exchange (NYSE) under the symbol “AXL.” We had approximately 184 stockholders of record as of February 11, 2020.

Dividends

We did not declare or pay any cash dividends on our common stock in 2019. Our Credit Agreement associated with our Senior Secured Credit Facilities limits our ability to declare or pay dividends or distributions on capital stock.

Securities Authorized for Issuance under Equity Compensation Plans

The information regarding our securities authorized for issuance under equity compensation plans is incorporated by reference from our Proxy Statement.

17




Item 6. Selected Financial Data

FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY
Year Ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
 
 
(in millions, except per share data)
 
Statement of operations data
 
 
 
 
 
 
 
 
 
 
Net sales
$
6,530.9

 
$
7,270.4

 
$
6,266.0

 
$
3,948.0

 
$
3,903.1

 
Gross profit
902.6

 
1,140.4

 
1,119.1

 
726.1

 
635.4

 
Selling, general and
 
 
 
 
 
 
 
 
 
 
   administrative expenses
364.7

 
385.7

 
390.1

 
314.2

 
274.1

 
Amortization of intangible assets
95.4

 
99.4

 
75.3

 
5.0

 
3.2

 
Impairment charges
665.0

(a)
485.5

(e)

 

 

 
Restructuring and acquisition-related costs
57.8

 
78.9

 
110.7

 
26.2

 

 
Gain (loss) on sale of business
(21.3
)
(b)
15.5

(f)

 

 

 
Operating income (loss)
(301.6
)
 
106.4

 
543.0

 
380.7

 
358.1

 
Net interest expense
211.5

 
214.3

 
192.7

 
90.5

 
96.6

 
Gain on bargain purchase of business
10.8

(c)

 

 

 

 
Gain on settlement of capital lease

 
15.6

(g)

 

 

 
Net income (loss)
(484.1
)
(d)(h)(i)
(56.8
)
(h)(i)
337.5

(h)(i)
240.7

(h)
235.6

(i)
Net income (loss) attributable to AAM
(484.5
)
(d)(h)(i)
(57.5
)
(h)(i)
337.1

(h)(i)
240.7

(h)
235.6

(i)
Diluted earnings (loss) per share
$
(4.31
)
 
$
(0.51
)
 
$
3.21

 
$
3.06

 
$
3.02

 
 
 
 
 
 
 
 
 
 
 
 
Balance sheet data
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
532.0

 
$
476.4

 
$
376.8

 
$
481.2

 
$
282.5

 
Total assets
6,644.6

 
7,510.7

 
7,882.8

 
3,422.3

(j)
3,176.9

(j)
Total long-term debt, net
3,612.3

 
3,686.8

 
3,969.3

 
1,400.9

 
1,375.7

 
Total AAM stockholders' equity
977.6

 
1,483.9

 
1,536.0

 
504.2

(j)
275.7

(j)
Dividends declared per share

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Statement of cash flows data
 
 
 
 
 
 
 
 
 
 
Cash provided by operating
   activities
$
559.6

 
$
771.5

 
$
647.0

 
$
407.6

 
$
377.6

 
Cash used in investing activities
(306.6
)
 
(478.2
)
 
(1,378.1
)
 
(227.7
)
 
(188.1
)
 
Cash provided by (used in) financing
   activities
(200.0
)
 
(184.5
)
 
615.6

 
18.4

 
(143.6
)
 
 
 
 
 
 
 
 
 
 
 
 
Other data
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
$
536.9

 
$
528.8

 
$
428.5

 
$
201.8

 
$
198.4

 
Capital expenditures
433.3

 
524.7

 
477.7

 
223.0

 
193.5

 
Proceeds from sale of business, net
141.2

(b)
47.1

(f)
5.9

 

 

 
Acquisition of business, net of cash acquired
9.4


1.3


895.5


5.6



 
Purchase buyouts of leased equipment
0.9

 
0.5

 
13.3

 
4.6

 

 



18





(a)
In 2019, we recorded a charge of $225 million to reduce the carrying value of our U.S. Casting operations to fair value less cost to sell, and a goodwill impairment charge of $440 million associated with the annual goodwill impairment test for our Metal Forming segment.

