The following table summarizes our beginning and ending balances for accounts receivable and contract liabilities associated with our contracts with customers:
Contract liabilities relate to deferred revenue associated with various settlements and commercial agreements for which we have a future performance obligation to the customer. We recognize this deferred revenue into revenue over the life of the associated program as we satisfy our performance obligations to the customer. We do not have contract assets as defined in ASC 606.
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 to the segments.
We use Segment Adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. We define EBITDA to be earnings before interest expense, income taxes, depreciation and amortization. Segment Adjusted EBITDA is defined as EBITDA for our reportable segments excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, gain (loss) on the sale of a business, impairment charges, pension settlements and non-recurring items.
|
| | | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, 2019 |
|
| Driveline |
| Metal Forming |
| Casting |
| Total |
Sales |
| $ | 1,146.7 |
|
| $ | 476.6 |
|
| $ | 209.0 |
|
| $ | 1,832.3 |
|
Less: intersegment sales |
| 8.6 |
|
| 107.0 |
|
| 39.3 |
|
| 154.9 |
|
Net external sales | | $ | 1,138.1 |
|
| $ | 369.6 |
|
| $ | 169.7 |
| | $ | 1,677.4 |
|
| | | | | | | | |
Segment Adjusted EBITDA | | $ | 171.6 |
| | $ | 80.4 |
| | $ | 13.8 |
| | $ | 265.8 |
|
| | | | | | | | |
|
| Three Months Ended September 30, 2018 |
|
| Driveline |
| Metal Forming |
| Casting |
| Total |
Sales |
| $ | 1,228.2 |
|
| $ | 509.0 |
|
| $ | 219.1 |
|
| $ | 1,956.3 |
|
Less: intersegment sales |
| 1.8 |
|
| 112.2 |
|
| 25.3 |
|
| 139.3 |
|
Net external sales | | $ | 1,226.4 |
|
| $ | 396.8 |
|
| $ | 193.8 |
|
| $ | 1,817.0 |
|
| | | | | | | | |
Segment Adjusted EBITDA | | $ | 176.9 |
| | $ | 83.6 |
| | $ | 14.5 |
| | $ | 275.0 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables represent information by reportable segment for the nine months ended September 30, 20192020 and 20182019 (in millions):
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Driveline | | Metal Forming | | Casting | | Total |
Sales | | $ | 3,422.5 |
| | $ | 1,444.1 |
| | $ | 655.0 |
| | $ | 5,521.6 |
|
Less: intersegment sales | | 10.6 |
| | 309.0 |
| | 101.1 |
| | 420.7 |
|
Net external sales | | $ | 3,411.9 |
| | $ | 1,135.1 |
| | $ | 553.9 |
| | $ | 5,100.9 |
|
| | | | | | | | |
Segment Adjusted EBITDA | | $ | 461.7 |
| | $ | 253.7 |
| | $ | 61.4 |
| | $ | 776.8 |
|
| | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| | Driveline | | Metal Forming | | Casting | | Total |
Sales | | $ | 3,718.6 |
| | $ | 1,581.7 |
| | $ | 701.3 |
| | $ | 6,001.6 |
|
Less: intersegment sales | | 5.3 |
| | 331.9 |
| | 88.1 |
| | 425.3 |
|
Net external sales | | $ | 3,713.3 |
| | $ | 1,249.8 |
| | $ | 613.2 |
| | $ | 5,576.3 |
|
| | | | | | | | |
Segment Adjusted EBITDA | | $ | 570.9 |
| | $ | 306.0 |
| | $ | 63.0 |
| | $ | 939.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 |
| | Driveline | | Metal Forming | | Casting | | | | Total |
Sales | | $ | 2,529.9 | | | $ | 1,005.8 | | | $ | 0 | | | | | $ | 3,535.7 | |
Less: intersegment sales | | 27.5 | | | 235.3 | | | 0 | | | | | 262.8 | |
Net external sales | | $ | 2,502.4 | | | $ | 770.5 | | | $ | 0 | | | | | $ | 3,272.9 | |
| | | | | | | | | | |
Segment Adjusted EBITDA | | $ | 315.5 | | | $ | 142.8 | | | $ | 0 | | | | | $ | 458.3 | |
| | | | | | | | | | |
| | Nine Months Ended September 30, 2019 |
| | Driveline | | Metal Forming | | Casting | | | | Total |
Sales | | $ | 3,534.6 | | | $ | 1,444.1 | | | $ | 541.6 | | | | | $ | 5,520.3 | |
Less: intersegment sales | | 77.9 | | | 309.0 | | | 32.5 | | | | | 419.4 | |
Net external sales | | $ | 3,456.7 | | | $ | 1,135.1 | | | $ | 509.1 | | | | | $ | 5,100.9 | |
| | | | | | | | | | |
Segment Adjusted EBITDA | | $ | 485.9 | | | $ | 250.2 | | | $ | 40.7 | | | | | $ | 776.8 | |
The following table represents total assets by segment as of September 30, 2019 and December 31, 2018
(in millions):
|
| | | | | | | | | | | | | | | | | | | | |
| | Driveline | | Metal Forming | | Casting | | Corporate and Elims | | Total |
Total Assets at September 30, 2019 | | $ | 3,649.4 |
| | $ | 2,579.9 |
| | $ | 454.7 |
| | $ | 632.3 |
| | $ | 7,316.3 |
|
| | | | | | | | | | |
Total Assets at December 31, 2018 | | 3,529.2 |
| | 2,723.0 |
| | 664.7 |
| | 593.8 |
| | 7,510.7 |
|
The following table represents a reconciliation of Total Segment Adjusted EBITDA to consolidated income (loss) before income taxes for the three months and nine months ended September 30, 20192020 and 20182019 (in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
Total segment adjusted EBITDA | $ | 265.8 |
| | $ | 275.0 |
| | $ | 776.8 |
| | $ | 939.9 |
|
Interest expense | (54.3 | ) | | (54.9 | ) | | (163.9 | ) | | (162.5 | ) |
Depreciation and amortization | (134.2 | ) | | (132.9 | ) | | (411.5 | ) | | (390.9 | ) |
Restructuring and acquisition-related costs | (11.7 | ) | | (11.7 | ) | | (36.0 | ) | | (66.8 | ) |
Gain on sale of business | — |
| | — |
| | — |
| | 15.5 |
|
Gain on settlement of capital lease | — |
| | — |
| | — |
| | 15.6 |
|
Debt refinancing and redemption costs | (5.1 | ) | | — |
| | (7.5 | ) | | (14.6 | ) |
Impairment charge | (225.0 | ) | | — |
| | (225.0 | ) | | — |
|
Income (loss) before income taxes | $ | (164.5 | ) | | $ | 75.5 |
| | $ | (67.1 | ) | | $ | 336.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Total segment adjusted EBITDA | $ | 297.1 | | | $ | 265.8 | | | $ | 458.3 | | | $ | 776.8 | |
Interest expense | (53.9) | | | (54.3) | | | (160.0) | | | (163.9) | |
Depreciation and amortization | (125.0) | | | (134.2) | | | (393.7) | | | (411.5) | |
Restructuring and acquisition-related costs | (9.7) | | | (11.7) | | | (38.6) | | | (36.0) | |
| | | | | | | |
Loss on sale of business | 0 | | | 0 | | | (1.0) | | | 0 | |
| | | | | | | |
Debt refinancing and redemption costs | (5.2) | | | (5.1) | | | (6.7) | | | (7.5) | |
Impairment charges | 0 | | | (225.0) | | | (510.0) | | | (225.0) | |
Non-recurring items: | | | | | | | |
Malvern Fire charges, net of recoveries | (8.6) | | | 0 | | | (8.6) | | | 0 | |
| | | | | | | |
| | | | | | | |
Income (loss) before income taxes | $ | 94.7 | | | $ | (164.5) | | | $ | (660.3) | | | $ | (67.1) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Holdings has no significant assets other than its 100% ownership in AAM, Inc. and Metaldyne Performance Group, Inc. (MPG Inc.), and no direct subsidiaries other than AAM, Inc. and MPG Inc. The 6.625% Notes, 6.50% Notes, 6.25% Notes (due 2026), and 6.25% Notes (due 2025) are senior unsecured obligations of AAM, Inc.; all of which are fully and unconditionally guaranteed, on a joint and several basis, by Holdings and substantially all domestic subsidiaries of AAM, Inc. and MPG Inc.
These Condensed Consolidating Financial Statements are prepared under the equity method of accounting whereby the investments in subsidiaries are recorded at cost and adjusted for the parent’s share of the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other equity changes.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statements of Operations | | | | | | | | |
Three Months Ended September 30, | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2019 | | | | | | | | | | | | |
Net sales | | | | | | | | | | | | |
External | | $ | — |
| | $ | 205.7 |
| | $ | 506.5 |
| | $ | 965.2 |
| | $ | — |
| | $ | 1,677.4 |
|
Intercompany | | — |
| | 0.5 |
| | 77.0 |
| | 16.5 |
| | (94.0 | ) | | — |
|
Total net sales | | — |
| | 206.2 |
| | 583.5 |
| | 981.7 |
| | (94.0 | ) | | 1,677.4 |
|
Cost of goods sold | | — |
| | 221.2 |
| | 529.6 |
| | 771.9 |
| | (94.0 | ) | | 1,428.7 |
|
Gross profit (loss) | | — |
| | (15.0 | ) | | 53.9 |
| | 209.8 |
| | — |
| | 248.7 |
|
Selling, general and administrative expenses | | — |
| | 68.9 |
| | 6.8 |
| | 17.0 |
| | — |
| | 92.7 |
|
Amortization of intangible assets | | — |
| | 1.4 |
| | 21.4 |
| | 0.9 |
| | — |
| | 23.7 |
|
Impairment charges | | — |
| | — |
| | 225.0 |
| | — |
| | — |
| | 225.0 |
|
Restructuring and acquisition-related costs | | — |
| | 6.2 |
| | 4.1 |
| | 1.4 |
| | — |
| | 11.7 |
|
Operating income (loss) | | — |
| | (91.5 | ) | | (203.4 | ) | | 190.5 |
| | — |
| | (104.4 | ) |
Non-operating income (expense), net | | — |
| | (62.7 | ) | | 2.3 |
| | 0.3 |
| | — |
| | (60.1 | ) |
Income (loss) before income taxes | | — |
| | (154.2 | ) | | (201.1 | ) | | 190.8 |
| | — |
| | (164.5 | ) |
Income tax expense (benefit) | | — |
| | (8.5 | ) | | (46.8 | ) | | 14.9 |
| | — |
| | (40.4 | ) |
Earnings (loss) from equity in subsidiaries | | (124.2 | ) | | 50.5 |
| | 38.2 |
| | — |
| | 35.5 |
| | — |
|
Net income (loss) before royalties | | (124.2 | ) | | (95.2 | ) | | (116.1 | ) | | 175.9 |
| | 35.5 |
| | (124.1 | ) |
Royalties | | — |
| | 86.6 |
| | 0.7 |
| | (87.3 | ) | | — |
| | — |
|
Net income (loss) after royalties | | (124.2 | ) | | (8.6 | ) | | (115.4 | ) | | 88.6 |
| | 35.5 |
| | (124.1 | ) |
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
Net income (loss) attributable to AAM | | $ | (124.2 | ) | | $ | (8.6 | ) | | $ | (115.4 | ) | | $ | 88.5 |
| | $ | 35.5 |
| | $ | (124.2 | ) |
Other comprehensive income (loss), net of tax | | (44.8 | ) | | (26.4 | ) | | (35.4 | ) | | (36.4 | ) | | 98.2 |
| | (44.8 | ) |
Comprehensive income (loss) attributable to AAM | | $ | (169.0 | ) | | $ | (35.0 | ) | | $ | (150.8 | ) | | $ | 52.1 |
| | $ | 133.7 |
| | $ | (169.0 | ) |
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2018 | | |
| | |
| | |
| | |
| | |
| | |
|
Net sales | | |
| | |
| | |
| | |
| | |
| | |
|
External | | $ | — |
| | $ | 247.1 |
| | $ | 544.3 |
| | $ | 1,025.6 |
| | $ | — |
| | $ | 1,817.0 |
|
Intercompany | | — |
| | 0.7 |
| | 75.6 |
