Dauch Corp (DCH) FY 2021 MD&A

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

COMPANY OVERVIEW

As a leading global tier 1 automotive and mobility supplier, AAM designs, engineers and manufactures Driveline and Metal Forming technologies to support electric, hybrid and internal combustion vehicles. Headquartered in Detroit with nearly 80 facilities in 17 countries, AAM is bringing the future faster for a safer and more sustainable future.

We are a primary supplier of driveline components to General Motors Company (GM) for its full-size rear-wheel drive (RWD) light trucks, sport utility vehicles (SUV), and crossover vehicles manufactured in North America, supplying a significant portion of GM's rear axle and four-wheel drive and all-wheel drive (4WD/AWD) axle requirements for these vehicle platforms. We also supply GM with various products from our Metal Forming segment. Sales to GM were approximately 37% of our consolidated net sales in 2021, 39% in 2020, and 37% in 2019.

We also supply driveline system products to Stellantis N.V. (Stellantis) for programs including the heavy-duty Ram full-size pickup trucks and its derivatives, the AWD Chrysler Pacifica and the AWD Jeep Cherokee. In addition, we sell various products to Stellantis from our Metal Forming segment. Sales to Stellantis were approximately 19% of our consolidated net sales in both 2021 and 2020, and 17% in 2019.

We are also a supplier to Ford Motor Company (Ford) for driveline system products on certain vehicle programs including the Ford Bronco Sport, Ford Edge, Ford Escape, Lincoln Nautilus, and we sell various products to Ford from our Metal Forming segment. Sales to Ford were approximately 12% of our consolidated net sales in both 2021 and 2020, and 9% in 2019.

No other customer represented 10% or more of consolidated net sales during these periods.

COVID-19 UPDATE - DIRECT AND INDIRECT IMPACT OF THE PANDEMIC

Direct Impact of COVID-19

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 2020, which continued into the second half of the second quarter of 2020. As a result, substantially all of our manufacturing facilities either temporarily suspended production or experienced significant reductions in volumes during this period.

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, began to stabilize and return to more normalized levels of production. We restarted operations in North America and Europe in May 2020, and we continued to ramp up production, along with our customers and supply base, through the remainder of 2020.

In 2021, we did not experience significant manufacturing downtime as a direct result of COVID-19. Our operations will depend on future developments, including the number of COVID-19 cases reported, vaccine effectiveness, the potential reimplementation of shelter-in-place orders, and customer production levels, which are outside of our control. We continue to monitor the impact of COVID-19 on our operations, as well as the operations of our customers and suppliers, as a resurgence in cases could have a sudden and significant impact on our operations, financial condition and financial results.

At AAM, safety is our first responsibility every day, in every facility, and that includes the health and wellness of our associates globally. In response to COVID-19, we have implemented several precautions for the health and safety of our associates, including increased sanitization efforts at our global facilities, social distancing, mask mandates, visitor restrictions, and remote work arrangements for certain associates, among other measures.

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Indirect Impact of COVID-19 - Semiconductor Chip Shortage and Other Supply Chain Constraints

COVID-19 has indirectly impacted our operations and financial results primarily through supply chain disruptions that have been caused by, or exacerbated by, the pandemic. During 2021, the automotive industry experienced, and continues to experience, significant disruptions in the supply chain, including a shortage of semiconductor chips used by our customers, increased metal and commodity costs, higher utility costs, increased transportation costs, higher labor costs and labor shortages. As a result, we have experienced increased volatility in our production schedules, including manufacturing downtime, often with little notice from customers, higher inventory levels and increased labor costs, which have negatively impacted our results of operations and cash flows during this period. We continue to work with customers and suppliers in our effort to protect continuity of supply as we expect these challenges to continue into 2022. Due to the ongoing uncertainty associated with these supply chain constraints, the ultimate impact on our net sales, results of operations and cash flows is unknown.

INDUSTRY TRENDS

There are a number of significant trends affecting the markets in which we compete. Intense competition, volatility in the price of raw materials, including steel, aluminum, and other metallic materials, and resources used in vehicle electrification and electronic components, labor shortages and increased labor costs, and significant pricing pressures remain. At the same time, there is a focus on investing in future products that will incorporate the latest technology and meet changing customer demands as certain original equipment manufacturers (OEMs) place increased emphasis on the development of battery and hybrid electric vehicles. The ability to respond timely to the continued advancement of technology and product innovation, as well as the capability to source programs on a global basis, are critical to attracting and retaining business in our global markets.

INCREASED INVESTMENT IN VEHICLE ELECTRIFICATION AND DEMAND FOR EMISSIONS REDUCTIONS The electrification of vehicles continues to expand, driven by a shift in focus by certain OEMs toward battery and hybrid electric vehicles, government regulations related to emissions, such as the Corporate Average Fuel Economy standards, and consumer demand for greater vehicle performance, enhanced functionality, increased electronic content and vehicle connectivity, reduced environmental impact and affordable convenience options. As vehicle electrification and electronic components become an increasingly larger focus for OEMs and suppliers, the industry has seen, and will likely continue to see, competition to develop and market new and alternative technologies, including from new market entrants such as non-traditional automotive companies and technology companies. Further, some traditional automotive industry participants are developing strategic partnerships with technology companies as each party seeks to leverage the existing customer relationships and technical knowledge of the partner, and expedite the development and commercialization of this new technology. An area of focus will be the product development cycle and bridging the gap between the shorter development cycles of information technology (IT) software and controls and the longer development cycles of traditional powertrain components. OEMs and suppliers are developing new products, such as hybrid and electric vehicles and the associated vehicle components, and are improving existing products to reduce emissions through lightweighting and efficiency initiatives, such as higher speed transmissions, and downsized engines.

We are responding, in part, with ongoing research and development (R&D) activities to develop hybrid and electric driveline systems and related subsystems and components. We have recently entered into a technology development agreement with REE Automotive Ltd. (REE), a leader in e-mobility, to develop a new electric propulsion system for e-mobility which will incorporate AAM's next generation e-drive systems. In addition, through our relationship with Suzhou Inovance Automotive Ltd., a leading provider of automotive power electronics and powertrain systems in China, we have launched a scalable 3-in-1 e-drive system, which integrates an inverter, electric motor and gearbox. We are currently exploring additional opportunities to leverage our 3-in-1 e-drive system technology with customers in China and Europe. To date, our hybrid and electric driveline systems have been awarded multiple contracts and received multiple awards.

We are also continuing to enhance our product portfolio to allow us to meet our customers' needs for high performance vehicles with reduced emissions and reduced environmental impact. Through our e-drive systems, e-beam axle technology, lightweight axles, high-efficiency axles, all-wheel drive systems, high-strength connecting rod technology, refined vibration control systems and forged axle tubes, we have significantly advanced our efforts to improve ride and handling performance, while reducing emissions and mass. These efforts have led to new business awards and further position us to compete in the global marketplace.