(b)
In 2019, we completed the sale of our U.S. Casting operations for $245 million, consisting of $185 million in cash, of which we received net proceeds of $141.2 million subsequent to certain customary closing adjustments, and a $60 million deferred payment obligation. As a result of the sale, we recorded a loss of $21.3 million.

(c)
In 2019, we recognized a gain on bargain purchase of $10.8 million associated with the acquisition of certain operations of Mitec Automotive AG.

(d)
In 2019, we offered a voluntary one-time lump sum payment option to certain eligible terminated vested participants in our U.S. pension plans that, if accepted, would settle our pension obligations to them. As a result of this settlement, we remeasured the assets and liabilities of our U.S. pension plans, which resulted in a non-cash charge of approximately $7.7 million, net of tax, related to the accelerated recognition of certain deferred losses.

(e)
We recorded a goodwill impairment charge in 2018 associated with the annual goodwill impairment test for our Casting and former Powertrain segments.

(f)
In 2018, we completed the sale of the aftermarket business associated with our former Powertrain segment for approximately $50 million, of which we received net proceeds of $47.1 million. As a result of the sale, we recorded a $15.5 million gain.

(g)
In 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 $15.6 million, including accrued interest.

(h)
For 2019, these amounts include impairment charges of $617.8 million, net of tax, integration related and other charges of $14.2 million, net of tax, severance costs of $15.3 million, net of tax, and implementation costs related to restructuring of $16.1 million, net of tax. For 2018, these amounts include goodwill impairment charges of $400.3 million, net of tax, acquisition and integration related charges of $27.5 million, net of tax, asset impairment and plant closure costs of $25.7 million, net of tax, and implementation costs, including professional expenses, relating to restructuring of $9.2 million, net of tax. For 2017, these amounts include acquisition and integration related charges of $56.0 million, net of tax, asset impairment and plant closure costs of $2.3 million, net of tax, and implementation costs, including professional expenses, relating to restructuring of $9.0 million, net of tax. For 2016, these amounts include acquisition and integration related charges of $7.1 million, net of tax, asset impairment and plant closure costs of $4.7 million and implementation costs, including professional expenses, relating to restructuring of $6.6 million, net of tax.

(i)
Includes charges of $6.6 million, net of tax, in 2019, $15.3 million, net of tax, in 2018, $2.3 million, net of tax, in 2017 and $0.5 million, net of tax, in 2015 related to debt refinancing and redemption costs.

(j)
Each of these amounts have been adjusted by $25.8 million, net of tax, related to the retrospective application of our change in accounting principle for indirect inventory, in which we changed our method of accounting from capitalizing indirect inventory and recording as expense when the inventory was consumed, to expensing indirect inventory at the time of purchase. This change in accounting principle was effective in the second quarter of 2017.


19




Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

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 U.S. operations of our Casting segment (the Casting Sale). The Casting Sale did not include the entities that conduct AAM's casting operations in El Carmen, Mexico, which are now included in our Driveline segment. 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 financial results.

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 North America, supplying a 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 segment. Sales to GM were approximately 37% of our consolidated net sales in 2019, 41% in 2018, and 47% in 2017.

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 our Metal Forming segment. Sales to FCA were approximately 17% of our consolidated net sales in 2019, 13% in 2018 and 14% in 2017.

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 Mitec Automotive AG (Mitec), as well as our investment in our Liuzhou AAM joint venture, have provided us with complementary technologies, expanded our product portfolio, significantly diversified our global customer base, and strengthened our long-term financial profile through greater scale. The synergies achieved through our strategic initiatives have enhanced AAM's ability to compete in today's technological and regulatory environment, while remaining cost competitive through increased scale and integration.


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 SEC on February 15, 2019, which discussion is incorporated herein by reference.

