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Text: You can access this announcement on the Investor Relations page of our website, www.
aam.com, and through the PR newswire services.
You can also find supplemental slides for this conference call on the Investor page of our website as well.
For additional information, we ask that you refer to our filings with the Securities and Exchange Commission.
Information regarding these non-GAAP measures as well as a reconciliation of these non-GAAP measures to GAAP financial information is available on our website.
With that, let me turn things over to AAM's Chairman and CEO, David Dauch.
Joining me on the call today are Mike Simonte, AAM's President; and Chris May, AAM's Vice President and Chief Financial Officer.
To begin my comments today, I'll review the highlights of our third quarter 2021 results.
I'll then touch on some exciting business development news, including electrification announcements with REE and our largest customer, General Motors.
And lastly, we'll discuss the ongoing supply chain challenges and our financial outlook.
After Chris covers the details of our financial results, we will then open up the call for any questions that you may have.
AAM delivered solid operating performance in the third quarter of 2021 despite unprecedented supply chain challenges that impacted industry production in the third quarter.
When we reported second quarter earnings, our expectation was that the worst of the shortage was behind us.
This turned out not to be the case.
Production volatility stemming from the semiconduct -- chip shortage took another leg down, which eventually forced OEMs to idle production at many facilities, including their full-size truck plants that were largely protected previously.
However, the AAM team did a great job in managing these obstacles and factors under our control, resulting in solid financial performance.
AAM sales for the third quarter of 2021 were $1.21 billion, down approximately 14% compared to $1.41 billion in the third quarter of 2020.
The decrease in our revenues on a year-over-year basis primarily reflects the impact of the semiconductor supply chain disruptions of nearly $245 million.
North American industry production was down approximately 25% according to third-party estimates.
Light truck production was down 20% year-over-year and volumes on our core platforms decreased significantly from a year ago.
The industry is at a point where a lack of inventory has begun to impact retail sales.
Days supply on key products that we support were at or below 30 days with certain platforms in single digits and large SUVs closer to 20 days.
Once the supply chain issues are resolved, which will take some time, we foresee an extended recovery to meet customer demand and replenish dealer inventories.
AAM is in a great position to benefit from the strong demand in light trucks, especially pickups and SUVs and the replenishment of crossover vehicles.
AAM's adjusted EBITDA in the third quarter of 2021 was $183 million or 15.1% of sales.
This compares to $297 million last year.
Excluding the impact of metal markets and currency, our EBITDA margins would have approximated 19%.
This is a testament to our optimization efforts and our strong cost control, yielding strong EBITDA conversion.
AAM's adjusted earnings per share in the third quarter of 2021 was $0.15 per share compared to $1.15 in the third quarter of 2020.
As for cash flow, we continue to generate positive free cash flow in the third quarter.
AAM's adjusted free cash flow was approximately $69 million.
Earlier this year, we announced a development agreement with REE.
We are pleased to share that we have secured an initial platform business award with our partner, and AAM plans to supply REE with high-performance electric drive units for its highly modular and disruptive REEcorner technology that enables full flat EV chassis for multiple applications.
This is a great electrification opportunity for AAM and its validation of our innovative industry-leading advanced electric drive technology, and we're excited to build upon this win with REE going forward.
Investors and other interested parties may have an opportunity to see our will and drive units and other EDU portfolio on display at trade shows beginning in January of 2022.
In addition, AAM announced today that we will be supplying track right differentials for the new GMC Hummer EV.
These differential subassemblies distribute power generated by the electric drive motor to the left and right wheels.
This enhances the experience for drivers looking for exceptional vehicle performance, both on and off road.
We are very happy to support GM on this great product, and we look forward to spy GM for their future electric driveline needs.
Our strategy and approach to the market continues to take hold.
Our opportunity to succeed in full electric drive units, subassemblies and components are well displayed with these two announcements.
As we all know, electrification is coming fast, and it's a great growth opportunity for AAM.
We have a strong product portfolio in EDUs and e-beam axles, gearboxes, subassemblies and components.
