September 30, 2006 Form 10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the quarterly period ended September 30,
2006
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or
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from _____________
to
_____________
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Commission
File Number: 1-14303
_______________________________________________________________________________
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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36-3161171
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S.
Employer Identification No.)
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One
Dauch Drive, Detroit, Michigan
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48211-1198
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(Address
of Principal Executive Offices)
|
(Zip
Code)
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(313)
758-2000
(Registrant's
Telephone Number, Including Area Code)
_______________________________________________________________________________
Indicate
by check mark whether the registrant: (1) has filed all reports required
to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was
required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x
Accelerated
filer o
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Exchange Act). Yes o
No
x
As
of
October 25, 2006, the latest practicable date, the number of shares of
the
registrant's Common Stock, par value $0.01 per share, outstanding
was 51,884,582
shares.
Internet
Website Access to Reports
The
website for American Axle & Manufacturing Holdings, Inc. is www.aam.com.
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on
Form 8-K and amendments to those reports filed or furnished pursuant
to Section
13 or 15(d) of the Exchange Act are available free of charge through
our website
as soon as reasonably practicable after they are electronically filed
with, or
furnished to, the Securities and Exchange Commission. The Securities
and
Exchange Commission also maintains a website at www.sec.gov
that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
FORM
10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2006
INDEX
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Page
No.
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1 |
PART
I.
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ITEM
1. |
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2
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2
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3
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4
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5
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ITEM
2.
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14
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ITEM
3.
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24
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ITEM 4.
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24 |
PART
II.
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ITEM
1.
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25
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ITEM
1A.
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25
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ITEM
6.
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25
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26
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27
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EX
10.53 CREDIT AGREEMENT DATED AS OF JUNE
28, 2006, AMENDED AS OF AUGUST 9, 2006 AMONG AMERICAN AXLE &
MANUFACTURING, INC., AMERICAN AXLE & MANUFACTURING HOLDINGS,
INC., AND JPMORGAN CHASE BANK, N.A., AND BANK OF AMERICA,
N.A.
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Certain
statements in this Quarterly Report on Form 10-Q (Quarterly Report) are
forward-looking in nature and relate to trends and events that may affect
our
future financial position and operating results. Such statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms “will,” “expect,” “anticipate,” “intend,”
“project” and similar words or expressions are intended to identify
forward-looking statements. These statements speak only as of the date of
this
Quarterly Report. The statements are based on our current expectations, are
inherently uncertain, are subject to risks and should be viewed with caution.
Actual results and experience may differ materially from the forward-looking
statements as a result of many factors, including, but not limited to:
· |
reduced
purchases of our products by General Motors Corporation (GM),
DaimlerChrysler Corporation (DaimlerChrysler) or other
customers;
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· |
reduced
demand for our customers’ products (particularly light trucks and SUVs
produced by GM and
DaimlerChrysler);
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· |
our
ability and our suppliers’ ability to maintain satisfactory labor
relations and avoid work stoppages;
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· |
our
ability to achieve cost reductions through our special attrition and
salaried retirement incentive
programs;
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· |
our
customers’ and their suppliers’ ability to maintain satisfactory labor
relations and avoid work stoppages;
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· |
supply
shortages or price increases in raw materials, utilities or other
operating supplies;
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· |
our
ability and our customers’ and suppliers’ ability to successfully launch
new product programs;
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· |
our
ability to respond to changes in technology or increased
competition;
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· |
adverse
changes in laws, government regulations or market conditions including
increases in fuel prices affecting our products or our customers’ products
(including the Corporate Average Fuel Economy regulations);
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· |
adverse
changes in the economic conditions or political stability of our
principal
markets (particularly North America, Europe, South America and
Asia);
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· |
liabilities
arising from legal proceedings to which we are or may become a
party or
claims against us or our products;
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· |
risks
of noncompliance with environmental regulations or risks of environmental
issues that could result in unforeseen costs at our
facilities;
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· |
availability
of financing for working capital, capital expenditures, R&D or other
general corporate purposes, including our ability to comply with
financial
covenants;
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· |
our
ability to attract and retain key
associates;
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· |
other
unanticipated events and conditions that may hinder our ability
to
compete.