RESULTS OF OPERATIONS

NET SALES Net sales were $6,530.9 million in 2019 as compared to $7,270.4 million in 2018. Our change in sales in 2019, as compared to 2018, primarily reflects the impact of lower full-sized truck sales resulting from the in-sourcing by our largest customer of a portion of a replacement program that launched in the second half of 2018, and a reduction of approximately $243 million associated with the impact of the GM work stoppage in the second half of 2019. Net sales in 2019 were also impacted by customer downtime as a result of program changeovers in 2019, and lower volumes on certain crossover vehicle programs that we support, as well as a decrease of approximately $142 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. These factors were partially offset by the impact of program launches associated with our new business backlog.

COST OF GOODS SOLD Cost of goods sold was $5,628.3 million in 2019 as compared to $6,130.0 million in 2018. The change in cost of goods sold in 2019, as compared to 2018, primarily reflects the impact of lower global automotive production volumes, a decrease of approximately $159 million associated with the impact of the GM work stoppage, and a decrease of approximately $142 million related to metal market pass-through costs and the impact of foreign exchange. This was partially offset by the impact of costs associated with program launches from our new business backlog.

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 $902.6 million in 2019 as compared to $1,140.4 million in 2018. Gross margin was 13.8% in 2019 as compared to 15.7% in 2018. Gross profit and gross margin were impacted by the factors discussed in Net Sales and Cost of Goods Sold above.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) SG&A (including R&D) was $364.7 million in 2019 as compared to $385.7 million in 2018. SG&A as a percentage of net sales was 5.6% in 2019 and 5.3% in 2018. R&D spending was $144.7 million in 2019 as compared to $146.2 million in 2018. The change in SG&A in 2019, as compared to 2018, was primarily attributable to lower compensation-related expense due, in part, to our restructuring initiatives.

AMORTIZATION OF INTANGIBLE ASSETS Amortization expense for the year ended December 31, 2019 was $95.4 million as compared to $99.4 million for the year ended December 31, 2018. The decrease in amortization expense for 2019 as compared to 2018 was primarily attributable to the customer platforms and relationships associated with the U.S. operations of our Casting segment, which ceased to be amortized upon being classified as held-for-sale in September 2019.

IMPAIRMENT CHARGES In the third quarter of 2019, we entered into a definitive agreement to sell the U.S. operations of our Casting segment. As a result, we recorded a pre-tax impairment charge of $225.0 million to reduce the carrying value of this business to fair value less cost to sell upon reclassifying the assets and liabilities to held-for-sale. See Note 2 - Sale of Business for further detail.

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 $440.0 million in 2019 associated with this segment. 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 segments were greater than their respective fair values. As such, we recorded a total goodwill impairment charge of $485.5 million in 2018 associated with these segments. See Note 5 - Goodwill and Other Intangible Assets for further detail.

RESTRUCTURING AND ACQUISITION-RELATED COSTS Restructuring and acquisition-related costs were $57.8 million in 2019 and $78.9 million in 2018. As part of our restructuring actions, we incurred severance charges of approximately $19.4 million, as well as implementation costs, consisting primarily of plant exit costs, of

22




approximately $20.4 million during 2019. In 2018, we incurred severance charges of approximately $2.5 million, as well as implementation costs, consisting primarily of plant exit costs and professional fees, of approximately $11.7 million, and long-lived asset impairment charges of $30.0 million.

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 $18 million of restructuring costs in 2019 under the 2019 Program. We expect to incur approximately $20 million to $30 million of total restructuring charges in 2020, substantially all of which are under the 2019 Program.

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 $30.0 million in 2018.

In 2019, we completed the acquisition of Mitec, and in 2017, we completed our acquisitions of MPG and USM Mexico. During 2019, we incurred $1.8 million of acquisition-related costs and $16.2 million of integration expenses associated with the acquisition of MPG. This compares to $1.2 million of acquisition-related costs, $0.5 million of acquisition-related severance costs and $33.0 million of integration expenses, primarily associated with the acquisition of MPG, for the year ended December 31, 2018.