| | 10.8 |
| | (87.1 | ) | | — |
|
Total net sales | | — |
| | 247.8 |
| | 619.9 |
| | 1,036.4 |
| | (87.1 | ) | | 1,817.0 |
|
Cost of goods sold | | — |
| | 220.6 |
| | 594.2 |
| | 821.9 |
| | (87.1 | ) | | 1,549.6 |
|
Gross profit | | — |
| | 27.2 |
| | 25.7 |
| | 214.5 |
| | — |
| | 267.4 |
|
Selling, general and administrative expenses | | — |
| | 63.4 |
| | 19.6 |
| | 13.3 |
| | — |
| | 96.3 |
|
Amortization of intangible assets | | — |
| | 1.0 |
| | 22.9 |
| | 0.9 |
| | — |
| | 24.8 |
|
Restructuring and acquisition-related costs | | — |
| | 5.0 |
| | 3.9 |
| | 2.8 |
| | — |
| | 11.7 |
|
Operating income (loss) | | — |
| | (42.2 | ) | | (20.7 | ) | | 197.5 |
| | — |
| | 134.6 |
|
Non-operating income (expense), net | | — |
| | (60.0 | ) | | 2.8 |
| | (1.9 | ) | | — |
| | (59.1 | ) |
Income (loss) before income taxes | | — |
| | (102.2 | ) | | (17.9 | ) | | 195.6 |
| | — |
| | 75.5 |
|
Income tax expense (benefit) | | — |
| | (1.0 | ) | | 0.1 |
| | 12.4 |
| | — |
| | 11.5 |
|
Earnings from equity in subsidiaries | | 63.8 |
| | 68.1 |
| | 33.8 |
| | — |
| | (165.7 | ) | | — |
|
Net income (loss) before royalties | | 63.8 |
| | (33.1 | ) | | 15.8 |
| | 183.2 |
| | (165.7 | ) | | 64.0 |
|
Royalties | | — |
| | 87.6 |
| | 0.7 |
| | (88.3 | ) | | — |
| | — |
|
Net income after royalties | | 63.8 |
| | 54.5 |
| | 16.5 |
| | 94.9 |
| | (165.7 | ) | | 64.0 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (0.2 | ) | | — |
| | (0.2 | ) |
Net income attributable to AAM | | $ | 63.8 |
| | $ | 54.5 |
| | $ | 16.5 |
| | $ | 94.7 |
| | $ | (165.7 | ) | | $ | 63.8 |
|
Other comprehensive income (loss), net of tax | | 1.5 |
| | 1.0 |
| | (10.3 | ) | | — |
| | 9.3 |
| | 1.5 |
|
Comprehensive income attributable to AAM | | $ | 65.3 |
| | $ | 55.5 |
| | $ | 6.2 |
| | $ | 94.7 |
| | $ | (156.4 | ) | | $ | 65.3 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statements of Operations | | | | | | | | |
Nine Months Ended September 30, | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2019 | | | | | | | | | | | | |
Net sales | | | | | | | | | | | | |
External | | $ | — |
| | $ | 711.8 |
| | $ | 1,561.8 |
| | $ | 2,827.3 |
| | $ | — |
| | $ | 5,100.9 |
|
Intercompany | | — |
| | 1.5 |
| | 219.8 |
| | 37.2 |
| | (258.5 | ) | | — |
|
Total net sales | | — |
| | 713.3 |
| | 1,781.6 |
| | 2,864.5 |
| | (258.5 | ) | | 5,100.9 |
|
Cost of goods sold | | — |
| | 721.1 |
| | 1,612.2 |
| | 2,306.9 |
| | (258.5 | ) | | 4,381.7 |
|
Gross profit (loss) | | — |
| | (7.8 | ) | | 169.4 |
| | 557.6 |
| | — |
| | 719.2 |
|
Selling, general and administrative expenses | | — |
| | 208.9 |
| | 22.4 |
| | 43.4 |
| | — |
| | 274.7 |
|
Amortization of intangible assets | | — |
| | 4.3 |
| | 66.6 |
| | 2.7 |
| | — |
| | 73.6 |
|
Impairment charges | | — |
| | — |
| | 225.0 |
| | — |
| | — |
| | 225.0 |
|
Restructuring and acquisition-related costs | | — |
| | 17.1 |
| | 12.3 |
| | 6.6 |
| | — |
| | 36.0 |
|
Operating income (loss) | | — |
| | (238.1 | ) | | (156.9 | ) | | 504.9 |
| | — |
| | 109.9 |
|
Non-operating income (expense), net | | — |
| | (184.0 | ) | | 7.0 |
| | — |
| | — |
| | (177.0 | ) |
Income (loss) before income taxes | | — |
| | (422.1 | ) | | (149.9 | ) | | 504.9 |
| | — |
| | (67.1 | ) |
Income tax expense (benefit) | | — |
| | (23.2 | ) | | (46.7 | ) | | 32.5 |
| | — |
| | (37.4 | ) |
Earnings (loss) from equity in subsidiaries | | (30.1 | ) | | 131.9 |
| | 105.3 |
| | — |
| | (207.1 | ) | | — |
|
Net income (loss) before royalties | | (30.1 | ) | | (267.0 | ) | | 2.1 |
| | 472.4 |
| | (207.1 | ) | | (29.7 | ) |
Royalties | | — |
| | 241.2 |
| | 2.2 |
| | (243.4 | ) | | — |
| | — |
|
Net income (loss) after royalties | | (30.1 | ) | | (25.8 | ) | | 4.3 |
| | 229.0 |
| | (207.1 | ) | | (29.7 | ) |
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (0.4 | ) | | — |
| | (0.4 | ) |
Net income (loss) attributable to AAM | | $ | (30.1 | ) | | $ | (25.8 | ) | | $ | 4.3 |
| | $ | 228.6 |
| | $ | (207.1 | ) | | $ | (30.1 | ) |
Other comprehensive income (loss), net of tax | | (58.9 | ) | | (40.2 | ) | | (32.1 | ) | | (29.5 | ) | | 101.8 |
| | (58.9 | ) |
Comprehensive income (loss) attributable to AAM | | $ | (89.0 | ) | | $ | (66.0 | ) | | $ | (27.8 | ) | | $ | 199.1 |
| | $ | (105.3 | ) | | $ | (89.0 | ) |
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2018 | | |
| | |
| | |
| | |
| | |
| | |
|
Net sales | | |
| | |
| | |
| | |
| | |
| | |
|
External | | $ | — |
| | $ | 851.4 |
| | $ | 1,699.2 |
| | $ | 3,025.7 |
| | $ | — |
| | $ | 5,576.3 |
|
Intercompany | | — |
| | 4.0 |
| | 231.6 |
| | 31.1 |
| | (266.7 | ) | | — |
|
Total net sales | | — |
| | 855.4 |
| | 1,930.8 |
| | 3,056.8 |
| | (266.7 | ) | | 5,576.3 |
|
Cost of goods sold | | — |
| | 804.5 |
| | 1,713.3 |
| | 2,410.1 |
| | (266.7 | ) | | 4,661.2 |
|
Gross profit | | — |
| | 50.9 |
| | 217.5 |
| | 646.7 |
| | — |
| | 915.1 |
|
Selling, general and administrative expenses | | — |
| | 183.4 |
| | 61.4 |
| | 43.8 |
| | — |
| | 288.6 |
|
Amortization of intangible assets | | — |
| | 3.9 |
| | 68.0 |
| | 2.6 |
| | — |
| | 74.5 |
|
Restructuring and acquisition-related costs | | — |
| | 31.1 |
| | 31.8 |
| | 3.9 |
| | — |
| | 66.8 |
|
Gain on sale of business | | — |
| | — |
| | (15.5 | ) | | — |
| | — |
| | (15.5 | ) |
Operating income (loss) | | — |
| | (167.5 | ) | | 71.8 |
| | 596.4 |
| | — |
| | 500.7 |
|
Non-operating income (expense), net | | — |
| | (193.8 | ) | | 11.0 |
| | 18.3 |
| | — |
| | (164.5 | ) |
Income (loss) before income taxes | | — |
| | (361.3 | ) | | 82.8 |
| | 614.7 |
| | — |
| | 336.2 |
|
Income tax expense | | — |
| | 8.1 |
| | 0.6 |
| | 22.7 |
| | — |
| | 31.4 |
|
Earnings from equity in subsidiaries | | 304.3 |
| | 241.6 |
| | 141.6 |
| | — |
| | (687.5 | ) | | — |
|
Net income (loss) before royalties | | 304.3 |
| | (127.8 | ) | | 223.8 |
| | 592.0 |
| | (687.5 | ) | | 304.8 |
|
Royalties | | — |
| | 256.8 |
| | 2.6 |
| | (259.4 | ) | | — |
| | — |
|
Net income after royalties | | 304.3 |
| | 129.0 |
| | 226.4 |
| | 332.6 |
| | (687.5 | ) | | 304.8 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | (0.5 | ) | | — |
| | (0.5 | ) |
Net income attributable to AAM | | $ | 304.3 |
| | $ | 129.0 |
| | $ | 226.4 |
| | $ | 332.1 |
| | $ | (687.5 | ) | | $ | 304.3 |
|
Other comprehensive loss, net of tax | | (20.9 | ) | | (2.6 | ) | | (50.5 | ) | | (37.3 | ) | | 90.4 |
| | (20.9 | ) |
Comprehensive income attributable to AAM | | $ | 283.4 |
| | $ | 126.4 |
| | $ | 175.9 |
| | $ | 294.8 |
| | $ | (597.1 | ) | | $ | 283.4 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Balance Sheets | | | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
September 30, 2019 | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 79.4 |
| | $ | 0.1 |
| | $ | 295.6 |
| | $ | — |
| | $ | 375.1 |
|
Accounts receivable, net | | — |
| | 95.2 |
| | 230.8 |
| | 650.9 |
| | — |
| | 976.9 |
|
Intercompany receivables | | — |
| | 4,864.1 |
| | 4,722.1 |
| | 183.0 |
| | (9,769.2 | ) | | — |
|
Inventories, net | | — |
| | 62.8 |
| | 116.9 |
| | 223.4 |
| | — |
| | 403.1 |
|
Prepaid expenses and other | | — |
| | 34.3 |
| | 3.7 |
| | 92.9 |
| | — |
| | 130.9 |
|
Current assets held-for-sale | | — |
| | — |
| | 312.2 |
| | — |
| | — |
| | 312.2 |
|
Total current assets | | — |
| | 5,135.8 |
| | 5,385.8 |
| | 1,445.8 |
| | (9,769.2 | ) | | 2,198.2 |
|
Property, plant and equipment, net | | — |
| | 294.1 |
| | 554.5 |
| | 1,477.8 |
| | — |
| | 2,326.4 |
|
Goodwill | | — |
| | — |
| | 719.0 |
| | 408.5 |
| | — |
| | 1,127.5 |
|
Intangible assets, net | | — |
| | 15.4 |
| | 836.9 |
| | 29.2 |
| | — |
| | 881.5 |
|
Intercompany notes and accounts receivable | | — |
| | 1,542.1 |
| | 186.7 |
| | — |
| | (1,728.8 | ) | | — |
|
Other assets and deferred charges | | — |
| | 339.7 |
| | 118.1 |
| | 324.9 |
| | — |
| | 782.7 |
|
Investment in subsidiaries | | 2,721.4 |
| | 2,155.9 |
| | 1,504.1 |
| | — |
| | (6,381.4 | ) | | — |
|
Total assets | | $ | 2,721.4 |
| | $ | 9,483.0 |
| | $ | 9,305.1 |
| | $ | 3,686.2 |
| | $ | (17,879.4 | ) | | $ | 7,316.3 |
|
Liabilities and Stockholders’ Equity | | |
| | |
| | |
| | |
| | |
| | |
|
Current liabilities | | |
| | |
| | |
| | |
| | |
| | |
|
Current portion of long-term debt | | $ | — |
| | $ | 2.1 |
| | $ | 5.3 |
| | $ | 16.4 |
| | $ | — |
| | $ | 23.8 |
|
Accounts payable | | — |
| | 101.3 |
| | 169.1 |
| | 433.3 |
| | — |
| | 703.7 |
|
Intercompany payables | | — |
| | 3,931.7 |
| | 5,835.5 |
| | 2.0 |
| | (9,769.2 | ) | | — |
|
Accrued expenses and other | | — |
| | 165.2 |
| | 34.9 |
| | 207.8 |
| | — |
| | 407.9 |
|
Current liabilities held-for-sale | | — |
| | — |
| | 101.7 |
| | — |
| | — |
| | 101.7 |
|
Total current liabilities | | — |
| | 4,200.3 |
| | 6,146.5 |
| | 659.5 |
| | (9,769.2 | ) | | 1,237.1 |
|
Intercompany notes and accounts payable | | 1,311.8 |
| | 36.0 |
| | — |
| | 381.0 |
| | (1,728.8 | ) | | — |
|
Long-term debt, net | | — |
| | 3,581.8 |
| | — |
| | 91.5 |
| | — |
| | 3,673.3 |
|
Other long-term liabilities | | — |
| | 503.0 |
| | 243.1 |
| | 250.2 |
| | — |
| | 996.3 |
|
Total liabilities | | 1,311.8 |
| | 8,321.1 |
| | 6,389.6 |
| | 1,382.2 |
| | (11,498.0 | ) | | 5,906.7 |
|
Total AAM Stockholders’ equity | | 1,406.8 |
| | 1,161.9 |
| | 2,915.5 |
| | 2,301.2 |
| | (6,378.6 | ) | | 1,406.8 |
|
Noncontrolling interests in subsidiaries | | 2.8 |
| | — |
| | — |
| | 2.8 |
| | (2.8 | ) | | 2.8 |
|
Total stockholders’ equity | | 1,409.6 |
| | 1,161.9 |
| | 2,915.5 |
| | 2,304.0 |
| | (6,381.4 | ) | | 1,409.6 |
|
Total liabilities and stockholders’ equity | | $ | 2,721.4 |
| | $ | 9,483.0 |
| | $ | 9,305.1 |
| | $ | 3,686.2 |
| | $ | (17,879.4 | ) | | $ | 7,316.3 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
December 31, 2018 | | | | | | | | | | | | |
Assets | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | 36.7 |
| | $ | 0.2 |
| | $ | 439.5 |
| | $ | — |
| | $ | 476.4 |