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INCREASED FOCUS ON ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) INITIATIVES AND REPORTING There has been a growing focus on ESG initiatives and reporting, including those related to Diversity, Equity, and Inclusion (DEI), by industry stakeholders, including customers, suppliers, providers of debt and equity capital, regulators and those in the workforce. These topics are increasingly driving decisions made by our stakeholders. Particularly within the automotive industry, trends toward electrification and reduced emissions have increased focus on the environmental impact of OEMs and suppliers. The ability of OEMs and suppliers to continually communicate and meet expectations on ESG programs and initiatives will impact their competitive advantage to attract and retain business, as well as a skilled workforce.

We have responded to this trend by implementing and launching programs and initiatives addressing each topic under ESG. In 2021, we launched E4 (E-to-the-fourth), AAM’s energy and environmental sustainability program to drive continuous improvement in our operations by reducing energy consumption, green house gas (GHG) emissions and water use while minimizing waste and lessening the environmental impact of our production operations. Also, as part of our continued focus on reducing GHG emissions, we plan to utilize Science Based Targets (SBT) in the development of our next-generation environmental goals. The Science Based Targets initiative (SBTi) is a partnership between CDP (formerly known as the Climate Disclosure Project), the United Nations Global Compact, World Resources Institute (WRI) and the World Wide Fund for Nature (WWF) that drives ambitious climate action in the private sector by enabling companies to set greenhouse gas emissions reduction targets that are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement.

In 2021, we communicated our DEI statement to associates worldwide. Refer to Item 1. Business - Human Capital Management, for specific DEI highlights. Additionally, our corporate Policy Committee, which is led by the CEO and includes our top leaders, established a Sustainability Steering Committee to provide direction and leadership to achieve our sustainability objectives.

An in-depth review of non-financial metrics and strategies related to our ESG initiatives and programs is included in our annual Sustainability Report, which includes more details on our existing programs and initiatives and future objectives. This report and other ESG areas of focus, such as AAM’s leadership, are made available to stakeholders through our company website. While evolving expectations and reporting standards are driving increased ESG reporting, this trend aligns with our cultural values and commitment to profitably grow our business in a way that is sustainable and socially responsible.

SHIFT IN CONSUMER PREFERENCE AND OEM PRODUCTION TO LIGHT TRUCK, CROSS-OVER VEHICLES (CUVs) AND SPORT-UTILITY VEHICLES (SUVs) There has been a trend toward increased demand for light trucks, CUVs and SUVs in certain markets, while demand for passenger cars has decreased. This increase in demand for light trucks, CUVs and SUVs has been driven by changes in consumer preference as technology advancements have made these vehicles lighter and more efficient, while the stabilizing cost of fuel has made owning these vehicles more affordable.

Certain OEMs are responding to this change in consumer preference by shifting their focus to developing and manufacturing these types of vehicles, resulting in a significant reduction of passenger car vehicle programs, especially in North America. We have benefited from this trend as a significant portion of our business supports light truck, CUV and SUV programs in North America.

GLOBAL AUTOMOTIVE PRODUCTION AND INDUSTRY CONSOLIDATION Our customers continue to design their products to meet demand in global markets and therefore require global support from their suppliers. For this reason, it is critical that suppliers maintain a global presence in these markets in order to compete for new contracts. We have business and engineering offices around the world to support our global locations and provide technical solutions to our customers on a regional basis, including in North America, which represents the largest portion of our core business, as well as in China and Europe where consumer acceptance of electric vehicles has been strong.

During 2021, the automotive industry experienced, and continues to experience, significant disruptions in the supply chain, including a shortage of semiconductor chips used by our customers, increased metal and commodity costs, higher utility costs, increased transportation costs, higher labor costs and labor shortages. We continue to work with customers and suppliers in our effort to protect continuity of supply as we expect these challenges to continue into 2022.

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The cyclical nature of the automotive industry, volatile commodity prices, the shifting demands of consumer preference, regulatory requirements and trade agreements require OEMs and suppliers to remain agile with regard to product development and global capability. A critical objective for OEMs and suppliers is the ability to meet these global demands while effectively managing costs. Some OEMs and suppliers may be preparing for these challenges through merger and acquisition (M&A) activity, including potential increased M&A activity as a result of the recent economic impact of COVID-19, development of strategic partnerships and reduction of vehicle platform complexity. In order to effectively drive technology development, recognize cost synergies, and increase global footprint, the industry may continue to see consolidation in the supply base as companies recognize and respond to the need for scalability.

In addition to AAM's technology development relationships and organic growth in technology and processes, our strategic acquisitions and joint venture partnerships have provided us with complementary technologies, expanded our product portfolio, significantly diversified our global customer base, and strengthened our long-term financial profile through greater scale. The synergies achieved through our strategic initiatives have enhanced AAM's ability to compete in today's technological and regulatory environment, while remaining cost competitive through increased scale and integration.

EVOLUTION OF THE AUTOMOTIVE INDUSTRY AS DEMAND FOR AUTONOMOUS VEHICLES, CAR-SHARING AND RIDE-SHARING INCREASES A developing trend is the expectation that autonomous, self-driving cars will become more common with continued advancements in technology, including applications such as last mile delivery. Autonomous vehicles present many possible benefits, such as a reduction in traffic collisions caused by human error and reduced traffic congestion, but there are also foreseeable challenges such as liability for damage and software safety and reliability. The increased integration of electronics and vehicle connectivity that will likely be required in autonomous vehicle developments will provide an opportunity for suppliers, such as AAM, with advanced capabilities in this area to be competitive in this expanding market.

In addition to selling vehicles, OEMs are also increasingly focused on offering their own car-sharing rental businesses and ride-sharing services. Car-sharing typically allows consumers to rent a car for a short period of time, while ride-sharing matches people to available carpools or other services that provide on-demand mobility. With population growth, increased government regulations to ease congestion and generational shifts in preferences, it is expected that the markets for these services will continue to grow, which could cause a change in the type of vehicles utilized. However, the growth in this area has been curtailed by the impact of COVID-19, as social distancing recommendations have led to reduced utilization of ride-sharing services by consumers.

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VOLUMES AND OUTLOOK

Our results of operations, financial condition and cash flows are significantly impacted by fluctuations in production volumes on the vehicle programs that we support. The following table represents historical and forecasted light vehicle production volumes in North America as our business is most significantly impacted by production volume fluctuations in this region. As our business is dependent on certain automotive segments, primarily the light truck, SUV and CUV segments, production volume fluctuations for the light vehicle market as a whole may not necessarily be indicative of the vehicle programs that we support.

Production volumes in North America were flat in 2021 as compared to 2020. Production volumes in 2021 were adversely impacted by the semiconductor chip shortage and other supply chain disruptions while production volumes in 2020 were adversely impacted by temporary manufacturing facility closures due to COVID-19.

We expect production volumes in North America to be in the range of 14.8 to 15.2 million units in 2022, and we expect volumes in all other geographic regions in which we operate to increase in 2022, as compared to 2021. These expected increases are primarily the result of projected improvements in the supply chain as the disruptions that adversely impacted production volumes in 2021 diminish, including the impact of the semiconductor chip shortage on our customers.

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The discussion of our Results of Operations and Liquidity and Capital Resources for 2020, as compared to 2019, can be found within "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 12, 2021, which discussion is incorporated herein by reference.