As such, our technology is guarding interest around the globe from new and established OEMs from small cars to light commercial vehicles.
We are in numerous discussions with manufacturers, and our business prospects look very positive.
Because of our deep driveline experience, we believe we have an edge among the competition, especially when it comes to systems integration and NVH.
Before I transition to Chris, I want to talk about the industry supply chain challenges and our financial guidance.
What the industry has and continues to experience is unprecedented.
A lack of semiconductor availability continues to drive high production volatility with very minimal warning.
Additionally, rising commodity costs, labor shortages, logistical challenges and port delays continue to stress the value chain.
We are hoping to see semiconductor stabilization over the next successive quarters, but it's difficult to ascertain when the industry will return to normal as global demand for chips remain strong and new capacity will take time to come online.
We expect this issue will continue well into 2022 and possibly into 2023.
That said, our priority at AAM is to execute our game plan, which means to produce high-quality products, deliver on time and be cost-efficient to support our customers and protect the continuity of supply regardless of the operating conditions, and we're doing just that.
One of the management's top priority is to diligently optimize the cost structure and improve efficiency, and we are doing that.
Now let's discuss our financial guidance.
Operating uncertainty continues in the fourth quarter, especially with the availability of semiconductors and rising commodity prices.
And as such, we have updated our guidance.
For the full year, we now target revenue in the range of $5.15 to $5.25 billion, adjusted EBITDA in the range of $830 million to $850 million and adjusted free cash flow of approximately $400 million.
In conclusion, we had a good and solid operating quarter.
We did what we do best, that is we delivered operational excellence.
The team delivered positive adjusted earnings and adjusted free cash flow under a very difficult operating environment.
We are confident that our strong operating fundamentals should support solid financial performance, especially as volumes recover over time.
In the meantime, we continue to secure our core truck, SUV and crossover business and generate strong cash flow to fund our electrification future.
In addition, we will continue to invest in advancing our electrification platform technology and our overall EV portfolio to serve multiple vehicle segments.
Our goal is to be the electrification supplier of choice for the broader OEM community, and we are making primary index-related inputs to metal materials that we purchase.
You may recall, we hedged this risk with our customers by passing through the majority, but not all of these index-related changes.
The metal portion of this column reflects these elevated pass-throughs on a year-over-year basis.
For the first three quarters of 2021, metal markets in a foreign currency have increased our revenues by approximately $212 million, and we expect this to be well over $300 million for the full year.
Now let's move on to profitability.
Gross profit was $165.6 million, or 13.7%, of sales in the third quarter of 2021 compared to $249.8 million in the third quarter of 2020.
Adjusted EBITDA was $183.2 million in the third quarter of 2021 or 15.1% of sales.
This compares to $297.1 million in the third quarter of 2020.
You can see a year-over-year walk down of adjusted EBITDA on Slide 8.
The return of COVID volumes added approximately $16 million, but was more than offset by the negative impact from the production volatility stemming from the semiconductor disruptions in the amount of $83 million.
Last year, we also had a $22 million benefit from an ED&D recovery and a customer settlement that did not recur in 2021.
But even through all these disruptions in the quarter, AAM still delivered $17 million of net performance.
As I just mentioned in our sales highlights, we are facing significant year-over-year increases in commodity metal markets.
The retained portion impacting this quarter plus foreign currency was $31 million.
You can see on our EBITDA walk, the dynamic this has on our margin calculations.
If you exclude the impact of this pass-through dynamic, our margins would have been significantly higher, as noted on our walk.
Let me now cover SG&A.
SG&A expense, including R&D, in the third quarter of 2021 was $90.5 million, or 7.5% of sales.
This compares to 4.7% of sales in the third quarter of 2020.
The AAM's R&D spending in the third quarter of 2021 was $34.7 million compared to $18 million in the third quarter of 2020.
Recall, we received significant engineering and development recovery last year of approximately $15 million.
The third quarter of 2021 incurred a sequential quarterly increase in R&D, in line with our expectations.