|
Accounts receivable, net | | — |
| | 122.7 |
| | 287.7 |
| | 556.1 |
| | — |
| | 966.5 |
|
Intercompany receivables | | — |
| | 3,337.2 |
| | 2,356.3 |
| | 93.5 |
| | (5,787.0 | ) | | — |
|
Inventories, net | | — |
| | 42.5 |
| | 157.7 |
| | 259.5 |
| | — |
| | 459.7 |
|
Prepaid expenses and other | | — |
| | 34.4 |
| | 6.0 |
| | 86.8 |
| | — |
| | 127.2 |
|
Total current assets | | — |
| | 3,573.5 |
| | 2,807.9 |
| | 1,435.4 |
| | (5,787.0 | ) | | 2,029.8 |
|
Property, plant and equipment, net | | — |
| | 275.8 |
| | 758.6 |
| | 1,480.0 |
| | — |
| | 2,514.4 |
|
Goodwill | | — |
| | — |
| | 719.0 |
| | 422.8 |
| | — |
| | 1,141.8 |
|
Intangible assets, net | | — |
| | 18.6 |
| | 1,059.6 |
| | 32.9 |
| | — |
| | 1,111.1 |
|
Intercompany notes and accounts receivable | | — |
| | 1,316.8 |
| | 144.5 |
| | — |
| | (1,461.3 | ) | | — |
|
Other assets and deferred charges | | — |
| | 319.8 |
| | 126.4 |
| | 267.4 |
| | — |
| | 713.6 |
|
Investment in subsidiaries | | 2,790.5 |
| | 2,241.5 |
| | 1,748.7 |
| | — |
| | (6,780.7 | ) | | — |
|
Total assets | | $ | 2,790.5 |
| | $ | 7,746.0 |
| | $ | 7,364.7 |
| | $ | 3,638.5 |
| | $ | (14,029.0 | ) | | $ | 7,510.7 |
|
Liabilities and Stockholders’ Equity | | |
| | |
| | |
| | |
| | |
| | |
|
Current liabilities | | |
| | |
| | |
| | |
| | |
| | |
|
Current portion of long-term debt | | $ | — |
| | $ | 100.0 |
| | $ | — |
| | $ | 21.6 |
| | $ | — |
| | $ | 121.6 |
|
Accounts payable | | — |
| | 94.2 |
| | 246.5 |
| | 499.5 |
| | — |
| | 840.2 |
|
Intercompany payables | | — |
| | 2,050.0 |
| | 3,615.7 |
| | 121.3 |
| | (5,787.0 | ) | | — |
|
Accrued expenses and other | | — |
| | 169.0 |
| | 35.8 |
| | 190.2 |
| | — |
| | 395.0 |
|
Total current liabilities | | — |
| | 2,413.2 |
| | 3,898.0 |
| | 832.6 |
| | (5,787.0 | ) | | 1,356.8 |
|
Intercompany notes and accounts payable | | 1,304.2 |
| | 12.5 |
| | — |
| | 144.6 |
| | (1,461.3 | ) | | — |
|
Long-term debt, net | | — |
| | 3,578.3 |
| | 3.0 |
| | 105.5 |
| | — |
| | 3,686.8 |
|
Other long-term liabilities | | — |
| | 508.9 |
| | 271.7 |
| | 200.2 |
| | — |
| | 980.8 |
|
Total liabilities | | 1,304.2 |
| | 6,512.9 |
| | 4,172.7 |
| | 1,282.9 |
| | (7,248.3 | ) | | 6,024.4 |
|
Total AAM Stockholders’ equity | | 1,483.9 |
| | 1,233.1 |
| | 3,192.0 |
| | 2,353.2 |
| | (6,778.3 | ) | | 1,483.9 |
|
Noncontrolling interests in subsidiaries | | 2.4 |
| | — |
| | — |
| | 2.4 |
| | (2.4 | ) | | 2.4 |
|
Total stockholders’ equity | | 1,486.3 |
| | 1,233.1 |
| | 3,192.0 |
| | 2,355.6 |
| | (6,780.7 | ) | | 1,486.3 |
|
Total liabilities and stockholders’ equity | | $ | 2,790.5 |
| | $ | 7,746.0 |
| | $ | 7,364.7 |
| | $ | 3,638.5 |
| | $ | (14,029.0 | ) | | $ | 7,510.7 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statements of Cash Flows | | | | | | | | |
Nine Months Ended September 30, | | | | | | | | | | | | |
(in millions) | | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2019 | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | — |
| | $ | 214.1 |
| | $ | 20.4 |
| | $ | 144.1 |
| | $ | — |
| | $ | 378.6 |
|
Investing activities | | |
| | |
| | |
| | |
| | |
| | |
|
Purchases of property, plant and equipment | | — |
| | (46.8 | ) | | (91.0 | ) | | (197.5 | ) | | — |
| | (335.3 | ) |
Proceeds from sale of property, plant and equipment | | — |
| | — |
| | 1.7 |
| | 0.3 |
| | — |
| | 2.0 |
|
Investment in joint ventures | | — |
| | — |
| | — |
| | (2.2 | ) | | — |
| | (2.2 | ) |
Intercompany activity | | — |
| | — |
| | (12.0 | ) | | 12.0 |
| | — |
| | — |
|
Net cash used in investing activities | | — |
| | (46.8 | ) | | (101.3 | ) | | (187.4 | ) | | — |
| | (335.5 | ) |
Financing activities | | |
| | |
| | |
| | |
| | |
| | |
|
Net debt activity | | — |
| | (113.8 | ) | | (0.2 | ) | | (15.3 | ) | | — |
| | (129.3 | ) |
Debt issuance costs | | — |
| | (3.3 | ) | | — |
| | — |
| | — |
| | (3.3 | ) |
Purchase of treasury stock | | (7.5 | ) | | — |
| | — |
| | — |
| | — |
| | (7.5 | ) |
Intercompany activity | | 7.5 |
|
| (7.5 | ) | | 81.0 |
| | (81.0 | ) | | — |
| | — |
|
Net cash used in financing activities | | — |
| | (124.6 | ) | | 80.8 |
| | (96.3 | ) | | — |
| | (140.1 | ) |
Effect of exchange rate changes on cash | | — |
| | — |
| | — |
| | (4.3 | ) | | — |
| | (4.3 | ) |
Net increase (decrease) in cash, cash equivalents and restricted cash | | — |
| | 42.7 |
| | (0.1 | ) | | (143.9 | ) | | — |
| | (101.3 | ) |
Cash, cash equivalents and restricted cash at beginning of period | | — |
| | 36.7 |
| | 2.7 |
| | 439.5 |
| | — |
| | 478.9 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | — |
| | $ | 79.4 |
| | $ | 2.6 |
| | $ | 295.6 |
| | $ | — |
| | $ | 377.6 |
|
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Holdings | | AAM Inc. | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Elims | | Consolidated |
2018 | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | — |
| | $ | 240.0 |
| | $ | 103.0 |
| | $ | 170.2 |
| | $ | — |
| | $ | 513.2 |
|
Investing activities | | | | | | | | | | |
| | |
|
Purchases of property, plant and equipment | | — |
| | (51.8 | ) | | (121.2 | ) | | (218.8 | ) | | — |
| | (391.8 | ) |
Proceeds from sale of property, plant and equipment | | — |
| | — |
| | 2.7 |
| | 0.5 |
| | — |
| | 3.2 |
|
Purchase buyouts of leased equipment | | — |
| | — |
| | (0.5 | ) | | — |
| | — |
| | (0.5 | ) |
Proceeds from sale of business, net | | — |
| | — |
| | 42.7 |
| | 4.4 |
| | — |
| | 47.1 |
|
Acquisition of business, net of cash acquired | | — |
| | — |
| | — |
| | (1.3 | ) | | — |
| | (1.3 | ) |
Intercompany activity | | — |
| | — |
| | (43.8 | ) | | 43.8 |
| | — |
| | — |
|
Net cash used in investing activities | | — |
| | (51.8 | ) | | (120.1 | ) | | (171.4 | ) | | — |
| | (343.3 | ) |
Financing activities | | |
| | |
| | |
| | |
| | |
| | |
|
Net debt activity | | — |
| | (140.3 | ) | | (0.6 | ) | | 54.2 |
| | — |
| | (86.7 | ) |
Debt issuance costs | | — |
| | (6.9 | ) | | — |
| | — |
| | — |
| | (6.9 | ) |
Purchase of treasury stock | | (3.7 | ) | | — |
| | — |
| | — |
| | — |
| | (3.7 | ) |
Purchase of noncontrolling interest | | — |
| | — |
| | (2.2 | ) | | — |
| | — |
| | (2.2 | ) |
Intercompany activity | | 3.7 |
| | (3.7 | ) | | 22.5 |
| | (22.5 | ) | | — |
| | — |
|
Net cash provided by (used in) financing activities | | — |
| | (150.9 | ) | | 19.7 |
| | 31.7 |
| | — |
| | (99.5 | ) |
Effect of exchange rate changes on cash | | — |
| | — |
| | — |
| | (5.3 | ) | | — |
| | (5.3 | ) |
Net increase in cash, cash equivalents and restricted cash | | — |
| | 37.3 |
| | 2.6 |
| | 25.2 |
| | — |
| | 65.1 |
|
Cash, cash equivalents and restricted cash at beginning of period | | — |
| | 91.9 |
| | 0.1 |
| | 284.8 |
| | — |
| | 376.8 |
|
Cash, cash equivalents and restricted cash at end of period | | $ | — |
| | $ | 129.2 |
| | $ | 2.7 |
| | $ | 310.0 |
| | $ | — |
| | $ | 441.9 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis (MD&A) should be read in conjunction with the unaudited condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Unless the context otherwise requires, references to "we," "our," "us" or "AAM" shall mean collectively (i) American Axle & Manufacturing Holdings, Inc. (Holdings), a Delaware corporation, (ii) American Axle & Manufacturing, Inc. (AAM, Inc.), a Delaware corporation, and its direct and indirect subsidiaries, and, (iii) Metaldyne Performance Group, Inc. (MPG) and its direct and indirect subsidiaries. AAM Inc. and MPG are wholly-owned subsidiaries of Holdings.
COMPANY OVERVIEW
We are a global Tier 1 supplier to the automotive industry. We design, engineer and manufacture driveline and metal forming and casting products that are making the next generation of vehicles smarter, lighter, safer and more efficient. We employ over 25,000approximately 20,000 associates, operating at nearly 9080 facilities in 17 countries, to support our customers on global and regional platforms with a focus on quality, operational excellence and technology leadership.
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 (SUVs), and SUVscrossover 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 and Casting segments.segment. Sales to GM were approximately 38%40% of our consolidated net sales in the first nine months of 2019, and 41% of our consolidated net sales2020, 38% in both the first nine months of 20182019, and 37% for the full year 2018.2019.
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 and Casting segments.segment. Sales to FCA were approximately 16%18% of our consolidated net sales in the first nine months of 2020, 16% in the first nine months of 2019, and 13%17% for the full year 2019.
We are also a supplier to Ford Motor Company (Ford) for driveline system products on certain vehicle programs, and we sell various products to Ford from our Metal Forming segment. Sales to Ford were approximately 12% of our consolidated net sales in the first nine months of 2020, and were approximately 9% for both the first nine months of 20182019 and for the full year 2018.of 2019.
No other customer represented 10% or more of consolidated net sales during these periods.
Impact of Novel Coronavirus (COVID-19)
COVID-19 Operational Impact and AAM Actions
In March of 2020, COVID-19 was designated by the World Health Organization as a pandemic illness and began to significantly disrupt global automotive production. In an effort to mitigate the spread of COVID-19, many governmental and public health agencies in locations in which we operate implemented shelter-in-place orders or similar measures. The majority of our customers temporarily ceased or significantly reduced production near the end of March, which continued into the second half of the second quarter. As a result, substantially all of our manufacturing facilities either temporarily suspended production or experienced significant reductions in volumes during this period.