Our discussion of Reportable Segments for 2020, as compared to 2019 is included within the MD&A of this 2021 Annual Report on Form 10-K as these amounts have been retrospectively recast to reflect a reorganization of our segments that was completed in 2021.

RESULTS OF OPERATIONS

NET SALES

Our increase in sales in 2021, as compared to 2020, primarily reflects increased production volumes on the vehicle programs that we support, as net sales in 2020 were adversely impacted by an estimated $1,243 million associated with the decline in global automotive production as a result of COVID-19. Net sales for 2021, as compared to 2020, also increased by approximately $306 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. These increases in sales were partially offset by a reduction in production volumes on certain vehicle programs that we support, which was primarily the result of the semiconductor shortage that is impacting the automotive industry, the impact of which we estimate to be approximately $607 million for the year ended December 31, 2021.

COST OF GOODS SOLD

The change in cost of goods sold in 2021, as compared to 2020, principally reflects the net increase in production volumes on the vehicle programs that we support as we estimate that cost of goods sold in 2020 was impacted by approximately $875 million associated with the decline in global automotive production as a result of COVID-19. Cost of goods sold also increased by approximately $384 million related to metal market pass-through costs and the impact of foreign exchange. These increases in cost of goods sold were partially offset by a reduction in production volumes, which was primarily the result of the semiconductor shortage, which we estimate reduced costs by approximately $419 million for the year ended December 31, 2021.

In 2021, one of our Major Customers announced its intention to cease production operations in Brazil in 2021 as part of their restructuring actions. This decision impacted certain of the programs that we support and, as a result, we accelerated depreciation on certain property, plant and equipment beginning in the first quarter of 2021. The impact on cost of goods sold of this acceleration was approximately $32 million in the year ended December 31, 2021.

Materials costs as a percentage of total cost of goods sold were approximately 60% in 2021 and 55% in 2020. Material costs as a percentage of cost of goods sold was impacted in 2020 as a result of lower product shipments driven by the impact of COVID-19, which drove lower material costs and caused fixed costs to be a greater component of cost of goods sold.

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GROSS PROFIT

Gross margin was 14.0% in 2021 as compared to 12.4% in 2020. 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 2020, the sharp decline in sales that began during the first quarter and extended into the second quarter of 2020 as a result of the impact of COVID-19, as well as the magnitude of the decline in sales, resulted in a reduction of both gross profit and gross margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)

SG&A as a percentage of net sales was 6.7% in both 2021 and 2020. R&D spending was $116.8 million in 2021 as compared to $117.4 million in 2020, which include customer engineering, design and development (ED&D) recoveries of approximately $15 million in both 2021 and 2020. The increase in SG&A in 2021, as compared to 2020, was primarily attributable to higher compensation-related expense, as temporary salary reductions were implemented in 2020 in response to COVID-19, and as a result of higher incentive compensation accruals in 2021.

AMORTIZATION OF INTANGIBLE ASSETS Amortization expense for the year ended December 31, 2021 was $85.8 million as compared to $86.6 million for the year ended December 31, 2020.

IMPAIRMENT CHARGES In the first quarter 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 quarter of 2020. See Note 3 - Goodwill and Other Intangible Assets for further detail.

RESTRUCTURING AND ACQUISITION-RELATED COSTS Restructuring and acquisition-related costs were $49.4 million in 2021 and $67.2 million in 2020. As part of our restructuring actions, we incurred severance charges of approximately $2.9 million, as well as implementation costs, consisting primarily of plant exit costs and professional fees, of approximately $40.3 million during 2021. In 2020, we incurred severance charges of approximately $22.3 million, as well as implementation costs, consisting primarily of plant exit costs and professional fees, of approximately $36.1 million. We expect to incur approximately $20 million to $30 million of total restructuring costs in 2022.

Acquisition-related costs and integration charges of $6.2 million were incurred in 2021 as we completed our acquisition of a manufacturing facility in Emporium, Pennsylvania and furthered the integration of global enterprise planning (ERP) systems at legacy MPG locations. This compares to integration charges of $8.8 million in 2020. See Note 2 - Restructuring and Acquisition-Related Costs for further detail.

LOSS ON SALE OF BUSINESS In 2021, we completed the sale of our ownership interest in a consolidated joint venture. As a result of the sale and deconsolidation of this joint venture, we recognized a loss of $2.7 million. In 2020, we finalized certain customary post-closing calculations associated with the sale of the U.S. operations of our casting business that was completed in the fourth quarter of 2019, resulting in an additional loss on sale of $1.0 million. These losses are presented in the Loss on sale of business line item of our Consolidated Statements of Operations for the years ended December 31, 2021 and 2020. See Note 16 - Acquisitions and Dispositions for further detail.

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OPERATING INCOME (LOSS) Operating income (loss) was income of $240.6 million in 2021 as compared to a loss of $396.0 million in 2020. Operating margin was 4.7% in 2021 as compared to (8.4)% in 2020. The changes in operating income (loss) and operating margin in 2021, as compared to 2020, were due to the factors discussed in Net Sales, Cost of Goods Sold, Gross Profit, SG&A, Impairment Charges and Restructuring and Acquisition-Related Costs above.

INTEREST EXPENSE Interest expense was $195.2 million in 2021 and $212.3 million in 2020. The decrease in interest expense in 2021, as compared to 2020, was primarily the result of our ongoing debt reduction initiatives and the impact of our debt refinancing actions in 2021. The weighted-average interest rate of our total debt outstanding was 5.8% in 2021 and 5.6% in 2020. We expect our interest expense in 2022 to be approximately $175 million to $185 million.

INTEREST INCOME Interest income was $10.9 million in 2021 and $11.6 million in 2020. Interest income primarily includes interest earned on cash and cash equivalents, realized and unrealized gains and losses on our short-term investments during the period, and the impact of the interest rate differential on our fixed-to-fixed cross-currency swap.

OTHER INCOME (EXPENSE) Following are the components of Other Income (Expense) for 2021 and 2020:

Debt refinancing and redemption costs In 2021, we made voluntary prepayments totaling $21.2 million on our Term Loan A Facility due 2024 and $238.8 million on our Term Loan B Facility due 2024. As a result, we expensed approximately $2.5 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of these borrowings.

Also in 2021, we voluntarily redeemed our 6.25% Notes due 2025. This resulted in principal payments totaling $700 million and $19.4 million in accrued interest. We also expensed approximately $9.6 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 $21.9 million for the payment of an early redemption premium.

In December 2020, we made a voluntary prepayment of $100 million on our Term Loan B Facility and paid approximately $15 million on our Term Loan A Facility due 2024. As a result, we expensed approximately $1.2 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the life of these borrowings.

Also in 2020, we voluntarily redeemed our 6.625% Notes due 2022, which resulted in total principal payments of $450 million and the payment of $7.7 million in accrued interest. As a result, we expensed approximately $1.7 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 $5.0 million for the payment of early redemption premiums.