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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.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three
months ended
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Nine
months ended
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September
30,
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September
30,
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2006
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2005
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2006
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2005
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(In
millions, except per share data)
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Net
sales
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$
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701.2
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$
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848.1
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$
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2,410.6
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$
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2,534.7
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Cost
of goods sold
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763.2
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764.8
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2,319.2
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2,293.7
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Gross
profit (loss)
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(62.0
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)
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83.3
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91.4
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241.0
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Selling,
general and administrative expenses
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48.0
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48.4
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145.9
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144.0
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Operating
income (loss)
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(110.0
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)
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34.9
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(54.5
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)
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97.0
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Net
interest expense
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(11.7
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)
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(7.3
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)
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(27.0
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)
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(20.0
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)
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Other
income (expense)
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Debt refinancing costs
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(0.3
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)
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-
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(2.7
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)
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-
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Other, net
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10.1
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1.2
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11.4
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(0.2
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)
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Income
(loss) before income taxes
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(111.9
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)
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28.8
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(72.8
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)
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76.8
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Income
tax expense (benefit)
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(49.0
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)
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9.5
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(38.9
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)
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25.3
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Net
income (loss)
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$
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(62.9
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)
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$
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19.3
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$
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(33.9
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)
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$
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51.5
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Basic
earnings (loss) per share
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$
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(1.25
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)
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$
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0.38
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$
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(0.67
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)
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$
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1.03
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Diluted
earnings (loss) per share
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$
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(1.25
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)
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$
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0.38
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$
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(0.67
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)
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$
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1.01
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See
accompanying notes to condensed consolidated financial statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
|
September
30,
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December
31,
|
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2006
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2005
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(In
millions)
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Assets
|
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|
|
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Current
assets
|
|
|
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Cash
and cash equivalents
|
$
|
13.9
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$
|
3.7
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|
Accounts
receivable, net
|
|
352.5
|
|
|
328.0
|
|
Inventories,
net
|
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236.9
|
|
|
207.2
|
|
Prepaid
expenses and other
|
|
81.6
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|
|
45.5
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Deferred
income taxes
|
|
44.9
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|
|
17.0
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Total
current assets
|
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729.8
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|
|
601.4
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|
|
|
|
|
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Property,
plant and equipment, net
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1,916.1
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|
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1,836.0
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Deferred
income taxes
|
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35.9
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|
|
3.0
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Goodwill
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147.8