At AAM, safety is our top responsibility and that includes the health and wellness of our associates globally. In response to COVID-19, we instituted several operational measures to ensure the safety of our associates, which included the following:
•Assembled a COVID-19 Task Force comprised of AAM's senior leadership working closely with associates across several functions and regions to coordinate decision making and communication related to actions taken by AAM to mitigate the impact of COVID-19;
•Suspended or reduced production at manufacturing facilities and directed associates who could do so to work remotely;
•Maintained communication with customers, including planning for business resumption and monitoring announcements regarding new program deferrals or other changes;
•Initiated thorough cleaning and decontamination procedures at many of our manufacturing facilities in preparation for resuming production; and
•Designed additional safety measures to further protect associates as production is restored and our associates resume working in our global facilities.
By the end of the first quarter of 2020, our manufacturing locations in Asia, which were impacted by COVID-19 earlier than other global regions, were beginning to stabilize and return to more normalized levels of production. We restarted operations in North America and Europe in May 2020, and we have continued to ramp up production, along with our customers and supply base, through the third quarter of 2019, we entered into a definitive agreement2020. Continuing to sellmaintain more normalized levels of production will depend on future developments, including the U.S. operationspotential extension of shelter-in-place orders and increased levels of production by our customers, which are outside of our Casting segmentcontrol. We continue to entities affiliated with Gamut Capital Management, L.P (the Casting Sale Agreement). As a result,monitor the assetsimpact of COVID-19 on our suppliers, as well as on our customers and liabilitiestheir suppliers.
Financial Impact of COVID-19
We estimate that the impact of COVID-19 on net sales was approximately $87 million and $1,203 million for the three and nine months ended September 30, 2020, respectively. Further, we estimate that the impact to gross profit of this reduction in net sales was approximately $16 million and $362 million for the three and nine months ended September 30, 2020, respectively. Due to the significant uncertainty associated with this business have met the criteria to be classified as held-for-sale in our Condensed Consolidated Balance Sheet as of September 30, 2019. The saleextent of the U.S. operationsimpact of COVID-19, including the possibility of a resurgence of COVID-19 cases and our Casting segment did not qualify for classification as discontinued operations asability to sustain more normalized levels of production, we cannot estimate the sale does not represent a strategic shift in our business that has had, or will have, a major effectultimate impact of COVID-19 on our results of operations and financial results.condition.
In 2019,order to mitigate the financial impact of COVID-19, we initiated a new global restructuring program (the 2019 Program)have continued our emphasis on cost management, and have implemented additional measures to further streamlineadjust to our businesscustomers’ revised production schedules, including:
•Continuing to flex our variable cost structure;
•Continuing to manage our controllable expenses, net of costs to ensure the health and safety of our associates;
•Reducing the annual cash retainer for each non-employee director by consolidating40% through September 30, 2020;
•Reducing salaries for executive officers by 30% and for certain other associates by various percentages depending on level through September 30, 2020;
•Reducing our four existing segments into three segments. This activity occurredprojected capital expenditures for the year;
•Amending our Credit Agreement to, among other things, revise our financial maintenance covenants to provide additional financial flexibility; and
•Pursuing options to defer and reduce tax payments through the disaggregationCARES Act and similar global initiatives.
The measures we are taking to address the impact of COVID-19 are expected to remain in place until further clarity can be achieved regarding the recovery and stabilization of the global economy, as well as the resulting impact of COVID-19 on the global automotive industry. We expect to adjust our former Powertrain segment, with a portion moving into our Driveline segment and a portion moving into our Metal Forming segment. The primary objectivesuse 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. Throughout this MD&A, amounts previously reported for the Powertrain segment have been reclassifiedthese measures, to the Drivelineextent possible, based on production volumes and Metal Forming segments accordingly.
RESULTS OF OPERATIONS –– THREE MONTHS ENDED SEPTEMBER 30, 20192020 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 20182019
Net Sales Net sales were $1,414.1 million in the third quarter of 2020, as compared to $1,677.4 million in the third quarter of 2019 as compared to $1,817.0 million in the third quarter of 2018.2019. Our change in sales in the third quarter of 2019,2020, as compared to the third quarter of 2018,2019, primarily reflects an estimated reduction of approximately $87 million associated with the decline in global automotive production as a result of COVID-19, and a reduction of approximately $57$155 million associated with the impactas a result of the GM work stoppagesale of the U.S. operations of our Casting business that began duringwas completed in the thirdfourth quarter of 2019 and the impact of lower global automotive production volumes.(the Casting Sale). Net sales in the third quarter of 2019,2020, as compared to the third quarter of 2018,2019, also decreased by approximately $50$15 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 $1,164.3 million in the third quarter of 2020, as compared to $1,428.7 million in the third quarter of 2019, as compared to $1,549.6 million in the third quarter of 2018.2019. The change in cost of goods sold principally reflects aan estimated reduction of approximately $39$71 million associated with the impact of the GM work stoppage, and the impact of lowerdecline in global automotive production volumes.as a result of COVID-19, and a reduction of $153 million as a result of the Casting Sale. Cost of goods sold was also impacted by a decrease of approximately $50$15 million related to metal market pass-through costs and the impact of foreign exchange.exchange, as well as the impact of improved operating performance and lower launch costs and our emphasis on cost management, including the additional measures that we implemented in response to the impact of COVID-19.
For the three months ended September 30, 2019,2020, material costs were approximately 55%58% of total costscost of goods sold, as compared to approximately 58%55% for the three months ended September 30, 2018.2019.
Gross Profit Gross profit was $249.8 million in the third quarter of 2020, as compared to $248.7 million in the third quarter of 2019 as compared to $267.4 million2019. Gross margin was 17.7% in the third quarter of 2018. Gross margin increased2020, as compared to 14.8% in the third quarter of 2019 as compared to 14.7% in the third quarter of 2018.2019. 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 research and development (R&D)) was $66.5 million or 4.7% of net sales in the third quarter of 2020, as compared to $92.7 million or 5.5% of net sales in the third quarter of 2019 as compared to $96.32019. R&D expense, net of customer engineering, design and development (ED&D) recoveries, was approximately $18.0 million or 5.3% of net sales in the third quarter of 2018. R&D spending was approximately2020, as compared to $37.4 million in the third quarter of 2019 as compared to $37.7 million in the third quarter of 2018.2019. The changedecrease in SG&A expense in the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018, is2019, was primarily attributable to lower net R&D expense, which includes a customer ED&D recovery of approximately $15 million. The decrease in SG&A also reflects lower compensation-related expense.expense due, in part, to our restructuring initiatives and the impact of our emphasis on cost management, including the additional measures that we implemented in response to the impact of COVID-19.
Amortization of Intangible Assets Amortization expense related to intangible assets was $21.6 million for the three months ended September 30, 2020 and $23.7 million for the three months ended September 30, 20192019. The reduction in amortization expense related to intangible assets reflects the Casting Sale and $24.8 million for the three months ended September 30, 2018.disposal of the intangible assets associated with this business.
Impairment ChargeIn conjunction with the Casting Sale, Agreement, the assets and liabilities associated with this business have met the criteria to be classified as held-for-sale in our Condensed Consolidated Balance Sheet as of September 30, 2019. Upon reclassification to held-for-sale in the third quarter of 2019, 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.
Restructuring and Acquisition-Related Costs Restructuring and acquisition-related costs were $11.7 million in the third quarter of both 2019 and 2018. As part of our restructuring actions, we incurred severance charges of approximately $2.2 million, as well as implementation costs of approximately $4.2 million during the three months ended September 30, 2019. This compares to severance charges of $0.3 million and implementation charges of $3.3 million for the three months ended September 30, 2018.
During the three months ended September 30, 2019, we incurred $5.3 million of integration expenses primarily associated with the ongoing integration of MPG. This compares to $0.1 million of acquisition-related costs and $5.3 million of integration expenses incurred during the three months ended September 30, 2018. Acquisition-related costs primarily consist of advisory, legal, accounting, valuation and certain other professional fees incurred. Integration expenses reflect costs incurred for information technology systems, ongoing operational activities, and consulting fees incurred in conjunction with acquisitions.
In the three months ended September 30, 2018, we initiated actions to exit operations at a manufacturing facility in our Driveline segment. 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 a charge of $2.7 million for the three months ended September 30, 2018.
Operating Income (Loss) Operating loss was $104.4 million in the third quarter of 2019, as compared to operating income of $134.6 million in the third quarter of 2018. Operating margin was (6.2)% in the third quarter of 2019, as compared to 7.4% in the third quarter of 2018. The changes in operating income (loss) and operating margin were primarily due to factors discussed in Net Sales, Cost of Goods Sold, SG&A, and Impairment Charge above.
Interest Expense and Investment Income Interest expense was $54.3 million in the third quarter of 2019, as compared to $54.9 million in the third quarter of 2018. Investment income was $2.2 million in the third quarter of 2019 as compared to $0.6 million in the third quarter of 2018.
The weighted-average interest rate of our long-term debt outstanding was 5.8% in the third quarter of 2019 and 5.9% in the third quarter of 2018.
Debt Refinancing and Redemption Costs In July 2019, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the First Amendment (First Amendment) to the Credit Agreement (as amended by the First Amendment, the Amended Credit Agreement). The First Amendment, among other things, 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), 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 remain 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.
In the third quarter of 2019, 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.
Other Expense, Net Other expense, net 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 cost. Other expense, net was $2.9 million in the third quarter of 2019, as compared to $4.8 million in the third quarter of 2018.
Income Tax Expense Income tax was a benefit of $40.4 million for the three months ended September 30, 2019, as compared to expense of $11.5 million for the three months ended September 30, 2018. Our effective income tax rate was 24.6% in the third quarter of 2019, as compared to 15.2% in the third quarter of 2018.
Our effective income tax rate for the three months ended September 30, 2019 varies from our effective income tax rate for the three months ended September 30, 2018 primarily due to an income tax benefit of $47.2 million recognized during the third quarter of 2019 as a result of the impairment charge recorded upon reclassifying the assets and liabilities of the U.S. Casting business to held-for-sale.
For the three months ended September 30, 2019 and 2018, our effective income tax rates vary from the U.S. federal statutory rate of 21% primarily due to favorable foreign tax rates, as well as the impact of tax credits and the effect of the discrete item described above.
Net Income (Loss) Attributable to AAM and Earnings (Loss) Per Share (EPS) Net income (loss) attributable to AAM was a loss of $124.2 million in the third quarter of 2019, as compared to income of $63.8 million in the third quarter of 2018. Diluted loss per share was $1.10 in the third quarter of 2019, as compared to diluted earnings per share of $0.55 in the third quarter of 2018. Net income (loss) attributable to AAM and EPS for the third quarters of 2019 and 2018 were primarily impacted by the factors discussed above.
RESULTS OF OPERATIONS –– NINE MONTHS ENDED SEPTEMBER 30, 2019 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2018
Net Sales Net sales were $5,100.9 million in the first nine months of 2019 as compared to $5,576.3 million in the first nine months of 2018. Our change in sales in the first nine months of 2019, as compared to the first nine months of 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, as well as the impact of customer downtime as a result of program changeovers in the first quarter of 2019 and lower volumes on certain crossover vehicle programs that we support.
Net sales for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, also decreased by approximately $57 million associated with the impact of the GM work stoppage, and $96 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 GM work stoppage continued into the fourth quarter of 2019 and we estimate the full year impact of the GM work stoppage on sales to be approximately $250 million.
Cost of Goods Sold Cost of goods sold was $4,381.7 million in the first nine months of 2019 as compared to $4,661.2 million in the first nine months of 2018. The change in cost of goods sold principally reflects the impact of lower global automotive production volumes, a decrease of approximately $39 million associated with the impact of the GM work stoppage, and a decrease of approximately $96 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, and an increase in depreciation expense of approximately $21 million as a result of significant program launch activity in 2018.
For the nine months ended September 30, 2019, material costs were approximately 56% of total costs of goods sold as compared to approximately 59% for the nine months ended September 30, 2018.
Gross Profit Gross profit was $719.2 million in the first nine months of 2019 as compared to $915.1 million in the first nine months of 2018. Gross margin was 14.1% in the first nine months of 2019 as compared to 16.4% in the first nine months of 2018. Gross profit and gross margin were impacted by the factors discussed in Net Sales and Cost of Goods Sold above.
SG&A SG&A (including R&D) was $274.7 million or 5.4% of net sales in the first nine months of 2019 as compared to $288.6 million or 5.2% of net sales in the first nine months of 2018. R&D spending was approximately $104.9 million in the first nine months of 2019 as compared to $110.3 million in the first nine months of 2018. The change in SG&A in the first nine months of 2019, as compared to the first nine months of 2018, was primarily attributable to a decrease in R&D spending and lower compensation-related expense.
Amortization of Intangible Assets Amortization expense related to intangible assets for the nine months ended September 30, 2019 was $73.6 million as compared to $74.5 million for the nine months ended September 30, 2018.
Impairment Charge In conjunction with the Casting Sale Agreement, the assets and liabilities associated with this business have met the criteria to be classified as held-for-sale in our Condensed Consolidated Balance Sheet as of September 30, 2019. Upon reclassification to held-for-sale in the third quarter of 2019, 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.