Unrealized gain on equity securities We have an investment in the equity securities of REE, an e-mobility company that completed a merger with a Special Purpose Acquisition Company in the third quarter of 2021 and became a publicly traded entity. These equity securities are measured at fair value each reporting period with changes in fair value reported as an unrealized holding gain or loss within Other income (expense), net in our Consolidated Statement of Operations. As of December 31, 2021, our investment in REE shares was valued at $27.4 million resulting in an unrealized gain of $24.4 million for the year ended December 31, 2021.

Pension settlement charges In the fourth quarter of 2021, we purchased group annuity contracts from an insurance company to settle our pension obligations for certain U.S. plan participants. This resulted in a non-cash pre-tax settlement charge of $42.3 million in the fourth quarter of 2021 related to the accelerated recognition of certain deferred losses. In 2020, our restructuring activities resulted in the accelerated recognition of certain deferred losses under our pension plans totaling $0.5 million.

Other, net Other, net, which includes the net effect of foreign exchange gains and losses, our proportionate share of earnings from equity in unconsolidated subsidiaries, and all components of net periodic pension and postretirement benefit costs other than service costs, was expense of $3.2 million in 2021, compared to expense of $5.2 million in 2020.

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INCOME TAX BENEFIT Income tax was a benefit of $4.7 million in 2021, as compared to a benefit of $49.2 million in 2020. Our effective income tax rate was (391.7)% in 2021 as compared to 8.1% in 2020.

In 2021, our effective income tax rate varied from the U.S. federal statutory rate primarily as a result of recognizing a net income tax benefit of approximately $5.2 million related to our ability to carry back prior year losses to tax years with the higher 35% corporate income tax rate.

In 2020, our effective income tax rate varied from the U.S. federal statutory rate primarily as a result of the goodwill impairment charge, which resulted in no income tax benefit, as well as favorable foreign tax rates, the impact of tax credits, and the finalization of an advance pricing agreement in a foreign jurisdiction, which resulted in a tax benefit of approximately $6.8 million. We also recognized a tax benefit of approximately $14.4 million related to our ability to carry back prior year losses, as well as projected current year losses, under the CARES Act to years with the previous 35% tax rate. These income tax benefits were partially offset by our inability to realize an income tax benefit for losses incurred in certain foreign and state jurisdictions, as well as a partial valuation allowance of approximately $5.3 million on certain U.S. federal income tax attributes.

Due to the uncertainty associated with the extent and ultimate impact of COVID-19 and the semiconductor shortage on global automotive production volumes, we may experience lower than projected earnings in certain jurisdictions in future periods, and as a result, it is reasonably possible that changes in valuation allowances could be recognized in future periods and such changes could be material to our financial statements.

NET INCOME (LOSS) ATTRIBUTABLE TO AAM AND EARNINGS (LOSS) PER SHARE (EPS) Net income (loss) attributable to AAM was income of $5.9 million in 2021 as compared to a loss of $561.3 million in 2020. Diluted earnings per share was $0.05 in 2021 as compared to a diluted loss of $4.96 per share in 2020. Net income (loss) and EPS were primarily impacted by the factors discussed above.

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SEGMENT REPORTING

Our business is organized into Driveline and Metal Forming segments, with each representing a reportable segment under Accounting Standards Codification (ASC) 280 - Segment Reporting. In the first quarter of 2021, we completed a reorganization of our segments, which included moving certain locations that were previously reported under our Driveline segment to our Metal Forming segment in order to better align our product and process technologies. The amounts in the tables below for the year ended December 31, 2020 and the year ended December 31, 2019 have been retrospectively recast to reflect this reorganization.

In the fourth quarter of 2019, we completed the sale of the U.S. operations of our former Casting segment (the Casting Sale). The Casting Sale did not qualify for classification as discontinued operations, as it did not represent a strategic shift in our business that had a major effect on our operations and financial results. As such, we continue to present Casting as a segment in the tables below, which is comprised entirely of the U.S. casting operations that were included in the sale.

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, CUVs, 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 OEMs and Tier 1 automotive suppliers.

The following tables outline our sales and Segment Adjusted EBITDA for each of our reportable segments for the years ended December 31, 2021, 2020 and 2019 (in millions):

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The change in Driveline sales for the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily reflects increased production volumes on the vehicle programs we support, as sales in 2020 were adversely impacted by an estimated $905 million associated with the decline in global automotive production as a result of COVID-19. Driveline sales for the year ended December 31, 2021, as compared to the year ended December 31, 2020, also increased by approximately $188 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. These increases were partially offset by a reduction in production volumes primarily as a result of the semiconductor shortage, the impact of which we estimate to be approximately $488 million for the year ended December 31, 2021.

The change in Driveline sales for the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily reflects an estimated reduction of approximately $905 million associated with the impact of the decline in global automotive production as a result of COVID-19. The change in Driveline sales also reflects a reduction of approximately $41 million, associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. These reductions in sales were partially offset as 2019 sales reflect a reduction associated with the GM work stoppage that occurred in the second half of 2019, and there was no such impact in 2020.

The increase in net sales in our Metal Forming segment for the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily reflects increased production volumes on the vehicle programs we support, as sales in 2020 were adversely impacted by an estimated $338 million associated with the decline in global automotive production as a result of COVID-19. Metal Forming sales for the year ended December 31, 2021, as compared to the year ended December 31, 2020, also increased by approximately $118 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments. These increases were partially offset by a reduction in production volumes primarily as a result of the semiconductor shortage, the impact of which we estimate to be approximately $119 million for the year ended December 31, 2021.

The change in net sales in our Metal Forming segment for the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily reflects an estimated reduction of approximately $338 million associated with the impact of the decline in global automotive production as a result of COVID-19. Also for the year ended December 31, 2020, as compared to the year ended December 31, 2019, Metal Forming sales were impacted by a reduction of approximately $40 million associated with the effect of metal market pass-throughs to our customers and the impact of foreign exchange related to translation adjustments.

We completed the Casting Sale in the fourth quarter of 2019, and therefore there are no net sales amounts presented for Casting in 2020 and 2021 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, loss on the sale of a business, impairment charges, pension settlements, unrealized gains or losses on equity securities, and non-recurring items.

For the year ended December 31, 2021, as compared to the year ended December 31, 2020, the increase in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to the net increase in production volumes on the vehicle programs that we support as sales in 2020 were adversely impacted by the decline in global automotive production as a result of COVID-19, as well as improved operating performance, including the favorable impact of our restructuring actions, partially offset by increased metal and commodity costs, labor costs and transportation costs.

For the year ended December 31, 2020, as compared to the year ended December 31, 2019, the change in Segment Adjusted EBITDA for the Driveline segment was primarily attributable to lower net global automotive production volumes as a result of the impact of COVID-19. This was partially offset by improved operating performance and lower launch costs, as well as the impact of a customer ED&D recovery of approximately $15 million. The change in Driveline Segment Adjusted EBITDA also reflects the impact of our continued emphasis on cost management, and the additional measures that we implemented in response to the impact of COVID-19.

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For the year ended December 31, 2021, as compared to the year ended December 31, 2020, the increase in Metal Forming Segment Adjusted EBITDA was primarily attributable to the net increase in production volumes on the vehicle programs that we support as sales in 2020 were adversely impacted by the decline in global automotive production as a result of COVID-19, as well as improved operating performance, including the favorable impact of our restructuring actions, partially offset by increased metal and commodity costs, labor costs and transportation costs.

