American Axle projected to generate FCF in 2021, despite chip shortage troubles

American Axle’s earnings will continue to take a slight hit in the second half of 2021, as the auto supplier continues to feel the effects of the semiconductor shortage, according to three sources following the company.

Carmakers this year have cut production amid supply chain disruptions, creating earnings pressure for a host of auto suppliers. But American Axle is better positioned than most, given that it manufactures driveline and metal-forming products for high-margin light trucks and SUVs, which continue to experience high consumer demand. The borrower is also making changes to its product lines as the auto industry transitions to the EV space, the sources added.

For FY20, most of the company’s sales were from GM (39%), Stellantis (19%) and Ford (12%). Major car makers have telegraphed that the chip crisis will continue into next year. Case in point, Ford CFO John Lawler during last week’s earnings call declined to give financial guidance for 2022, but said the company expects the chip shortage to continue into next year and potentially, to a lesser extent, into 2023.

As such, chip constraints will remain a drag on American Axle’s earnings for this year. Moreover, the company is still heavily reliant on internal combustion engines, which could become less popular as OEs transition to electric cars, at least on the passenger side, the sources said. Additionally, sources pointed out that OEs don’t want to pay for in-sourcing the manufacturing while they’re in the process of phasing out the combustion engines.

Despite the reliance on internal combustion engines, the company’s products are diversified and geared towards some of the higher-end light trucks and SUVs, along with contributing to the auto industry’s transition to fuel efficiency and emission reduction. In turn, the diversification and fuel-efficient products have insulated the company from a greater impact from the semiconductor shortage.

Electrification/e-Drive wins represent roughly 15% of the company’s three-year new business backlog, with increasing quoted and emerging opportunities, according to a 16 August Moody’s report.

For 3Q21, American Axle is projected to book adjusted EBITDA of USD 175m to USD 185m, compared to a reported USD 222.6m in 2Q21, the sources added. For the fourth quarter, adjusted EBITDA is expected to come in at roughly USD 200m, compared to USD 261.5m year-over-year.

That brings estimated 2021 EBITDA to USD 855m to USD 875m, compared to USD 719.8m in 2020. For comparison, American Axle generated USD 970.3m of adjusted EBITDA in 2019.

Sources peg 2021 free cash flow to total USD 375m to USD 425m through USD 855m to USD 875m adjusted EBITDA, less USD 215m to USD 245m of capex, less USD 185m of interest expense, and less USD 50m of taxes.

Looking ahead, the sources said they expect the major headwinds from the semiconductor shortage to resolve by the end of 2022, resulting in higher expected adjusted EBITDA and free cash flow for 2022.

For 2022, free cash flow is expected to total USD 440m through USD 955m of adjusted EBITDA, USD 280m of capex, USD 185m of interest expense and USD 50m of taxes, sources added.

On the electric vehicle front, sources pointed out that American Axle’s products can be used in electric vehicles, and the auto industry’s eventual transition will only benefit the company.

Ford announced that it and a South Korean supplier plan to spend USD 11.4bn to build three battery factories and an electric truck plant in the United States, according to a 27 September release. Ford and GM alike hope to be zero-emission by 2030.

Also exemplifying the industry and aftermarket business transition to the EV space, Hertz last week announced its plans to purchase 100,000 Tesla vehicles as the rental car giant looks to build out its electric vehicle (EV) car rental fleet. The deal is estimated to total roughly USD 4.2bn in revenue, with completion targeted for the end of 2022, according to press reports.

Sources predict that the chip shortage could run its course by 1Q22 to 2Q22. But last month’s forecast by IHS Markit says the auto industry won’t enter a recovery phase until 1H23, according to press reports. The semiconductor shortage has resulted in a 7.4m unit loss of light vehicle production year-to-date, without factoring the loss in 4Q21, according to an IHS Markit report from 5 October.

To offset the effects of the shortage, the OEMs cleared existing inventory during the first half of the year and now plan to direct production to their higher-end and more profitable models, cushioning the suppliers from a larger blow to free cash flow, the sources noted.

“It’s when the more popular cars like Ford’s F150 production shuts down that it would be bad,” one of the sources said.

Still, the investment thesis is supported by the product diversification and that company can be split into two segments — driveline and metal forming, the sources said. The driveline segment consists of front and rear axles, driveshafts, differential assemblies, clutch modules, balance shaft systems, disconnecting driveline technology, and electric and hybrid driveline products and systems.

The metal forming segment consists of axle and transmission shafts, ring and pinion gears, differential gears and assemblies, connecting rods and variable valve timing products.

As of 30 June, liquidity totaled USD 1.48bn through USD 587.7m of cash and USD 895.2m of revolver availability. Leverage shook out to 3.13x through USD 3.27bn of total debt and USD 1.04bn of adjusted EBITDA.

American Axle’s USD 496m 6.5% senior unsecured notes due 2027 traded on 2 November at 104.5 to yield 3.272%, in line with recent levels, according to MarketAxess.

The USD 600m 5% senior unsecured notes due 2029 traded at 95 to yield 5.794% today, down from a recent high of 98 to yield 5.309% on 19 October.

The equity traded today at USD 9.61 per share and a USD 1.096bn market cap, up 2.67% from yesterday’s close.

American Axle did not respond to a request for comment.

2021 Debtwire

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