Restructuring and Acquisition-Related Costs Restructuring and acquisition-related costs were $36.0 million for the nine months ended September 30, 2019, as compared to $66.8 million for the nine months ended September 30, 2018. As part of our restructuring actions, we incurred severance charges of approximately $10.4 million and $2.3 million, as well as implementation costs, including professional expenses, of approximately $13.1 million and $8.8 million, during the nine months ended September 30, 2019 and 2018, respectively. We expect to incur approximately $30 million to $35 million of total restructuring charges in 2019, including costs incurred under the 2019 Program.
During the nine months ended September 30, 2019, we incurred $12.5 million of integration expenses primarily associated with the ongoing integration of MPG. This compares to $1.2 million of acquisition-related costs and $27.9 million of integration expenses incurred during the nine months ended September 30, 2018. We expect to incur total integration charges of approximately $15 million to $20$9.7 million in 2019 as we further the integrationthird quarter of MPG.
Acquisition-related costs primarily consist of advisory, legal, accounting, valuation2020 and certain other professional fees incurred. Integration expenses reflect costs incurred for information technology systems, ongoing operational activities, and consulting fees incurred in conjunction with acquisitions.
In the first nine months of 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 a charge of $26.6$11.7 million for the nine months ended September 30, 2018.
Gain on Sale of Business 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 on salethird quarter of business line item of our Condensed Consolidated Statement of Income2019. See Note 2 - Restructuring and Acquisition-Related Costs for the nine months ended September 30, 2018.additional detail.
Operating Income (Loss) Operating income was $109.9$152.0 million in the first nine monthsthird quarter of 20192020, as compared to $500.7operating loss of $104.4 million in the first nine monthsthird quarter of 2018.2019. Operating margin was 2.2%10.7% in the first nine monthsthird quarter of 20192020, as compared to 9.0%(6.2)% in the first nine monthsthird quarter of 2018.2019. The changes in operating income (loss) and operating margin were primarily due to factors discussed in Net Sales, Cost of Goods Sold, SG&A and Impairment Charge Restructuring and Acquisition-Related Costs and Gain on Sale of Business above.
Interest Expense and InvestmentInterest Income Interest expense was $163.9$53.9 million in the first nine monthsthird quarter of 20192020, as compared to $162.5$54.3 million in the first nine monthsthird quarter of 2018. Investment2019. Interest income was $3.4 million in the first nine monthsthird quarter of 20192020, as compared to $1.6$2.2 million in the first nine monthsthird quarter of 2018.
2019. The weighted-average interest rate of our long-term debt outstanding was 5.9% for5.6% in the nine months ended September 30, 2019third quarter of 2020 and 5.8% forin the nine months ended September 30, 2018. We expect our interest expense for the full year 2019 to be approximately $215 million to $225 million.third quarter of 2019.
Debt Refinancing and Redemption CostsIn Julythe third quarter of 2020, we voluntarily redeemed the remaining portion of our 6.625% Notes due 2022, which resulted in a principal payment of $350 million and the payment of $5.7 million in accrued interest. We expensed approximately $1.3 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 $3.9 million for the payment of an early redemption premium.
In the third quarter of 2019, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the First Amendment to the Credit Agreement. The First Amendment, among other things, established $340 million in incremental term loan A commitments under the Amended Credit Agreement withAs a maturity date of July 29, 2024, 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 remain 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.
In the third quarter of 2019,result, 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 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 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. During the nine months ended September 30, 2018, 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.
In May 2018, we voluntarily redeemed a portion of our 6.625% Notes due 2022. This resulted in a principal payment of $100.0 million, and a payment of $0.8 million in accrued interest. During the nine months ended September 30, 2018, 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.
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.
Other Expense, Net Other expense, net 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 cost. Other expense, net was $9.0$1.6 million in the first nine monthsthird quarter of 20192020, as compared to $4.6$2.9 million in the first nine monthsthird quarter of 2018. The change in other expense, net was primarily attributable to increased net expense associated with the components of net periodic pension and postretirement benefit costs other than service cost.2019.
Income Tax ExpenseBenefit Income tax was a benefit of $37.4$22.5 million for the ninethree months ended September 30, 20192020, as compared to expensea benefit of $31.4$40.4 million for the ninethree months ended September 30, 2018.2019. Our effective income tax rate was 55.7%(23.8)% in the first nine monthsthird quarter of 20192020, as compared to 9.3%24.6% in the first ninethird quarter of 2019.
We review the likelihood that we will realize the benefit of deferred tax assets and estimate whether recoverability of our deferred tax assets is "more likely than not" based on the available evidence. During the previous three month period ended June 30, 2020, we determined that a portion of our deferred tax assets related to U.S. interest expense carryforwards were not more likely than not to be realized and, as such, we recorded a valuation allowance resulting in tax expense of approximately $36.0 million during the second quarter of 2020.
As enacted under the Tax Cuts and Jobs Act (TCJA), on December 22, 2017, and as amended by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), section 163(j) of the Internal Revenue Code generally limits the deductibility of net business interest expense to 30% (or for certain years as provided under the CARES Act, 50%) of “adjusted taxable income” for taxable years beginning after December 31, 2017. On July 28, 2020, the Internal Revenue Service and the U.S. Department of Treasury issued final regulations (the Final Regulations) and concurrently issued new proposed regulations (the New Proposed Regulations) under section 163(j) that provide a number of important additional changes and clarifications to the Final Regulations. Based upon the Final Regulations and New Proposed Regulations, which were issued during the three months ended September 30, 2020, as well as the amendments to section 163(j) made by the CARES Act, we have determined that our deferred tax assets related to U.S. interest expense carryforwards are more likely than not to be realized and, as such, we have released the valuation allowance recorded during the second quarter of 2018.2020 resulting in approximately $36.0 million in tax benefit during the three month period ended September 30, 2020.
Due to the uncertainty associated with the extent and ultimate impact of COVID-19 on global automotive production volumes, we may experience lower than projected earnings in certain jurisdictions in future periods, and it is reasonably possible that changes in valuation allowances could be recognized in the next twelve months as a result.
Our effective income tax rate for the ninethree months ended September 30, 20192020 varies from our effective income tax rate for the nine months ended September 30, 2018, primarily due to an income tax benefit of $47.2 million recognized during the ninethree months ended September 30, 2019 as a result of the impairment charge recorded upon reclassifyingitems described above. For the assets and liabilities of the U.S. Casting business to held-for-sale. In addition, as part of the Tax Cuts and Jobs Act in 2017, 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 the ninethree months ended September 30, 2019, the period in which the final regulations were issued.
Our effective income tax rate for the nine months ended September 30, 2018 was impacted by certain discrete income tax items recognized during this period. During the first nine months of 2018, we recognized a discrete tax benefit as a result of finalizing an advance pricing agreement in a foreign jurisdiction, which resulted in a reduction of our liability for unrecognized income tax benefits2020 and related interest and penalties of $20.0 million. Also in the first nine months of 2018, we recognized a discrete tax expense related to the sale of the aftermarket business associated with our former Powertrain segment.
For the nine months ended September 30, 2019, and 2018, our effective income tax rates vary from the U.S. federal statutory rate of 21% primarily due to favorable foreign tax rates, as well as the impact of tax credits and the effect of the discrete items described above.
Net Income (Loss) Attributable to AAM and Earnings (Loss) Per Share (EPS) Net income (loss) attributable to AAM was income of $117.2 million in the third quarter of 2020, as compared to a loss of $124.2 million in the third quarter of 2019. Diluted earnings per share was $0.99 in the third quarter of 2020, as compared to diluted loss per share of $1.10 in the third quarter of 2019. Net income (loss) attributable to AAM and EPS for the third quarters of 2020 and 2019 were primarily impacted by the factors discussed above.
RESULTS OF OPERATIONS –– NINE MONTHS ENDED SEPTEMBER 30, 2020 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2019
Net Sales Net sales were $3,272.9 million in the first nine months of 2020 as compared to $5,100.9 million in the first nine months of 2019. Our change in sales in the first nine months of 2020, as compared to the first nine months of 2019, primarily reflects an estimated reduction of approximately $1,203 million associated with the decline in global automotive production as a result of COVID-19, and a reduction of $509 million as a result of the Casting Sale. Net sales for the first nine months of 2020, as compared to the first nine months of 2019, also decreased by approximately $88 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments.
Cost of Goods Sold Cost of goods sold was $2,926.7 million in the first nine months of 2020 as compared to $4,381.7 million in the first nine months of 2019. The change in cost of goods sold principally reflects an estimated reduction of approximately $841 million associated with the decline in global automotive production as a result of COVID-19, and a reduction of $492 million as a result of the Casting Sale. Cost of goods sold was also impacted by a decrease of approximately $88 million related to metal market pass-through costs and the impact of foreign exchange, as well as the impact of improved operating performance and lower launch costs and our emphasis on cost management, including the additional measures that we implemented in response to the impact of COVID-19.
For the nine months ended September 30, 2020, material costs were approximately 54% of total costs of goods sold as compared to approximately 56% for the nine months ended September 30, 2019. Material costs as a percentage of cost of goods sold declined as a result of lower product shipments caused by COVID-19, which drove lower material costs and caused fixed costs to be a greater component of cost of goods sold.
Gross Profit Gross profit was $346.2 million in the first nine months of 2020 as compared to $719.2 million in the first nine months of 2019. Gross margin was 10.6% in the first nine months of 2020 as compared to 14.1% in the first nine months of 2019. Gross profit and gross margin were impacted by the factors discussed in Net Sales and Cost of Goods Sold above. While we were able to significantly reduce our variable costs during the nine months ended September 30, 2020, the sharp decline in sales that began during the first quarter and extended into the second quarter, as well as the magnitude of the decline in sales, resulted in a reduction of both gross profit and gross margin.
SG&A SG&A (including R&D) was $230.6 million or 7.0% of net sales in the first nine months of 2020 as compared to $274.7 million or 5.4% of net sales in the first nine months of 2019. R&D expense, net of ED&D recoveries, was approximately $86.3 million in the first nine months of 2020 as compared to $104.9 million in the first nine months of 2019. The decrease in SG&A in the first nine months of 2020, as compared to the first nine months of 2019, was primarily attributable to lower net R&D expense, which includes a customer ED&D recovery of approximately $15 million. The decrease in SG&A also reflects lower compensation-related expense due, in part, to our restructuring initiatives and the impact of our emphasis on cost management, including the additional measures that we implemented in response to the impact of COVID-19.
The increase in SG&A as a percentage of sales during the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, was primarily attributable to the decline in sales as a result of COVID-19.
Amortization of Intangible Assets Amortization expense related to intangible assets for the nine months ended September 30, 2020 was $65.0 million as compared to $73.6 million for the nine months ended September 30, 2019. The reduction in amortization expense related to intangible assets reflects the Casting Sale and the disposal of the intangible assets associated with this business.
Impairment Charges In the first nine months of 2020, the reduction in global automotive production volumes caused by the impact of COVID-19 represented an indicator to test our goodwill for impairment. As a result of this goodwill impairment test, we determined that the carrying values of our Driveline and Metal Forming reporting units were greater than their respective fair values. As such, we recorded a total goodwill impairment charge of $510.0 million in the first nine months of 2020. See Note 3 - Goodwill and Other Intangible Assets for further detail.
In conjunction with the Casting Sale, the assets and liabilities associated with this business met the criteria to be classified as held-for-sale in our Condensed Consolidated Balance Sheet as of September 30, 2019. Upon reclassification to held-for-sale in the third quarter of 2019, 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.
Restructuring and Acquisition-Related Costs Restructuring and acquisition-related costs were $38.6 million for the nine months ended September 30, 2020, as compared to $36.0 million for the nine months ended September 30, 2019. We expect to incur approximately $70 million to $80 million of total restructuring charges in 2020 and we expect to incur integration charges of $10 million to $15 million in 2020 as we finalize the integration of ERP systems at legacy MPG locations. See Note 2 - Restructuring and Acquisition-Related Costs for additional detail regarding our restructuring and integration activity.
Loss on Sale of Business In the first nine months of 2020, we finalized certain customary post-closing calculations associated with the Casting Sale, resulting in an additional loss on sale of $1.0 million.
Operating Income (Loss) Operating income (loss) was a loss of $499.0 million in the first nine months of 2020 as compared to income of $109.9 million in the first nine months of 2019. Operating margin was (15.2)% in the first nine months of 2020 as compared to 2.2% in the first nine months of 2019. The changes in operating income (loss) and operating margin were due primarily to the factors discussed in Net Sales, Cost of Goods Sold, Gross Profit, SG&A, and Impairment Charges above.
Interest Expense and Interest Income Interest expense was $160.0 million in the first nine months of 2020 as compared to $163.9 million in the first nine months of 2019. Interest income was $9.2 million in the first nine months of 2020 as compared to $3.4 million in the first nine months of 2019. The weighted-average interest rate of our long-term debt outstanding was 5.6% for the nine months ended September 30, 2020 and 5.9% for the nine months ended September 30, 2019. We expect our interest expense for the full year 2020 to be approximately $205 million to $215 million.