For the year ended December 31, 2020, as compared to the year ended December 31, 2019, the change in Metal Forming Segment Adjusted EBITDA 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.

We completed the Casting Sale in the fourth quarter of 2019, and therefore there are no Segment Adjusted EBITDA amounts presented for Casting in 2020 and 2021 as AAM no longer operates in this business.

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Reconciliation of Non-GAAP and GAAP Information

In addition to results reported in accordance with accounting principles generally accepted in the United States of America (GAAP) in this MD&A, we have provided certain non-GAAP financial measures such as EBITDA and Total Segment Adjusted EBITDA. Such information is reconciled to its closest GAAP measure in accordance with Securities and Exchange Commission rules below.

We define EBITDA to be earnings before interest expense, income taxes, depreciation and amortization. Total Segment Adjusted EBITDA is defined as EBITDA for our reportable segments excluding the impact of restructuring and acquisition-related costs, debt refinancing and redemption costs, loss on the sale of a business, impairment charges, pension settlements, unrealized gains or losses on equity securities, 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. EBITDA and Total Segment Adjusted EBITDA are also key metrics used in our calculation of incentive compensation. 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.

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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. At December 31, 2021 we had nearly $1.5 billion of liquidity consisting of approximately $530 million of cash and cash equivalents, approximately $893 million of available borrowings under our Revolving Credit Facility and approximately $65 million of available borrowings under foreign credit facilities. We have no significant debt maturities before 2024. We believe that operating cash flow, available cash and cash equivalent balances and available committed borrowing capacity under our Senior Secured Credit Facilities and foreign credit facilities will be sufficient to meet these needs.

OPERATING ACTIVITIES Net cash provided by operating activities was $538.4 million in 2021 as compared to $454.7 million in 2020. The following factors impacted cash provided by operating activities:

Impact of COVID-19 We experienced increased earnings and cash flows from operating activities in 2021, as compared to 2020, as 2020 earnings and cash flows from operating activities were significantly impacted by a reduction in production volumes due to the impact of COVID-19.

Inventories In 2021, we experienced a decrease in year-over-year cash flow from operating activities of approximately $141 million related to the change in our inventories balance from December 31, 2020 to December 31, 2021, as compared to the change in our inventories balance from December 31, 2019 to December 31, 2020. This change was primarily attributable to increased inventory levels in 2021 as a result of volatility in production schedules and unexpected downtime at certain of our manufacturing facilities due primarily to the semiconductor shortage that is impacting the automotive industry. Cash flows from inventories were also impacted in 2021 by increased metal and commodity costs, increased labor costs, and increased transportation costs.

Accounts payable and accrued expenses We experienced an increase in year-over-year cash flow from operating activities of approximately $100 million related to the change in our accounts payable and accrued expenses balances from December 31, 2020 to December 31, 2021, as compared to the change in these balances from December 31, 2019 to December 31, 2020. This change was primarily attributable to the timing of payments to suppliers and increased inventory levels.

Interest paid Interest paid in 2021 was $184.9 million as compared to $192.4 million in 2020. The decrease in interest paid was primarily the result of our ongoing debt reduction initiatives and the impact of our debt refinancing actions in 2021. See Note 4 - Long-Term Debt for additional detail.

Income taxes Income taxes paid, net was $26.6 million in 2021, as compared to $2.1 million in 2020. During 2021, we received an income tax refund of approximately $6 million related to the utilization of net operating losses under the provisions of the CARES Act. During 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 and an income tax refund of approximately $11 million related to prior alternative minimum tax credits. See Note 1 - Organization and Summary of Significant Accounting Policies for additional detail regarding the CARES Act. Also in 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.

As of December 31, 2021 and December 31, 2020, we have recorded a liability for unrecognized income tax benefits and related interest and penalties of $23.4 million and $22.2 million, respectively.

Restructuring and acquisition-related costs We incurred $49.4 million and $67.2 million of charges related to restructuring and acquisition-related costs in 2021 and 2020, respectively, and a significant portion of these charges were cash charges. In 2022, we expect restructuring and acquisition-related payments to be between $20 million and $30 million for the full year.

Pension and other postretirement benefits (OPEB) Our cash payments for OPEB, net of GM cost sharing, were $14.2 million in 2021 and $12.5 million in 2020. This compares to our annual postretirement cost of $8.9 million in 2021 and $10.1 million in 2020. We expect our cash payments for OPEB obligations in 2022, net of GM cost sharing, to be approximately $16.5 million.

Due to the availability of our pre-funded pension balances (previous contributions in excess of prior required pension contributions), we expect our regulatory pension funding requirements in 2022 to be less than $1.0 million.

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Malvern Fire In 2021, we received $59.1 million of cash as reimbursements and advances under our insurance policies, of which $36.0 million was associated with operating expenses incurred as a result of the Malvern Fire and has been presented as an operating cash inflow in our Consolidated Statement of Cash Flows for the period. At December 31, 2021, we have an insurance recovery receivable of $11.3 million, which is included in Prepaid expenses and other in our Consolidated Balance Sheet.

In 2020, we received $11.1 million of cash as an advance under our insurance policies associated with expenses incurred as a result of the Malvern Fire. At December 31, 2020, we had an insurance recovery receivable of $43.1 million, which is included in Prepaid expenses and other in our Consolidated Balance Sheet. See Note 15 - Manufacturing Facility Fire and Insurance Recovery for additional detail.

INVESTING ACTIVITIES For the year ended December 31, 2021, net cash used in investing activities was $161.1 million as compared to $218.4 million for the year ended December 31, 2020. Capital expenditures were $181.2 million in 2021 and $215.6 million in 2020. We expect our capital spending in 2022 to be 3.5% to 4% of sales, which includes support for our global program launches in 2022 and 2023 within our new and incremental business backlog, as well as program capacity increases and future launches of replacement programs.

In 2021, in addition to the $36.0 million of cash reimbursements and advances received under our insurance policies associated with operating expenses incurred as a result of the Malvern Fire, we received $23.1 million of cash associated with property, plant and equipment that was damaged or destroyed as a result of the Malvern Fire. This cash received has been classified as an investing cash inflow based on the nature of the associated loss incurred.

Also in 2021, we paid $4.9 million of cash for the acquisition of the Emporium, Pennsylvania Manufacturing Facility. See Note 16 - Acquisitions and Dispositions for further detail.

FINANCING ACTIVITIES Net cash used in financing activities was $401.4 million in 2021, compared to net cash used in financing activities of $214.5 million in 2020. Total debt outstanding, net of debt issuance costs, was $3,104.5 million at year-end 2021 and $3,455.0 million at year-end 2020. The change in total debt outstanding, net of issuance costs, at year-end 2021, as compared to year-end 2020, was primarily due to the factors noted below.