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 $10 million to $15 million in 2020 as we finalize the integration of ERP systems at legacy MPG locations.
(GAIN) LOSS ON SALE OF BUSINESS In December 2019, we completed the Casting Sale and recorded a loss on sale of business of $21.3 million, which is presented in the (Gain) loss on sale of business line item of our Consolidated Statement of Operations for the year ended December 31, 2019. See Note 2 - Sale of Business for further detail.

In April 2018, we completed the sale of the aftermarket business associated with our former Powertrain segment for approximately $50 million. As a result, we recorded a $15.5 million pre-tax gain, which is presented in the (Gain) loss on sale of business line item of our Consolidated Statement of Operations for the year ended December 31, 2018.

OPERATING INCOME (LOSS) Operating loss was $301.6 million in 2019 as compared to income of $106.4 million in 2018. Operating margin was (4.6)% in 2019 as compared to 1.5% in 2018. The changes in operating income (loss) and operating margin in 2019, as compared to 2018, were due to the factors discussed in Net Sales, Cost of Goods Sold, SG&A, Amortization of Intangible Assets, Impairment Charges, Restructuring and Acquisition-Related Costs and (Gain) Loss on Sale of Business above.

INTEREST EXPENSE Interest expense was $217.3 million in 2019 and $216.3 million in 2018. The weighted-average interest rate of our total debt outstanding was 5.8% in both 2019 and 2018. We expect our interest expense in 2020 to be approximately $200 million to $210 million.

INTEREST INCOME Interest income was $5.8 million in 2019 and $2.0 million in 2018. Interest income includes interest earned on cash and cash equivalents, realized and unrealized gains and losses on our short-term investments during the period, and the impact of the interest rate differential on our fixed-to-fixed cross-currency swap.

OTHER INCOME (EXPENSE) Following are the components of Other Income (Expense) for 2019 and 2018:

Debt refinancing and redemption costs In July 2019, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the First Amendment to the Credit Agreement. The First Amendment, among other things,

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established $340 million in incremental term loan A commitments under the Amended Credit Agreement with a maturity date of July 29, 2024 (Term Loan A Facility due 2024), reduced the availability under the Revolving Credit Facility from $932 million to $925 million and extended the maturity date of the Revolving Credit Facility from April 6, 2022 to July 29, 2024, and 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. The applicable margin and the maturity date for the Term Loan B Facility remained unchanged. The proceeds of $340 million were used to repay all of the outstanding loans under the existing Term Loan A Facility and a portion of the outstanding Term Loan B Facility, resulting in no additional indebtedness. We expensed $5.1 million for the write-off of the unamortized debt issuance costs related to the existing Term Loan A Facility and a portion of the unamortized debt issuance costs related to our Term Loan B Facility that we had been amortizing over the expected life of the borrowings.

In December 2019, we used a portion of the cash proceeds from the Casting Sale to make a payment on our Term Loan B Facility, which included a principal payment of $59.8 million and $0.4 million in accrued interest. We also expensed approximately $1.0 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing.

In May 2019, we voluntarily redeemed the remaining balance outstanding under our 7.75% Notes due 2019. This resulted in a principal payment of $100 million and $0.3 million in accrued interest. We also expensed approximately $0.1 million for the write-off of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing, and approximately $2.2 million for an early redemption premium.

In November 2018, we voluntarily redeemed a portion of our 7.75% Notes due 2019. This resulted in a principal payment of $100 million, and a payment of $3.9 million in accrued interest. As a result of the redemption, we expensed approximately $0.3 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing, and approximately $4.5 million for an early redemption premium.

In May 2018, we voluntarily redeemed a portion of our 6.625% Notes due 2022. This resulted in a principal payment of $100 million, and a payment of $0.8 million in accrued interest. As a result of the redemption, we expensed $0.8 million for the write-off of a portion of the remaining unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing and $3.3 million for an early redemption premium.