Debt Refinancing and Redemption Costs In the first quarter of 2020, we voluntarily redeemed $100 million of our 6.625% Notes due 2022. As a result, we expensed approximately $0.4 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 $1.1 million for the payment of an early redemption premium.
In the third quarter of 2020, we voluntarily redeemed the remaining portion of our 6.625% Notes due 2022, which resulted in a principal payment of $350 million and the payment of $5.7 million in accrued interest. We expensed approximately $1.3 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 $3.9 million for the payment of an early redemption premium.
In the first nine months of 2019, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the First Amendment to the Credit Agreement. As a result, 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.
Also in the first nine months of 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 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.
Other Expense, Net Other expense, net 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 cost. Other expense, net was $3.8 million in the first nine months of 2020 as compared to $9.0 million in the first nine months of 2019.
Income Tax Benefit Income tax was a benefit of $63.1 million for the nine months ended September 30, 2020 as compared to a benefit of $37.4 million for the nine months ended September 30, 2019. Our effective income tax rate was 9.6% in the first nine months of 2020 as compared to 55.7% in the first nine months of 2019.
During the nine months ended September 30, 2020, we recognized the impact of the items discussed under Income Tax Benefit in the "Results of Operations - Three Months Ended September 30, 2020 as Compared to Three Months Ended September 30, 2019" section of this MD&A. Additionally, we recognized a tax benefit in the second quarter of 2020 of approximately $7.0 million related to our ability to carry back projected current year losses under the CARES Act to years with the previous 35% tax rate. Further, during the nine months ended September 30, 2020, we recognized a net tax benefit of approximately $7.5 million related to our ability to carry back losses from prior years under the CARES Act and finalized an advance pricing agreement in a foreign jurisdiction, which resulted in a tax benefit of approximately $6.8 million.
Our effective income tax rate for the nine months ended September 30, 2020 varies from our effective income tax rate for the nine months ended September 30, 2019, as a result of the items described above, and also as a result of the impact of the goodwill impairment charge recorded during the first nine months of 2020, which had no corresponding income tax benefit. In addition, in the first nine months of 2019, we recognized an income tax benefit of $9.3 million related to final regulations issued by the Department of Treasury and Internal Revenue Service in the first quarter of 2019. The final regulations changed the manner in which we were required to compute the one-time transition tax under the Tax Cuts and Jobs Act that was imposed on certain foreign earnings for which U.S. income tax was previously deferred.
For the nine months ended September 30, 2020 and 2019, our effective income tax rates vary from the U.S. federal statutory rate of 21% primarily due to favorable foreign tax rates, as well as the impact of tax credits and the effect of the items described above.
Net Income (Loss) Attributable to AAM and Earnings (Loss) Per Share (EPS) Net income (loss) attributable to AAM was a loss of $597.3 million in the first nine months of 2020 as compared to a loss of $30.1 million in the first nine months of 2019 as compared to income2019. Diluted EPS was a loss of $304.3 million$5.28 per share in the first nine months of 2018. Diluted EPS was2020 as compared to a loss of $0.27 per share in the first nine months of 2019 as compared to earnings of $2.63 per share in the first nine months of 2018.
2019. Net income (loss) attributable to AAM and EPS for the first nine months of 20192020 and 20182019 were primarily impacted by the factors discussed above.
SEGMENT REPORTING
In the first quarter of 2019, we reorganized ourOur business to disaggregate our former Powertrain segment, with a portion moving to our Driveline segment and a portion moving to our Metal Forming segment. As a result, our business is now organized into Driveline and Metal Forming and Casting segments, with each representing a reportable segment under ASC 280 Segment Reporting. In the fourth quarter of 2019, we completed the Casting Sale. The PowertrainCasting 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 for the periods prior to the sale, and the reported amounts are now comprised entirely of the U.S. casting operations that were included in the sale. The amounts previously reported in our Casting segment for the three and nine months ended September 30, 2018retained operations in El Carmen, Mexico have been reclassified to our Driveline and Metal Forming.segment for the periods presented.
The results of each segment are regularly reviewed by the chief operating decision maker to assess the performance of the segment and make decisions regarding the allocation of resources to the segments.
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, SUVs, crossover vehicles, passenger cars and commercial vehicles; and
•Metal Forming products consist primarily of axle and transmission shafts, ring and pinion gears, differential gears and assemblies, connecting rods and variable valve timing products for Original Equipment Manufacturers and Tier 1 automotive suppliers; andsuppliers.
Casting products consist of 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.
The following table represents sales by reportable segment for the three and nine months ended September 30, 20192020 and 20182019 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
Driveline | $ | 1,094.5 | | | $ | 1,186.8 | | | $ | 2,529.9 | | | $ | 3,534.6 | | | | | |
Metal Forming | 433.2 | | | 476.6 | | | 1,005.8 | | | 1,444.1 | | | | | |
Casting | — | | | 168.4 | | | — | | | 541.6 | | | | | |
Eliminations | (113.6) | | | (154.4) | | | (262.8) | | | (419.4) | | | | | |
Net Sales | $ | 1,414.1 | | | $ | 1,677.4 | | | $ | 3,272.9 | | | $ | 5,100.9 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Driveline | $ | 1,146.7 |
| | $ | 1,228.2 |
| | $ | 3,422.5 |
| | $ | 3,718.6 |
|
Metal Forming | 476.6 |
| | 509.0 |
| | 1,444.1 |
| | 1,581.7 |
|
Casting | 209.0 |
| | 219.1 |
| | 655.0 |
| | 701.3 |
|
Eliminations | (154.9 | ) | | (139.3 | ) | | (420.7 | ) | | (425.3 | ) |
Net Sales | $ | 1,677.4 |
| | $ | 1,817.0 |
| | $ | 5,100.9 |
| | $ | 5,576.3 |
|
The change in Driveline sales for the three months ended September 30, 2019, as compared to the three months ended September 30, 2018, primarily reflects the impact of the GM work stoppage, and a reduction of approximately $27 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments.
The change in Driveline sales for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 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, as well as lower volumes on certain crossover vehicle programs that we support. Driveline sales for the nine months ended September 30, 2019 were also negatively impacted by the GM work stoppage, and by approximately $70 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. This was partially offset by the impact of program launches associated with our new business backlog.
The change in net sales in our Metal Forming segment in the three and nine months ended September 30, 2019,2020, as compared to the three and nine months ended September 30, 2018, reflect lower2019, primarily reflects estimated reductions of approximately $73 million and $992 million, respectively, associated with the impact of the decline in global automotive production volumes, as well as a reduction in intersegment sales to our Driveline segment due to the factors discussed for Driveline above. Also for the three and nine months ended September 30, 2019, as compared to the three and nine months ended September 30, 2018, Metal Forming sales were negatively impacted byresult of COVID-19. These estimated reductions include approximately $17$73 million and $26$934 million, respectively, related to external customers. The
change in Driveline sales also reflects a reduction of approximately $11 million and $47 million, respectively, associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments.
The change in net sales in our Metal Forming segment in the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, primarily reflects estimated reductions of approximately $15 million and $380 million, respectively, associated with the impact of the decline in global automotive production as a result of COVID-19. These estimated reductions include approximately $14 million and $269 million, respectively, related to external customers. Also for the three and nine months ended September 30, 2020, as compared to the three and nine months ended September 30, 2019, Metal Forming sales were impacted by a reduction of approximately $4 million and $41 million, respectively, associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments.
The change in net sales in our Casting segment in the three and nine months ended September 30, 2019,2020, as compared to the three and nine months ended September 30, 2018, reflect lower production volumes, partially offset by price increases to customers2019, is the result of approximately $6 million for the three months and $9 million forCasting Sale that was completed in the nine months ended September 30, 2019.fourth quarter of 2019 as AAM no longer operates in this business.
We use Segment Adjusted EBITDA as the measure of earnings to assess the performance of each segment and determine the resources to be allocated to the segments. We define EBITDA to be earnings before interest expense, income taxes, depreciation and amortization. Segment Adjusted EBITDA is defined as EBITDA for our reportable segments excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, gain (loss) on the sale of a business, impairment charges, pension settlements, and non-recurring items.
The amounts for Segment Adjusted EBITDA for the three and nine months ended September 30, 20192020 and 20182019 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
Driveline | $ | 207.4 | | | $ | 181.0 | | | $ | 315.5 | | | $ | 485.9 | | | | | |
Metal Forming | 89.7 | | | 79.3 | | | 142.8 | | | 250.2 | | | | | |
Casting | — | | | 5.5 | | | — | | | 40.7 | | | | | |
Total segment adjusted EBITDA | $ | 297.1 | | | $ | 265.8 | | | $ | 458.3 | | | $ | 776.8 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Driveline | $ | 171.6 |
| | $ | 176.9 |
| | $ | 461.7 |
| | $ | 570.9 |
|
Metal Forming | 80.4 |
| | 83.6 |
| | 253.7 |
| | 306.0 |
|
Casting | 13.8 |
| | 14.5 |
| | 61.4 |
| | 63.0 |
|
Total segment adjusted EBITDA | $ | 265.8 |
| | $ | 275.0 |
| | $ | 776.8 |
| | $ | 939.9 |
|
For the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, the increase in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to improved operating performance and lower launch costs, as well as the impact of a customer ED&D recovery of approximately $15 million during the third quarter of 2020. The increase in Driveline Segment Adjusted EBITDA also reflects our continued emphasis on cost management, and the additional measures that we implemented in response to COVID-19. These favorable factors were partially offset by lower net global automotive production volumes as a result of COVID-19.
For the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, the change in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to lower net global automotive production volumes as well as a decrease associated withresult of the GM work stoppage.impact of COVID-19. This was partially offset by approximately $8 million associated withimproved operating performance and lower net manufacturing costs.
For the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, the change in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to lower global automotive production volumes,launch costs, as well as the impact of a customer ED&D recovery of approximately $15 million. The change in product mix due to customer downtime as a result of program changeovers in the first quarter of 2019, andDriveline Segment Adjusted EBITDA also reflects the impact of our continued emphasis on cost management, and the GM work stoppage.additional measures that we implemented in response to the impact of COVID-19.
The changeincrease in Metal Forming Segment Adjusted EBITDA for the three months ended September 30, 2019,2020, as compared to the three months ended September 30, 2018,2019, was primarily attributable to improved operating performance, as well as the impact of our continued emphasis on cost management, and the additional measures that we implemented in response to COVID-19. These favorable factors were partially offset by lower net global automotive production volumes partially offset by approximately $5 million associated with lower net manufacturing costs. Foras a result of COVID-19.
The change in Metal Forming Segment Adjusted EBITDA for the nine months ended September 30, 2019,2020, as compared to the nine months ended September 30, 2018,2019, was primarily attributable to the impact of the decline in global automotive production as a result of the impact of COVID-19. This was partially offset by improved operating performance, as well as the impact of our continued emphasis on cost management, and the additional measures that we implemented in response to the impact of COVID-19.
The change in Segment Adjusted EBITDA for the Metal Formingour Casting segment 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 change in Casting Segment Adjusted EBITDA for the three and nine months ended September 30, 2019,2020, as compared to the three and nine months ended September 30, 20182019, was primarily attributable to lower production volumes, offset by the impactresult of price increases to customers.the Casting Sale that was completed in the fourth quarter of 2019 as AAM no longer operates in this business.
Reconciliation of Non-GAAP and GAAP Information
In addition to results reported in accordance with accounting principles generally accepted in the United States of America (GAAP) in this MD&A, we have provided certain non-GAAP financial measures such as EBITDA and Total Segment Adjusted EBITDA. Such information is reconciled to its closest GAAP measure in accordance with Securities and Exchange Commission rules below.