Senior Secured Credit Facilities Our Senior Secured Credit Facilities, which are comprised of our Revolving Credit Facility, our Term Loan A Facility due 2024, and our Term Loan B Facility due 2024, provide back-up liquidity for our foreign credit facilities. We intend to use the availability of long-term financing under the Senior Secured Credit Facilities to refinance any current maturities related to such debt agreements that are not otherwise refinanced on a long-term basis in their local markets, except where otherwise reclassified to Current portion of long-term debt on our Consolidated Balance Sheet.

In June 2021, Holdings, AAM, Inc., and certain subsidiaries of Holdings entered into an agreement (the Agreement) amending the Second Amendment to the Credit Agreement. For the period from April 1, 2020 through March 31, 2022 (the Amendment Period), the Agreement modified a covenant in the Second Amendment restricting the ability of Holdings, AAM and certain subsidiaries of Holdings to make certain voluntary payments and distributions of, or in respect of, certain senior unsecured notes of AAM during the Amendment Period, which modification permitted voluntary payments and redemptions of the 6.25% Notes due 2025 issued by AAM.

In 2021, we made voluntary prepayments totaling $238.8 million on our Term Loan B Facility due 2024 and $21.2 million on our Term Loan A Facility due 2024. As a result, we expensed approximately $2.5 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the expected life of these borrowings.

In December 2020, we made a voluntary prepayment of $100 million on our Term Loan B Facility due 2024 and paid approximately $15 million on our Term Loan A Facility due 2024. As a result, we expensed approximately $1.2 million for the write-off of a portion of the unamortized debt issuance costs that we had been amortizing over the life of these borrowings.

At December 31, 2021, $893.2 million was available under the Revolving Credit Facility. This availability reflects a reduction of $31.8 million for standby letters of credit issued against the facility. The proceeds of the Revolving Credit Facility are used for general corporate purposes.

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Redemption of 6.25% Notes due 2025 In 2021, we voluntarily redeemed our 6.25% Notes due 2025. This resulted in principal payments totaling $700 million and $19.4 million in accrued interest. We also expensed approximately $9.6 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 $21.9 million for the payment of an early redemption premium.

5.00% Notes due 2029 In the third quarter of 2021, we issued $600 million in aggregate principal amount of 5.00% Notes due 2029 (the 5.00% Notes). Proceeds from the 5.00% Notes were used to fund the redemption of the remaining $600 million of 6.25% Notes due 2025. We paid debt issuance costs of $9.2 million in the year ended December 31, 2021 related to the 5.00% Notes.

Redemption of 6.625% Notes due 2022 In 2020, we voluntarily redeemed our 6.625% Notes due 2022. This resulted in principal payments totaling $450.0 million and $7.7 million in accrued interest. We also expensed approximately $1.7 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 $5.0 million for an early redemption premium.

6.875% Notes due 2028 In the second quarter of 2020, we issued $400 million in aggregate principal amount of 6.875% 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% Notes due 2022 and for general corporate purposes. We paid debt issuance costs of $6.4 million in the year ended December 31, 2020 related to the 6.875% Notes.

Foreign Credit Facilities We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries.  At December 31, 2021, $86.1 million was outstanding under our foreign credit facilities and an additional $65.1 million was available, as compared to December 31, 2020, when $88.8 million was outstanding under our foreign credit facilities and an additional $72.8 million was available.

Treasury stock Treasury stock increased by $4.3 million in 2021 to $216.3 million as compared to $212.0 million at year-end 2020, 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.

Credit ratings To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to our securities as an indicator of credit quality for fixed income investors. A credit rating agency may change or withdraw its ratings based on its assessment of our current and future ability to meet interest and principal repayment obligations. Credit ratings may affect our cost of borrowing and/or our access to debt capital markets. The credit ratings and outlook currently assigned to our securities by the rating agencies are as follows:

Dividend program We have not declared or paid any cash dividends on our common stock in 2021 or 2020.

Contractual obligations Our contractual obligations consist primarily of: 1) current and long-term debt; 2) operating and finance lease obligations; 3) obligated purchase commitments for capital expenditures and related project expense; 4) pension and other postretirement benefit obligations, net of GM cost sharing; and 5) interest obligations. Information regarding expected payments by period can be found in Item 8, "Financial Statements and Supplementary Data" in this Form 10-K at Note 4 - Long-Term Debt for our current and long-term debt obligations, Note 14 - Leasing for our operating and finance lease obligations, Note 11 - Commitments and Contingencies for purchase commitments related to capital expenditures and project expense, and Note 7 - Employee Benefit Plans for pension and other postretirement benefit obligations.

The expected future interest obligations associated with our current and long-term debt and finance lease obligations are as follows: $165.1 million in 2022, $155.7 million in 2023, $124.7 million in 2024, $106.5 million in 2025, $90.0 million in 2026, and $149.4 million in 2027 and thereafter.

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Subsidiary Guarantees of Registered Debt Securities Our 6.875% Notes, 6.50% Notes, 6.25% Notes and 5.00% Notes (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; or

•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 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.

At December 31, 2021 and December 31, 2020, amounts owed by the Combined Entities to non-guarantor entities totaled approximately $800 million and $660 million, respectively, and amounts owed to the Combined Entities from non-guarantor entities totaled approximately $655 million and $750 million, respectively.

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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. Typically, our business is moderately seasonal as our major OEM customers historically have an extended shutdown of operations (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 6 weeks) for program changeovers. Accordingly, our quarterly results may reflect these trends.

LEGAL PROCEEDINGS

See Note 11 - Commitments and Contingencies in Item 8, "Financial Statements and Supplementary Data" for discussion of legal proceedings and the effect on AAM.

EFFECT OF NEW ACCOUNTING STANDARDS

See Note 1 - Organization and Summary of Significant Accounting Policies in Item 8, "Financial Statements and Supplementary Data" for discussion of new accounting standards and the effect on AAM.

CRITICAL ACCOUNTING ESTIMATES

In order to prepare consolidated financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts and disclosures in our consolidated financial statements. These estimates are subject to an inherent degree of uncertainty and actual results could differ from our estimates.

Other items in our consolidated financial statements require estimation. In our judgment, they are not as critical as those disclosed below. We have discussed and reviewed our critical accounting estimates disclosure with the Audit Committee of our Board of Directors.

VALUATION OF DEFERRED TAX ASSETS AND OTHER TAX LIABILITIES Because we operate in many different geographic locations, including several foreign, state and local tax jurisdictions, the evaluation of our ability to use all recognized deferred tax assets is complex. In accordance with ASC 740 - Income Taxes, we review the likelihood that we will realize the benefit of deferred tax assets and estimate whether recoverability of our deferred tax assets is “more likely than not,” based on forecasts of taxable income in the related tax jurisdictions. In determining the requirement for a valuation allowance, the historical results, projected future operating results based upon approved business plans, eligible carry forward periods, and tax planning opportunities are considered, along with other relevant positive and negative evidence. If, based upon available evidence, it is more likely than not the deferred tax assets will not be realized, a valuation allowance is recorded.

As of December 31, 2021, we have a valuation allowance of approximately $201.7 million related to net deferred tax assets in several foreign jurisdictions and U.S. federal, state and local jurisdictions. As of December 31, 2020 and 2019, our valuation allowance was $208.0 million and $196.0 million, respectively.