In March 2018, we made a tender offer for our 6.25% Notes due 2021. Under this tender offer, we retired $383.1 million of the 6.25% Notes due 2021. We redeemed the remaining $16.9 million of the 6.25% Notes due 2021 during the second quarter of 2018. As a result of the tender and subsequent redemption, we expensed $2.5 million for the write-off of the remaining unamortized debt issuance costs that we had been amortizing over the expected life of the borrowing and $8.0 million in tender premiums.

Gain on bargain purchase of a business In the fourth quarter of 2019, we completed the acquisition of Mitec, under which we acquired $20.2 million of net assets for a purchase price of $9.4 million, which was funded entirely with available cash. We recognized a gain on bargain purchase of $10.8 million associated with this acquisition.

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 $15.6 million, including accrued interest.

Pension settlement charge In 2019, we offered a voluntary one-time lump sum payment option to certain eligible terminated vested participants in our U.S. pension plans that, if accepted, would settle our pension obligations to them. This resulted in a non-cash settlement charge of $9.8 million in the fourth quarter of 2019 related to the accelerated recognition of certain deferred losses.

Other, net Other, net, which includes the net effect of foreign exchange gains and losses, our proportionate share of earnings from equity in unconsolidated subsidiaries, and all components of net periodic pension and postretirement benefit costs other than service costs and certain settlement charges, was expense of $12.5 million in 2019, compared to expense of $2.2 million in 2018. The increased expense in other, net in 2019, as compared to 2018, was primarily the result of increased net foreign currency remeasurement losses of approximately $6.3 million.

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INCOME TAX EXPENSE (BENEFIT) Income tax was a benefit of $48.9 million in 2019, as compared to a benefit of $57.1 million in 2018. Our effective income tax rate was 9.2% in 2019 as compared to 50.1% in 2018.

In 2019, our income tax benefit varied from the tax benefit computed at the U.S. federal statutory rate primarily as a result of the goodwill impairment charge, which resulted in no income tax benefit, as well as the incremental tax expense associated with the global intangible low-taxed income inclusion under the Tax Cuts and Jobs Act of 2017 (the 2017 Act), and our inability to realize an income tax benefit for losses incurred in certain foreign and state jurisdictions. These items were partially offset by the impact of favorable foreign tax rates and income tax credits. In addition, as part of the 2017 Act, a one-time transition tax (Transition Tax) was imposed on certain foreign earnings for which U.S. income tax was previously deferred. The Department of Treasury and Internal Revenue Service issued final regulations on February 5, 2019 regarding the Transition Tax, which changed the manner in which we are required to compute the Transition Tax when it is recognized over a two-year period. The application of the final regulations resulted in a $9.3 million income tax benefit, which has been recorded in 2019, the period in which the final regulations were issued.

In 2018, our income tax benefit is higher than the tax benefit computed at the U.S. federal statutory rate primarily due to the impact of favorable foreign tax rates, and the impact of income tax credits, partially offset by our inability to realize an income tax benefit for losses incurred in certain foreign and state jurisdictions. In addition, during 2018, we finalized an advance pricing agreement in a foreign jurisdiction and settled various other matters, which resulted in an income tax benefit and a reduction of our liability for unrecognized tax benefits and related interest and penalties of approximately $20 million. We also recorded an income tax benefit of approximately $85 million in 2018 as a result of the goodwill impairment charge, partially offset by a discrete tax expense related to the sale of the aftermarket business associated with our former Powertrain segment.

NET INCOME (LOSS) ATTRIBUTABLE TO AAM AND EARNINGS (LOSS) PER SHARE (EPS) Net income (loss) attributable to AAM was a loss of $484.5 million in 2019 as compared to a loss of $57.5 million in 2018. Diluted loss per share was $4.31 in 2019 as compared to a diluted loss of $0.51 per share in 2018. Net Income (Loss) and EPS were primarily impacted by the factors discussed above.


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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 December 31, 2018 and 2017 have been reclassified to Driveline and Metal Forming accordingly.