We define EBITDA to be earnings before interest expense, income taxes, depreciation and amortization. Total Segment Adjusted EBITDA is defined as EBITDA for our reportable segments excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, gain (loss) on the sale of a business, impairment charges, pension settlements, and non-recurring items. We believe that EBITDA 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
Net income (loss) | $ | 117.2 | | | $ | (124.1) | | | $ | (597.2) | | | $ | (29.7) | | | | | |
Interest expense | 53.9 | | | 54.3 | | | 160.0 | | | 163.9 | | | | | |
Income tax benefit | (22.5) | | | (40.4) | | | (63.1) | | | (37.4) | | | | | |
Depreciation and amortization | 125.0 | | | 134.2 | | | 393.7 | | | 411.5 | | | | | |
EBITDA | $ | 273.6 | | | $ | 24.0 | | | $ | (106.6) | | | $ | 508.3 | | | | | |
Restructuring and acquisition-related costs | 9.7 | | | 11.7 | | | 38.6 | | | 36.0 | | | | | |
Debt refinancing and redemption costs | 5.2 | | | 5.1 | | | 6.7 | | | 7.5 | | | | | |
Impairment charges | — | | | 225.0 | | | 510.0 | | | 225.0 | | | | | |
Loss on sale of business | — | | | — | | | 1.0 | | | — | | | | | |
Non-recurring items: | | | | | | | | | | | |
Malvern Fire charges, net of recoveries | 8.6 | | | — | | | 8.6 | | | — | | | | | |
Total segment adjusted EBITDA | $ | 297.1 | | | $ | 265.8 | | | $ | 458.3 | | | $ | 776.8 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income (loss) | $ | (124.1 | ) | | $ | 64.0 |
| | $ | (29.7 | ) | | $ | 304.8 |
|
Interest expense | 54.3 |
| | 54.9 |
| | 163.9 |
| | 162.5 |
|
Income tax expense (benefit) | (40.4 | ) | | 11.5 |
| | (37.4 | ) | | 31.4 |
|
Depreciation and amortization | 134.2 |
| | 132.9 |
| | 411.5 |
| | 390.9 |
|
EBITDA | $ | 24.0 |
| | $ | 263.3 |
|
| $ | 508.3 |
|
| $ | 889.6 |
|
Restructuring and acquisition-related costs | 11.7 |
| | 11.7 |
| | 36.0 |
| | 66.8 |
|
Debt refinancing and redemption costs | 5.1 |
| | — |
| | 7.5 |
| | 14.6 |
|
Impairment charge | 225.0 |
| | — |
| | 225.0 |
| | — |
|
Gain on sale of business | — |
| | — |
| | — |
| | (15.5 | ) |
Non-recurring items: | | | | | | | |
Gain on settlement of capital lease | — |
| | — |
| | — |
| | (15.6 | ) |
Total segment adjusted EBITDA | $ | 265.8 |
| | $ | 275.0 |
|
| $ | 776.8 |
|
| $ | 939.9 |
|
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund debt service obligations, capital expenditures and working capital requirements, in addition to advancing our strategic initiatives. We believe that operating cash flow, available cash and cash equivalent balances and available borrowing capacity under our Senior Secured Credit Facilities and foreign credit facilities will be sufficient to meet these needs.
COVID-19 Considerations Related to Liquidity and Capital Resources
In order to mitigate the financial impact of COVID-19, we have implemented measures to conserve cash and protect our liquidity position, including:
•Continuing to flex our variable cost structure;
•Continuing to manage our controllable expenses, net of costs to ensure the health and safety of our associates;
•Reducing the annual cash retainer for each non-employee director by 40% through September 30, 2020;
•Reducing salaries for executive officers by 30% and for certain other associates by various percentages depending on level through September 30, 2020;
•Reducing our projected capital expenditures for the year;
•Amending our Credit Agreement to, among other things, revise our financial maintenance covenants to provide additional financial flexibility; and
•Pursuing options to defer and reduce tax payments through the CARES Act and similar global initiatives.
At September 30, 2020, we had nearly $1.5 billion of liquidity consisting of approximately $537 million of cash and cash equivalents, approximately $891 million of available borrowings under our Revolving Credit Facility and approximately $55 million of available borrowings under foreign credit facilities. We have no significant debt maturities before 2024. Based on our cash and cash equivalents, together with available borrowings under credit facilities, and the measures we are taking to conserve cash, we believe that our current liquidity position and projected operating cash flows will be sufficient to meet our primary cash needs for the next 12 months.
Operating Activities In the first nine months of 2019,2020, net cash provided by operating activities was $378.6$246.4 million as compared to $513.2$378.6 million in the first nine months of 2018.2019. The following factors impacted cash from operating activities in the first nine months of 20192020, as compared to the first nine months of 2018:2019:
Accounts receivableImpact of COVID-19 ForWe experienced lower earnings and cash flows from operating activities as a result of the significant reduction in production volumes during the nine months ended September 30, 2019, we experienced an increase in cash flow from operating activities of approximately $140 million related2020 due to the change in our accounts receivable balance from December 31, 2018 to September 30, 2019, as compared to the change in our accounts receivable balance from December 31, 2017 to September 30, 2018. This changeimpact of COVID-19.
Income taxes Income taxes paid (refunds received), net was primarily attributable to lower sales, as well as the timinga refund of payments related to customer receivables.
Inventories For the nine months ended September 30, 2019, we experienced an increase in cash flow from operating activities of approximately $86 million related to the change in our inventories balance from December 31, 2018 to September 30, 2019, as compared to the change in our inventories balance from December 31, 2017 to September 30, 2018. This change was primarily the result of increased levels of inventories as of September 30, 2018 in preparation for program changeovers and new launch activity that occurred in the second half of 2018. As of September 30, 2019, inventories have decreased as the program changeovers and new launch activity have transitioned into production, and as a result of inventory reduction initiatives in 2019.
Accounts payable and accrued expenses For the nine months ended September 30, 2019, we experienced a decrease in cash flow from operating activities of approximately $180 million related to the change in our accounts payable and accrued expenses balances from December 31, 2018 to September 30, 2019, as compared to the change in our accounts payable and accrued expenses balances from December 31, 2017 to September 30, 2018. This change was attributable primarily to accounts payable and was the result of increased levels of accounts payable as of September 30, 2018 in preparation for program changeovers and new launch activity that occurred in the second half of 2018. As of September 30, 2019, there has been a decrease in accounts payable primarily associated with the decrease in inventories as discussed above.
Interest paid Interest paid in the first nine months of 2019 was $136.3 million, as compared to $127.8$5.2 million in the first nine months of 2018.2020 as compared to taxes paid of $45.7 million in the first nine months of 2019. During the third quarter of 2020, we received an income tax refund of approximately $31 million related to the utilization of net operating losses under the provisions of the CARES Act. See Note 1 - Organization and Basis of Presentation for additional detail regarding the CARES Act.
Also in the first nine months of 2020, we finalized an advance pricing agreement in a foreign jurisdiction, which resulted in a cash payment to the tax authorities of $18.5 million, and a reduction of our liability for unrecognized tax benefits and related interest and penalties of $25.3 million. As of September 30, 2020 and December 31, 2019, we have recorded a liability for unrecognized income tax benefits and related interest and penalties of $23.3 million and $52.6 million, respectively.
Restructuring and acquisition-related costs For the full year 2019,2020, we expect restructuring and acquisition-related payments in cash flows from operating activities to be between $55 million and $65$70 million, and we expect the timing of cash payments to approximate the timing of charges incurred.
Pension and other postretirement benefits Due to the availability of our pre-funded pension balances (previous contributions in excess of prior required pension contributions) related to certain of our U.S. pension plans, we expect our regulatory pension funding requirements in 20192020 to be approximately $2.2$1.5 million. We expect our cash payments for other postretirement benefit obligations in 2019,2020, net of GM cost sharing, to be approximately $17.7$17 million.
Investing Activities In the first nine months of 2019,2020, net cash used in investing activities was $335.5$149.2 million as compared to $343.3$335.5 million for the nine months ended September 30, 2018.2019. Capital expenditures were $146.3 million in the first nine months of 2020 as compared to $335.3 million in the first nine months of 2019 as compared to $391.8 million in the first nine months of 2018.2019. We expect our capital spending in 20192020 to be approximately 7% of sales, which includes support for our global program launches in 2019 and 2020 within our new and incremental business backlog, as well as program capacity increases and future launches of replacement programs.up to $250 million.
In the second quarter of 2019, we made a payment of $2.2 million as part of our investment in the Liuzhou Wuling joint venture that was formed in 2018. We expect to make additional payments totaling approximately $8 million as part of this investment during the fourth quarter of 2019.
In the first nine months of 2018, we completed the sale of the aftermarket business associated with our Powertrain segment. As a result of this sale, we received net proceeds of approximately $47 million.
Financing Activities In the first nine months of 2019,2020, net cash used in financing activities was $140.1$87.6 million, as compared to net cash used in financing activities of $99.5$140.1 million in the first nine months of 2018.2019. The following factors impacted cash from financing activities in the first nine months of 20192020 as compared to the first nine months of 2018:2019:
Senior Secured Credit Facilities In 2017, Holdings and American Axle & Manufacturing, Inc. (AAM, Inc.) entered into a credit agreement (the Credit Agreement). In connection with the Credit Agreement, Holdings, AAM, Inc. and certain of their restricted subsidiaries entered into a Collateral Agreement and Guarantee Agreement with the financial institutions party thereto. The Credit Agreement included a $100.0 million term loan A facility (the Term Loan A Facility), a $1.55 billion term loan B facility (the Term Loan B Facility) and a $932 million multi-currency revolving credit facility (the Revolving Credit Facility, and together with the Term Loan A Facility and the Term Loan B Facility, the Senior Secured Credit Facilities).
In July 2019, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the First Amendment (First Amendment) to the Credit Agreement (as amended by the First Amendment, the Amended Credit Agreement).Agreement. The First Amendment, among other things, 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 remainremained 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. In the third quarter of 2019, we paid $3.3 million of debt issuance costs related to this First Amendment.
At September 30, 2019, we had $890.8 million availableThis also satisfies all payment requirements under the RevolvingTerm Loan B Facility until maturity in 2024.
In April 2020, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into the Second Amendment (Second Amendment) to the Credit Facility. This availability reflectsAgreement. For the period from April 1, 2020 through March 31, 2022 (the Amendment Period), the Second Amendment, among other things, replaced the total net leverage ratio covenant with a reductionnew senior secured net leverage ratio covenant, reduced the minimum levels of $34.2 million for standby lettersthe cash interest expense coverage ratio covenant, and modified certain covenants restricting the ability of credit issued againstHoldings, AAM and certain subsidiaries of Holdings to create, incur, assume or permit to exist certain additional indebtedness and liens and to make certain restricted payments, voluntary payments and distributions. The Second Amendment also increased the facility. The borrowingsmaximum levels of the total net leverage ratio covenant after the Amendment Period, modified the applicable margin with respect to interest rates under the Term Loan A Facility due 2024 and interest rates and commitment fees under the Revolving Credit Facility, are usedand increased the minimum adjusted London Interbank Offered Rate for general corporate purposes.Eurodollar-based loans under the Term Loan A Facility due 2024 and Revolving Credit Facility. The applicable margin for the Term Loan B Facility remains unchanged. We paid debt issuance costs of $4.6 million in the nine months ended September 30, 2020 related to the Second Amendment.
The Senior Secured Credit Facilities provide back-up liquidity for our foreign credit facilities. We intend to use the availability of long-term financing under the Senior Secured Credit Facilities to refinance any current maturities related to such debt agreements that are not otherwise refinanced on a long-term basis in their local markets, except where otherwise reclassified to Current portion of long-term debt on our Condensed Consolidated Balance Sheet.
At September 30, 2020, we had $891.4 million available under the Revolving Credit Facility. This availability reflects a reduction of $33.6 million for standby letters of credit issued against the facility. The borrowings under the Revolving Credit Facility are used for general corporate purposes.
6.875% Notes due 2028 In June 2020, we issued $400 million in aggregate principal amount of 6.875% senior notes due 2028 (the 6.875% Notes). Proceeds from the 6.875% Notes were used primarily to fund the redemption of the remaining $350 million of 6.625% senior notes due 2022 described below and for general corporate purposes. We paid debt issuance costs of $6.4 million in the nine months ended September 30, 2020 related to the 6.875% Notes.
Redemption of 6.625% Notes due 2022 In the first quarter of 2020, we voluntarily redeemed a portion of our 6.625% Notes due 2022. This resulted in a principal payment of $100.0 million and $2.0 million in accrued interest. We expensed approximately $0.4 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 $1.1 million for the payment of an early redemption premium.
In the third quarter of 2020, we voluntarily redeemed the remaining portion of our 6.625% Notes due 2022, which resulted in a principal payment of $350 million and the payment of $5.7 million in accrued interest. We expensed approximately $1.3 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 $3.9 million for the payment of an early redemption premium.
Redemption of 7.75% Notes due 2019 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.
6.25% Notes due 2026 In March 2018, we issued $400.0 million in aggregate principal amount of 6.25% senior notes due 2026 (the 6.25% Notes due 2026). Proceeds from the 6.25% Notes due 2026 were used primarily to fund the tender offer for the 6.25% senior notes due 2021 (the 6.25% Notes due 2021) described below. We paid debt issuance costs of $6.6 million in the first nine months of 2018 related to the 6.25% Notes due 2026.
Tender Offer of 6.25% Notes due 2021 Also 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 in the first quarter of 2018. We redeemed the remaining $16.9 million of the 6.25% Notes due 2021 during the second quarter of 2018. During the nine months ended September 30, 2018, 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.
Redemption of 6.625% Notes due 2022 In May 2018, we voluntarily redeemed a portion of our 6.625% Notes due 2022. This resulted in a principal payment of $100.0 million, and a payment of $0.8 million in accrued interest. During the nine months ended September 30, 2018, 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.
Settlement of Capital Lease Obligation In the third quarter of 2018, we paid $6.6 million related to the settlement of a capital lease obligation that we had recognized as a result of the acquisition of MPG.
Foreign credit facilities We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries. At September 30, 2019, $107.82020, $104.5 million was outstanding under our foreign credit facilities, as compared to $127.1$106.0 million at December 31, 2018.2019. At September 30, 2019,2020, an additional $93.7$54.7 million was available under our foreign credit facilities.