If, in the future, we generate taxable income on a sustained basis in foreign and U.S. federal, state and local jurisdictions for which we have recorded valuation allowances, our current estimate of the recoverability of our deferred tax assets could change and result in the future reversal of some or all of the valuation allowance. While we believe we have made appropriate valuations of our deferred tax assets, unforeseen changes in tax legislation, regulatory activities, audit results, operating results, financing strategies, organization structure and other related matters may result in material changes in our deferred tax asset valuation allowances or our tax liabilities.

Further, due to the uncertainty associated with the extent and ultimate impact of COVID-19 and the semiconductor shortage 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 future periods and such changes could be material to our financial statements.

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Unrecognized Income Tax Benefits

We record uncertain tax positions on the basis of a two-step process whereby: (1) we determine whether it is "more likely than not" that the tax positions will be sustained based on the technical merits of the position: and (2) for those positions that meet the "more likely than not" recognition threshold, we recognize the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. We record interest and penalties on uncertain tax positions in income tax expense (benefit). As of December 31, 2021 and 2020, we had a liability for unrecognized income tax benefits and related interest and penalties of $23.4 million and $22.2 million, respectively. We continue to monitor the progress and conclusions of all ongoing audits and other communications with tax authorities and adjust our estimated liability as necessary.

Other Income Tax Matters

We operate in multiple jurisdictions throughout the world and the income tax returns of several subsidiaries in various tax jurisdictions are currently under examination. During their examination of our 2015 U.S. federal income tax return, the Internal Revenue Service (IRS) asserted that income earned by a Luxembourg subsidiary from its Mexican branch operations should be categorized as foreign base company sales income (FBCSI) under Section 954(d) of the Internal Revenue Code and recognized currently as taxable income on our 2015 U.S. federal income tax return. As a result of this assertion, the IRS issued a Notice of Proposed Adjustment (NOPA). AAM believes that the proposed adjustment is without merit and we have contested the matter, which is currently under review in the IRS’s administrative appeals process. We believe it is likely that we will be successful in ultimately defending our position. As such, we have not recorded any impact of the IRS’s proposed adjustment in our consolidated financial statements. As of December 31, 2021, in the event AAM is not successful in defending its position, the potential additional income tax expense, including estimated interest charges, related to tax years 2015 through 2021, is estimated to be in the range of approximately $275 million to $325 million. The cash flow impact in 2022 related to this issue is not expected to be significant as a result of available net operating losses and income tax credits.

In a matter of related interest, on May 5, 2020, the U.S Tax Court ruled against another U.S. corporation, finding that the income it earned through a Mexican branch of its Luxembourg subsidiary corporation was FBCSI. In that situation, the taxpayer appealed the U.S. Tax Court decision to the U.S. Court of Appeals for the Sixth Circuit. On December 6, 2021, the U.S. Court of Appeals affirmed, in a split decision, the Tax Court decision in favor of the IRS. On January 20, 2022, the taxpayer in the above referenced matter, filed a petition for rehearing. The court’s decision on whether such a rehearing will be granted is pending.

Notwithstanding the decisions rendered thus far in that case, and because our position is based upon different facts and circumstances, including but not limited to, differences in structure, and different income tax regulations in effect for our tax years under examination, we continue to believe, after consultation with tax and legal counsel that it is more likely than not that our structure does not give rise to FBCSI. We intend to continue to vigorously contest the conclusions reached in the NOPA through the IRS’s administrative appeals process, and, if necessary, through litigation.

PENSION AND OTHER POSTRETIREMENT BENEFITS In calculating our assets, liabilities and expenses related to pension and OPEB, key assumptions include the discount rate, expected long-term rates of return on plan assets, mortality projections and rates of increase in health care costs.

The discount rates used in the valuation of our U.S. pension and OPEB obligations were based on an actuarial review of a hypothetical portfolio of long-term, high quality corporate bonds matched against the expected payment stream for each of our plans. In 2021, the weighted-average discount rates determined on that basis were 2.90% for the valuation of both our pension benefit obligations and the valuation of our OPEB obligations. The discount rate used in the valuation of our United Kingdom (U.K.) pension obligations were based on hypothetical yield curves developed from corporate bond yield information within each regional market. In 2021, the weighted-average discount rates determined on that basis were 1.85% for our U.K. plans. The expected weighted-average long-term rates of return on our plan assets were 7.00% for our U.S. plans, and 4.00% for our U.K. plans in 2021.

We developed these rates of return assumptions based on future capital market expectations for the asset classes represented within our portfolio and a review of long-term historical returns. The asset allocation for our plans was developed in consideration of the demographics of the plan participants and expected payment stream of the liability. Our investment policy allocates approximately 25% - 35% of the U.S. plans' assets to equity securities, depending on the plan, with the remainder invested in fixed income securities, hedge fund investments and cash.

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The rates of increase in health care costs are based on current market conditions, inflationary expectations and historical information.

All of our assumptions were developed in consultation with our actuarial service providers. While we believe that we have selected reasonable assumptions for the valuation of our pension and OPEB obligations at year-end 2021, actual trends could result in materially different valuations.

The effect on our pension plans of a 0.5% decrease in both the discount rate and expected return on assets is shown below as of December 31, 2021, our valuation date.

No changes in benefit levels or in the amortization of gains or losses have been assumed.

For 2022, we assumed a weighted-average annual increase in the per-capita cost of covered health care benefits of 6.60% for OPEB. The rate is assumed to decrease gradually to 5.0% by 2030 and remain at that level thereafter. A 0.5% decrease in the discount rate for our OPEB would have decreased total expense in 2021 and increased the postretirement obligation, net of GM cost sharing, at December 31, 2021 by $0.9 million and $17.9 million, respectively. A 1.0% increase in the assumed health care trend rate would have increased total service and interest cost in 2021 and the postretirement obligation, net of GM cost sharing, at December 31, 2021 by $1.0 million and $27.6 million, respectively.

AAM and GM share in the cost of OPEB for eligible retirees proportionally based on the length of service an employee had with AAM and GM. We estimate the future cost sharing payments and present it as an asset on our Consolidated Balance Sheet. As of December 31, 2021, we estimated $213.2 million in future GM cost sharing. If, in the future, GM were unable to fulfill this financial obligation, our OPEB obligations could be different than our current estimates.

GOODWILL We record goodwill when the purchase price of acquired businesses exceeds the value of their identifiable net tangible and intangible assets acquired. We periodically evaluate goodwill for impairment in accordance with the accounting guidance for goodwill and other indefinite-lived intangibles that are not amortized. We review our goodwill for impairment annually during the fourth quarter. In addition, we review goodwill for impairment whenever adverse events or changes in circumstances indicate a possible impairment.

This review is performed at the reporting unit level, and involves a comparison of the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to the excess carrying value over fair value.