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 El Carmen, Mexico, which are now included in our Driveline segment. 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 financial results. As such, we continue to present Casting as a segment in the tables below, which is 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 years presented.

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.


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The following tables outline our sales and Segment Adjusted EBITDA for each of our reportable segments for the years ended December 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 December 31, 2019, as compared to the year ended December 31, 2018, primarily reflects the impact of lower full-size truck sales resulting from the in-sourcing by our largest customer of a portion of a replacement program that launched in the second half of 2018, and a reduction of approximately $217 million associated with the impact of the GM work stoppage. Net sales in 2019 were also impacted by customer downtime as a result of program changeovers in 2019, and lower volumes on certain crossover vehicle programs that we support, as well as a decrease of approximately $95 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. These factors were partially offset by the impact of program launches associated with our new business backlog.

The increase in Driveline sales for the year ended December 31, 2018, as compared to the year ended December 31, 2017, primarily reflects higher volumes related to crossover vehicles and increased production volumes from program launches associated with our new business backlog. This was partially offset by the impact of lower full-size truck sales resulting from the in-sourcing by our largest customer of a portion of a replacement program that launched in the second half of 2018, and a reduction in production volumes for certain North American light truck programs we support as we prepared for program changeovers in 2018. Driveline sales for the year

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ended December 31, 2018, as compared to the year ended December 31, 2017, were also impacted by an increase related to metal market pass-throughs to our customers of approximately $31 million.

The change in sales in our Metal Forming segment for the year ended December 31, 2019, as compared to the year ended December 31, 2018, reflects lower global automotive production volumes, as well as a reduction in intersegment sales to our Driveline segment due to the factors discussed for Driveline above. Metal Forming sales for the year ended December 31, 2019 were also negatively impacted by approximately $47 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments, and by approximately $17 million associated with the GM work stoppage.

The increase in sales in our Metal Forming segment for the year ended December 31, 2018, as compared to the year ended December 31, 2017, primarily reflects the inclusion of twelve months of MPG sales in 2018, as compared to nine months of MPG sales in 2017, as the acquisition was completed in April 2017. The increase in sales in 2018, as compared to 2017, also reflects an increase in metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments totaling approximately $43 million.

The change in sales in our Casting segment for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily reflects lower production volumes in the automotive, commercial and industrial markets, and the impact of AAM completing the sale of the U.S. Casting operations on December 16, 2019. Casting sales in 2019 were also negatively impacted by approximately $9 million associated with the GM work stoppage.

The increase in sales in our Casting segment for the year ended December 31, 2018, as compared to the year ended December 31, 2017, reflects the inclusion of twelve months of MPG sales in 2018, as compared to nine months of MPG sales in 2017, and an increase of approximately $13 million in metal market pass-throughs to our customers.

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 December 31, 2019, as compared to the year ended December 31, 2018, the change in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to lower global automotive production volumes and the impact of the GM work stoppage. Driveline Segment Adjusted EBITDA was also impacted by a change in product mix due to customer downtime as a result of program changeovers in 2019.

For the year ended December 31, 2018, as compared to the year ended December 31, 2017, the change in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to increased material and freight costs, as well as an increase in project expense of approximately $15 million, and costs associated with increased levels of global launch activity in 2018.

The change in Metal Forming Segment Adjusted EBITDA for the year ended December 31, 2019, as compared to the year ended December 31, 2018, was primarily attributable to lower global automotive production volumes, as well as an increase in net manufacturing costs, including higher material, freight and tariff costs, of approximately $10 million. The increase in Metal Forming Segment Adjusted EBITDA for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was primarily due to the acquisition of MPG, partially offset by increased material and freight costs.

The change in Casting Segment Adjusted EBITDA for the year ended December 31, 2019, as compared to the year ended December 31, 2018, primarily reflects lower production volumes, offset by the impact of price increases to customers. The increase in Casting Segment Adjusted EBITDA for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was primarily due to the acquisition of MPG, which was partially offset by increased labor costs in an effort to address workforce shortages at certain locations.


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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 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