We will continue to focus on controlling our SG&A costs, while at the same time, investing in technologies and innovations to achieve our pivot to electrification.
We do expect R&D spend to increase in the coming quarters as we launch new programs and continue to pursue meaningful opportunities in the electric vehicle business as we experienced significant customer interest in our new products and technology.
Now let's move on to interest and taxes.
Net interest expense was $47 million in the third quarter of 2021 compared to $50.5 million in the third quarter of 2020.
We expect this favorable trend to continue as we benefit from continued debt reductions.
In the third quarter, we redeemed $100 million of our 6.25% notes due 2025 and refinanced the remaining $600 million balance.
In the third quarter of 2021, we reported an income tax benefit of $13.6 million compared to a benefit of $22.5 million in the third quarter of 2020.
As we near the end of 2021, we expect our effective tax rate to be approximately 10% to 15%.
We would also expect our cash taxes to be in the $25 million to $30 million range.
Taking all these sales and cost drivers into account, our GAAP net loss was $2.4 million, or $0.02 per share, in the third quarter of 2021 compared to an income of $117.2 million, or $0.99 per share, in the third quarter of 2020.
Let's now move on to cash flow and the balance sheet.
Net cash provided by operating activities for the third quarter of 2021 was $89.8 million compared to $249.5 million last year.
Capital expenditures net of proceeds from the sale of property, plant and equipment for the third quarter of 2021 was $33.2 million.
Cash payments for restructuring and acquisition-related activity for the third quarter of 2021 were $9 million.
The net cash outflow related to the recovery from the Malvern fire we experienced in September of 2020 was $3.5 million in the quarter.
However, we anticipate the Malvern fire to have a neutral cash impact for the full year as timing of cash expenditures and cash insurance proceeds aligned over time.
In total, we would expect $55 million to $65 million in cash payments for restructuring and acquisition costs in 2021.
Reflecting the impact of this activity, AAM generated adjusted free cash flow of $69.1 million in the third quarter of 2021.
From a debt leverage perspective, we ended the quarter with net debt of $2.6 billion and LTM adjusted EBITDA of $930.2 million, calculating a net leverage ratio of 2.8 times at September 30.
We are focused on improving the balance sheet and delivering on our goal to improve our leverage this year.
We have made meaningful progress in reducing our gross debt outstanding and reducing our leverage ratio by more than a full turn as of the end of the third quarter.
Before we move on to the Q&A portion of the call, let me close out my comments with some thoughts on our 2021 financial outlook.
We expect adjusted EBITDA to be in the range of $830 million to $850 million.
Just as a reminder, investors need to consider the impact of the metal market pass-throughs as it relates to our margin calculations when comparing from period to period.
In periods and environment such as this, it is meaningful.
We expect to generate approximately $400 million of adjusted free cash flow in 2021, or nearly 50% adjusted free cash flow to adjusted EBITDA conversion.
We expect our capital expenditures at less than 4% of sales as our capital reuse and optimization efforts continue to deliver results.
Our updated outlook is based on the latest and best information we have regarding customer production schedules.
We continue to assume our customers will prioritize building full-size pickup trucks and SUVs through the end of the year with minimal disruptions.
However, the operating environment remains choppy with multiple factors posing a risk to the supply chain.
As volumes begin to normalize, we should be in a great position to leverage that environment to generate profits and cash flow.
This in turn will be used to support our highly advanced research and development initiatives in electrification and solidly position us for future profitable growth aligned with our capital allocation priorities.
We have reserved some time to take questions.
So at this time, please feel free to proceed with any questions you may have.

user
q3 adjusted earnings per share $0.15.
q3 loss per share $0.02.
q3 sales $1.21 billion.
for fy 2021 targeting sales in range of $5.15 billion - $5.25 billion.
for fy 2021 targeting adjusted ebitda in range of $830 million - $850 million.
adjusted ebitda in q3 unfavorably impacted by lower sales as result of semiconductor shortage by about $83 million.
sales for q3 of 2021 were unfavorably impacted by semiconductor chip shortage by approximately $245 million.

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