In performing goodwill impairment testing, we utilize a third-party valuation specialist to assist management in determining the fair value of our reporting units. Fair value of each reporting unit is estimated based on a combination of discounted cash flows and the use of pricing multiples derived from an analysis of comparable public companies multiplied against historical and/or anticipated financial metrics of each reporting unit. These calculations contain uncertainties as they require management to make assumptions including, but not limited to, market comparables, future cash flows of the reporting units, and appropriate discount and long-term growth rates. A decline in the actual cash flows of our reporting units in future periods, as compared to the projected cash flows used in our valuations, could result in the carrying value of the reporting units exceeding their respective fair values. Further, a change in market comparables, discount rate or long-term growth rate, as a result of a change in economic conditions or otherwise, could result in the carrying values of the reporting units exceeding their respective fair values.

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Our business is organized into two segments: Driveline and Metal Forming. Under the goodwill guidance, we determined that each of our segments represented a reporting unit. The determination of our reporting units and impairment indicators also require us to make significant judgments. At December 31, 2021 all goodwill was associated with our Driveline reporting unit. As a result of our goodwill impairment test completed in the fourth quarter of 2021, we determined that the fair value of our Driveline reporting unit exceeded its carrying value by approximately 30%. See Note 3 - Goodwill and Other Intangible Assets for further detail regarding our goodwill impairment analyses for the years 2021, 2020 and 2019.

IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, excluding goodwill, to be held and used are reviewed for impairment whenever adverse events or changes in circumstances indicate a possible impairment. Recoverability of each “held for use” asset group affected by impairment indicators is determined by comparing the forecasted undiscounted cash flows of the operations to which the assets relate to their carrying amount. If the carrying amount of an asset group exceeds the undiscounted cash flows and is therefore not recoverable, the assets in this group are written down to their estimated fair value. We estimate fair value based on market prices, when available, or on a discounted cash flow analysis. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Significant judgments and estimates used by management when evaluating long-lived assets for impairment include:

•An assessment as to whether an adverse event or circumstance has triggered the need for an impairment review;

•Determination of asset groups, the primary asset within each group, and the primary asset's average estimated useful life;

•Undiscounted future cash flows generated by the assets; and

•Determination of fair value when an impairment is deemed to exist, which may require assumptions related to future general economic conditions, future expected production volumes, product pricing and cost estimates, working capital and capital investment requirements, discount rates and estimated liquidation values.

See Note 3 - Goodwill and Other Intangible Assets and Note 16 - Acquisitions and Dispositions for further detail regarding our assessment of impairment of long-lived assets.

PRODUCT WARRANTY We record a liability and related charge to cost of goods sold for estimated warranty obligations at the dates our products are sold or when specific warranty issues are identified. Product warranties not expected to be paid within one year are recorded as a noncurrent liability on our Consolidated Balance Sheet. Our estimated warranty obligations for products sold are based on significant management estimates, with input from our warranty, sales, engineering, quality and legal departments. For products and customers with actual warranty payment experience, we estimate warranty costs principally based on past claims history. For certain products and customers, actual warranty payment experience does not exist or is not mature. In these cases, we estimate our costs based on the contractual arrangements with our customers, existing customers' warranty program terms and internal and external warranty data, which includes a determination of our responsibility for potential warranty issues or claims and estimates of repair costs. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. We continuously evaluate these estimates and our customers' administration of their warranty programs. We closely monitor actual warranty claim data and adjust the liability, as necessary, on a quarterly basis.

In addition to our ordinary warranty provisions with our customers, we may be responsible for certain costs associated with product recalls and field actions, which are recorded at the time our obligation is probable and can be reasonably estimated.

Our warranty accrual was $59.5 million as of December 31, 2021 and $66.7 million as of December 31, 2020. During 2021 and 2020, we made adjustments to our warranty accrual to reflect revised estimates regarding our projected future warranty obligations. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods. It is possible that changes in our assumptions or future warranty issues could materially affect our financial position and results of operations.

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Forward-Looking Statements

In this MD&A and elsewhere in this Form 10-K (Annual Report), we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 and relate to trends and events that may affect our future financial position and operating results. The terms such as “will,” “may,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “project,” "target," and similar words or expressions, as well as statements in future tense, are intended to identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and may differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

•significant disruptions in production, sales and/or supply as a result of public health crises, including pandemic or epidemic illness such as COVID-19, or otherwise;

•global economic conditions;

•reduced purchases of our products by General Motors Company (GM), Stellantis N.V. (Stellantis), Ford Motor Company (Ford) or other customers;

•our ability to respond to changes in technology, increased competition or pricing pressures;

•our ability to develop and produce new products that reflect market demand;

•lower-than-anticipated market acceptance of new or existing products;

•our ability to attract new customers and programs for new products;

•reduced demand for our customers' products (particularly light trucks and sport utility vehicles (SUVs) produced by GM, Stellantis and Ford);

•risks inherent in our global operations (including tariffs and the potential consequences thereof to us, our suppliers, and our customers and their suppliers, adverse changes in trade agreements, such as the United States-Mexico-Canada Agreement (USMCA), immigration policies, political stability, taxes and other law changes, potential disruptions of production and supply, and currency rate fluctuations);

•supply shortages, such as the semiconductor shortage that the automotive industry is currently experiencing, labor shortages, including increased labor costs, or price increases in raw material and/or freight, utilities or other operating supplies for us or our customers as a result of pandemics, natural disasters or otherwise;

•a significant disruption in operations at one or more of our key manufacturing facilities;

•negative or unexpected tax consequences;

•risks related to a failure of our information technology systems and networks, and risks associated with current and emerging technology threats and damage from computer viruses, unauthorized access, cyber attack and other similar disruptions;

•availability of financing for working capital, capital expenditures, research and development (R&D) or other general corporate purposes including acquisitions, as well as our ability to comply with financial covenants;

•our customers' and suppliers' availability of financing for working capital, capital expenditures, R&D or other general corporate purposes;

•an impairment of our goodwill, other intangible assets, or long-lived assets if our business or market conditions indicate that the carrying values of those assets exceed their fair values;

•liabilities arising from warranty claims, product recall or field actions, product liability and legal proceedings to which we are or may become a party, or the impact of product recall or field actions on our customers;

•our ability or our customers' and suppliers' ability to successfully launch new product programs on a timely basis;

•risks of environmental issues, including impacts of climate-related events, that could result in unforeseen issues or costs at our facilities, or risks of noncompliance with environmental laws and regulations, including reputational damage;

•our ability to maintain satisfactory labor relations and avoid work stoppages;

•our suppliers', our customers' and their suppliers' ability to maintain satisfactory labor relations and avoid work stoppages;

•our ability to achieve the level of cost reductions required to sustain global cost competitiveness;

•our ability to realize the expected revenues from our new and incremental business backlog;

•price volatility in, or reduced availability of, fuel;

•our ability to protect our intellectual property and successfully defend against assertions made against us;

•adverse changes in laws, government regulations or market conditions affecting our products or our customers' products;

•our ability or our customers' and suppliers' ability to comply with regulatory requirements and the potential costs of such compliance;

•changes in liabilities arising from pension and other postretirement benefit obligations;

•our ability to attract and retain qualified personnel in key positions and functions; and

•other unanticipated events and conditions that may hinder our ability to compete.

It is not possible to foresee or identify all such factors and we make no commitment to update any forward-looking statement or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement.

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