Treasury stock Treasury stock increased by $7.5$2.7 million in the first nine months of 20192020 to $209.3$212.0 million as compared to $201.8$209.3 million at year-end 2018,2019, due to the withholding and repurchase of shares of AAM stock to satisfy employee tax withholding obligations due upon the vesting of performance shares and restricted stock units.
Subsidiary Guarantees of Registered Debt Securities Our 6.875% Notes, 6.50% Notes, 6.25% Notes (due 2026), and 6.25% Notes (due 2025) (collectively, the Notes) are senior unsecured obligations of AAM, Inc. (Issuer); all of which are fully and unconditionally guaranteed, on a joint and several basis, by Holdings and substantially all domestic subsidiaries of AAM, Inc. and MPG Inc (Subsidiary Guarantors). Holdings has no significant assets other than its 100% ownership in AAM, Inc. and MPG Inc., and no direct subsidiaries other than AAM, Inc. and MPG Inc.
Each guarantee by Holdings and/or any of the Subsidiary Guarantors is:
•a senior obligation of the relevant Subsidiary Guarantors;
•the unsecured and unsubordinated obligation of the relevant Subsidiary Guarantors; and
•of equal rank with all other existing and future unsubordinated and unsecured indebtedness of the relevant Subsidiary Guarantors.
Each guarantee by a Subsidiary Guarantor provides by its terms that it will be automatically, fully and unconditionally released and discharged upon:
•Any sale, exchange or transfer (by merger or otherwise) of the Capital Stock of such Subsidiary Guarantor, or the sale or disposition of all the assets of such Subsidiary Guarantor, which sale, exchange, transfer or disposition is made in compliance with the applicable provisions of the indentures;
•the exercise by the Issuer of its legal defeasance option or covenant defeasance option or the discharge of the Issuer’s obligations under the indentures in accordance with the terms of the indentures;
•the election of the Issuer to affect such a release following the date that such guaranteed Notes have an investment grade rating from both Standard & Poor's Ratings Group, Inc, and Moody's Investors Service, Inc.
The following represents summarized financial information of AAM Holdings, AAM Inc. and the Subsidiary Guarantors (collectively, the Combined Entities). The information has been prepared on a combined basis and excludes any investments of AAM Holdings, AAM Inc., or the Subsidiary Guarantors in non-guarantor subsidiaries. Intercompany transactions and amounts between Combined Entities have been eliminated.
| | | | | | | | | | | |
Statement of Operations Information | (in millions) |
| Nine Months Ended September 30, 2020 | | Year Ended December 31, 2019 |
Net sales | $ | 2,538.9 | | | $ | 3,043.3 | |
Gross profit | 157.6 | | | 192.0 | |
Loss from operations | (486.3) | | | (793.3) | |
Net loss | (528.8) | | | (718.0) | |
| | | |
Balance Sheet Information | (in millions) |
| September 30, 2020 | | December 31, 2019 |
Current assets | $ | 1,177.9 | | | $ | 699.5 | |
Noncurrent assets | 2,780.1 | | | 3,120.4 | |
| | | |
Current liabilities | 1,099.4 | | | 551.9 | |
Noncurrent liabilities | 4,253.5 | | | 4,281.3 | |
| | | |
Redeemable preferred stock | — | | | — | |
Noncontrolling interest | — | | | — | |
At September 30, 2020 and December 31, 2019, amounts owed by the Combined Entities to non-guarantor entities totaled approximately $640 million and $125 million, respectively, and amounts owed to the Combined Entities from non-guarantor entities totaled approximately $710 million and $630 million, respectively.
CRITICAL ACCOUNTING ESTIMATES
Subsequent to the disaggregation ofgoodwill impairment charge that was recorded for our PowertrainDriveline reporting unit into the Driveline and Metal Forming reporting units in the first quarter of 2019,2020, the fair value of our Metal Formingthis reporting unit exceededapproximated its carrying value by approximately 11%.value. Fair value of the reporting unit is estimated based on a combination of discounted cash flows and the use of pricing multiples derived from an analysis of comparable public companies multiplied against historical and/or anticipated financial metrics of the reporting unit. These calculations contain uncertainties as they require management to make assumptions including, but not limited to, market comparables, future cash flows of the reporting unit, and appropriate discount and long-term growth rates.
A decline in the actual cash flows of Metal Formingthe Driveline reporting unit in future periods, as compared to the projected cash flows used in the valuation, could result in the carrying value of thethis reporting unit exceeding its fair value. Further, a change in themarket comparables, discount rate or long-term growth rate, as a result of a change in economic conditions or otherwise, including those resulting from the impact of COVID-19, could result in the carrying value of thethis reporting unit exceeding its fair value.value, which would result in an additional impairment charge.
AAM's critical accounting estimates are included in our Annual Report on Form 10-K for the year ended December 31, 20182019 and did not materially change during the nine months ended September 30, 2019.2020.
CYCLICALITY AND SEASONALITY
Our operations are cyclical because they are directly related to worldwide automotive production, which is itself cyclical and dependent on general economic conditions and other factors. OurTypically, our business is also moderately seasonal as our major OEM customers historically have an extended shutdown of operations (typically(normally 1-2 weeks) in conjunction with their model year changeover and an approximate one-week shutdown in December. Our major OEM customers also occasionally have longer shutdowns of operations (up to six weeks) for program changeovers. Accordingly, our quarterly results may reflect these trends.
LITIGATION AND ENVIRONMENTAL MATTERS
We are involved in, or potentially subject to, various legal proceedings or claims incidental to our business. These include, but are not limited to, matters arising out of product warranties, tax or contractual matters, and environmental obligations. Although the outcome of these matters cannot be predicted with certainty, at this time 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 applicableall laws, regulations and ordinances. We have made, and anticipate continuing to make, capital and other expenditures including(including recurring administrative costs,costs) to comply with environmental requirements.requirements at our current and former facilities. Such expenditures were not significant in the third quarter of 2019.2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Our business and financial results are affected by fluctuations in global financial markets, including currency exchange rates and interest rates. Our hedging policy has been developed to manage these risks to an acceptable level based on management’s judgment of the appropriate trade-off between risk, opportunity and cost. We do not hold financial instruments for trading or speculative purposes.
Currency Exchange Risk From time to time, we use foreign currency forward contracts to reduce the effects of fluctuations in exchange rates relating to certain foreign currencies. At September 30, 2019,2020, we had currency forward contracts with a notional amount of $191.5$155.8 million outstanding. The potential decrease in fair value of foreign exchange contracts, assuming a 10% adverse change in the foreign currency exchange rates, would be approximately $17.5$14.2 million at September 30, 20192020 and was approximately $17.1$16.5 million at December 31, 2018.2019.
In the third quarter of 2019, we entered into a fixed-to-fixed cross-currency swap to reduce the variability of functional currency equivalent cash flows associated with changes in exchange rates on certain Euro-based intercompany loans. In the first quarter of 2020, we
discontinued this cross-currency swap, which was in an asset position of $9.8 million on the date that it was discontinued. Also in the first quarter of 2020, we entered into a new fixed-to-fixed cross-currency swap to reduce the variability of functional currency equivalent cash flows associated with changes in exchange rates on certain Euro-based intercompany loans. At September 30, 2019,2020, the notional amount of the fixed-to-fixed cross-currency swap was $217.9$234.4 million. The potential decrease in fair value of the fixed-to-fixed cross-currency swap, assuming a 10% adverse change in the foreign currency exchange rates, would be approximately $21.8$23.4 million at September 30, 2020 and was approximately $22.4 million at December 31, 2019.
Future business operations and opportunities, including the expansion of our business outside North America, may further increase the risk that cash flows resulting from these global operations may be adversely affected by changes in currency exchange rates. If and when appropriate, we intend to manage these risks by creating natural hedges in the structure of our global operations, utilizing local currency funding of these expansions and various types of foreign exchange contracts.
Interest Rate Risk We are exposed to variable interest rates on certain credit facilities. From time to time, we have used interest rate hedging to reduce the effects of fluctuations in market interest rates. In 2018, we entered into a variable-to-fixed interest rate swap to reduce the variability of cash flows associated with interest payments on our variable rate debt. In the second quarter of 2019, we discontinued this variable-to-fixed interest rate swap, which was a liability of $9.7 million on the date that it was discontinued.
Also in the second quarter of 2019, we entered into a new variable-to-fixed interest rate swap to reduce the variability of cash flows associated with interest payments on our variable rate debt. We have the following notional amounts hedged in relation to our variable-to-fixed interest rate swap: $1.0 billion through May 2020, $900.0 million through May 2021, $750.0 million through May 2022, $600.0 million through May 2023 and $500.0 million through May 2024.
The pre-tax earnings and cash flow impact of a one-percentage-point increase in interest rates (approximately 17%18% of our weighted-average interest rate at September 30, 2019)2020) on our long-term debt outstanding, would be approximately $6.9$7.3 million at September 30, 20192020 and was approximately $8.2$6.3 million at December 31, 2018,2019, on an annualized basis.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) were effective as of September 30, 2019.2020.
Changes in Internal Control over Financial Reporting
On January 1, 2019, we began the implementation of our global enterprise resource planning (ERP) systems at certain of the locations that were acquired as part of the MPG acquisition. As part of these implementations, we have modified the design and documentation of our internal controls processes and procedures, where appropriate. We will continue to implement these ERP systems at certain locations throughoutinto 2021.
As a result of temporarily closing certain of our global facilities due to the remainderimpact of 2019 and earlyCOVID-19, a significant number of our associates have continued to work remotely during the third quarter of 2020.
Also This has not had a material effect on January 1, 2019, we adopted new accounting guidance under Accounting Standards Codification Topic 842 (ASC 842) Leases. As part of the adoption of ASC 842, we implemented changes to our internal control over financial reporting as we have maintained our existing controls including the implementation of a new software system for lease accounting and reporting. Other changes to internal controls related to ASC 842 included updating our company policy associated with leases, determining the term of lease agreements, including whether options to extend or terminate a lease are reasonably certain to be exercised, and establishing the appropriate discount rates to calculate our lease liabilities.procedures over financial reporting during this period.
Except as described above with regard to implementation of ERP systems at certain legacy MPG locations, there were no changes in our internal control over financial reporting during the quarter ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There were no material changes fromIn addition to the risk factors previouslythat are included in Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Item 1A "Risk Factors" in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, the following was identified as a significant risk to AAM during the nine months ended September 30, 2020.
Our business and financial condition have been, and may continue to be, adversely affected by the impact of COVID-19.
Our business is subject to risks associated with public health issues, including pandemics such as COVID-19. During the nine months ended September 30, 2020, COVID-19 has disrupted global economic markets and has led to significant reductions in global automotive production volumes. As a result of COVID-19, governmental and public health officials in substantially all of the locations in which we operate had mandated certain precautions to mitigate the spread of the disease, including shelter-in-place orders or similar measures. As such, we temporarily suspended production, or experienced a significant reduction in production volumes, in substantially all of our manufacturing facilities during this period.
Our results of operations and financial condition have been, and may continue to be, adversely impacted by the actions taken to contain the impact of COVID-19, and the ultimate extent of such impact will depend on future developments, such as the duration and extent of the pandemic, the imposition or reimposition of shelter-in-place or similar measures and its impact on: consumers and sales of the vehicles we support, our customers and our and their suppliers, how quickly economic conditions and our and our customers’ operations can return to more normalized levels, and sustain such levels, and whether the pandemic leads to recessionary conditions and the duration of any such recession. In addition, government sponsored economic stimulus programs in response to the pandemic may not be available to our customers, our suppliers or us, or be expanded, renewed or otherwise sufficient to achieve their economic goals. Our supply chain also may be disrupted due to supplier closures or bankruptcies. Our operations may also be impacted by interruptions due to the direct impact of, or precautionary measures associated with, COVID-19 at our locations or those of our customers or suppliers.
Further, COVID-19 could exacerbate other risks disclosed in Item 1A. "Risk Factors" as included in our Annual Report on Form 10-K for the year ended December 31, 2018 Form 10-K.2019. These risks include, but are not limited to, dependency on certain customers, dependency on certain global automotive market segments, risks and uncertainties associated with our company’s global operations, dependency on certain key manufacturing facilities, cyclicality in the automotive industry, disruptions in our supply chain and our customers’ supply chain, and compliance with our debt covenants.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our equity security purchases during the quarter ended September 30, 2019:2020:
ISSUER PURCHASES OF EQUITY SECURITIES
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | (in millions) |
|
July 1 - July 31, 20192020 | | — |
| | $ | — |
| | — |
| | $ | — |
|
August 1 - August 31, 20192020 | | — |
| | — |
| | — |
| | — |
|
September 1 - September 30, 20192020 | | — |
| | — |
| | — |
| | — |
|
Total | | — |
| | $ | — |
| | — |
| | $ | — |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ James G. Zaliwski
James G. Zaliwski