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147.8
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Other
assets and deferred charges
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76.4
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78.4
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Total
assets
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$
|
2,906.0
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$
|
2,666.6
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Liabilities
and Stockholders’ Equity
|
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Current
liabilities
|
|
|
|
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Accounts
payable
|
$
|
348.6
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$
|
338.5
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Trade
payable program liability
|
|
21.1
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|
|
42.6
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Accrued
compensation and benefits
|
|
192.7
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|
|
115.3
|
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Other
accrued expenses
|
|
42.6
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|
|
52.8
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Total
current liabilities
|
|
605.0
|
|
|
549.2
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|
|
|
|
|
|
|
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Long-term
debt
|
|
628.4
|
|
|
489.2
|
|
Deferred
income taxes
|
|
96.3
|
|
|
116.1
|
|
Postretirement
benefits and other long-term liabilities
|
|
625.5
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|
|
517.3
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|
Total
liabilities
|
|
1,955.2
|
|
|
1,671.8
|
|
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|
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Stockholders'
equity
|
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|
|
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Common
stock, par value $0.01 per share
|
|
0.5
|
|
|
0.5
|
|
Paid-in
capital
|
|
378.1
|
|
|
385.6
|
|
Retained
earnings
|
|
786.5
|
|
|
843.5
|
|
Treasury
stock at cost, 5.1 million shares
|
|
|
|
|
|
|
in 2006 and 2005
|
|
(171.8
|
)
|
|
(171.7
|
)
|
Unearned
compensation
|
|
-
|
|
|
(14.8
|
)
|
Accumulated
other comprehensive loss, net of tax
|
|
|
|
|
|
|
Minimum pension liability adjustments
|
|
(52.6
|
)
|
|
(52.6
|
)
|
Foreign currency translation adjustments
|
|
12.1
|
|
|
3.9
|
|
Unrecognized gain (loss) on derivatives
|
|
(2.0
|
)
|
|
0.4
|
|
Total
stockholders' equity
|
|
950.8
|
|
|
994.8
|
|
Total
liabilities and stockholders' equity
|
$
|
2,906.0
|
|
$
|
2,666.6
|
|
See accompanying notes to condensed consolidated financial
statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
(Unaudited)
|
Nine
months ended
|
|
|
September
30,
|
|
|
2006
|
|
2005
|
|
|
(In
millions)
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income (loss)
|
$
|
(33.9
|
)
|
$
|
51.5
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
|
|
|
provided
by operating activities
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
153.2
|
|
|
135.0
|
|
Deferred
income taxes
|
|
(78.7
|
)
|
|
(3.9
|
)
|
Stock-based
compensation
|
|
8.0
|
|
|
3.5
|
|
Pensions
and other postretirement benefits, net of contributions
|
|
82.1
|
|
|
50.4
|
|
Loss
on retirement of equipment
|
|
5.7
|
|
|
2.5
|
|
Debt
refinancing costs
|
|
2.7
|
|
|
-
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
Accounts
receivable
|
|
(22.8
|
)
|
|
(118.4
|
)
|
Inventories
|
|
(28.4
|
)
|
|
(16.8
|
)
|
Accounts
payable and accrued expenses
|
|
114.1
|
|
|
29.2
|
|
Other
assets and liabilities
|
|
(40.3
|
)
|
|
10.4
|
|
Net
cash provided by operating activities
|
|
161.7
|
|
|
143.4
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
(243.5
|
)
|
|
(243.6
|
)
|
Purchase
buyouts of leased equipment
|
|
(19.5
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
(263.0
|
)
|
|
(243.6
|
)
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
Net
borrowings under revolving credit facilities
|
|
24.0
|
|
|
114.3
|
|
Borrowings
of long-term debt
|
|
260.9
|
|
|
-
|
|
Payments
of long-term debt and capital lease obligations
|
|
(147.4
|
)
|
|
(3.6
|
)
|
Debt
issuance costs
|
|
(3.1
|
)
|
|
-
|
|
Employee
stock option exercises
|
|
0.3
|
|
|
4.3
|
|
Dividends
paid
|
|
(23.3
|
)
|
|
(22.7
|
)
|
Net
cash provided by financing activities
|
|
111.4
|
|
|
92.3
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
0.1
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
10.2
|
|
|
(8.0
|
)
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
3.7
|
|
|
14.4
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
$
|
13.9
|
|
$
|
6.4
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
Interest
paid
|
$
|
33.9
|
|
$
|
27.6
|
|
Income
taxes paid, net of refunds
|
$
|
47.7
|
|
$
|
26.8
|
|
See
accompanying notes to condensed consolidated financial statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
September
30, 2006
1. ORGANIZATION
AND BASIS OF PRESENTATION
Organization
American
Axle & Manufacturing Holdings, Inc. (Holdings) and its subsidiaries
(collectively, we, our, us or AAM) is a premier Tier
I
supplier to the automotive industry and a worldwide leader in the manufacture,
engineering, design and validation of driveline and drivetrain systems and
related powertrain components and chassis modules for light trucks, sport
utility vehicles (SUVs), passenger cars and crossover vehicles.
Driveline and drivetrain systems include components that transfer power from
the
transmission and deliver it to the drive wheels. Our driveline, drivetrain
and
related powertrain products include axles, chassis modules, driveshafts,
power
transfer units, transfer cases, chassis and steering components, driving
heads,
crankshafts, transmission parts and metal-formed products. In addition to
locations in the United States (U.S.) (Michigan, New York and Ohio), we have
offices or facilities in Brazil, China, England, Germany, India, Japan, Mexico,
Luxembourg, Poland, Scotland and South Korea.
Basis
of Presentation We
have
prepared the accompanying interim condensed consolidated financial statements
in
accordance with the instructions to Form 10-Q under the Securities Exchange
Act
of 1934. These condensed consolidated financial statements are unaudited
but
include all adjustments which we consider necessary for a fair presentation
of
the information set forth herein. Results of operations for the periods
presented are not necessarily indicative of the results for the full fiscal
year.
The
balance sheet at December 31, 2005 presented herein has been derived from
the
audited consolidated financial statements at that date but does not include
all
of the information and footnotes required by accounting principles generally
accepted in the United States of America (GAAP) for complete consolidated
financial statements.
In
order
to prepare the accompanying interim condensed consolidated financial statements,
we are required to make estimates and assumptions that affect the reported
amounts and disclosures in our interim condensed consolidated financial
statements. Actual results could differ from those estimates.
For
further information, refer to the audited consolidated financial statements
and
notes included in our Annual Report on Form 10-K for the year ended December
31,
2005.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
We
state
our inventories at the lower of cost or market. The cost of our U.S. inventories
is determined principally using the last-in, first-out method (LIFO). The cost
of our foreign and indirect inventories is determined principally using the
first-in, first-out method (FIFO). We
classify indirect inventories, which include perishable tooling, repair parts
and other materials consumed in the manufacturing process but not incorporated
into our finished products, as raw materials. When we determine that our gross
inventories exceed usage requirements, or if inventories become obsolete or
otherwise not saleable, we record a provision for such loss as a component
of
our inventory accounts. This policy predominantly affects our accounting for
indirect inventories.
Inventories
consist of the following:
|
September
30,
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
Raw
materials and work-in-progress
|
$
|
243.7
|
|
$
|
212.2
|
|
Finished
goods
|
|
30.5
|
|
|
29.9
|
|
Gross
inventories
|
|
274.2
|
|
|
242.1
|
|
LIFO
reserve
|
|
(14.6
|
)
|
|
(14.6
|
)
|
Other
inventory valuation reserves
|
|
(22.7
|
)
|
|
(20.3
|
)
|
Inventories,
net
|
$
|
236.9
|
|
$
|
207.2
|
|
3. LONG-TERM
DEBT
Long-term
debt consists of the following:
|
September
30,
|
|
December
31,
|
|
|
2006
|
|
2005
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
$
|
90.0
|
|
$
|
-
|
|
5.25%
Notes, net of discount
|
|
249.7
|
|
|
249.7
|
|
2.00%
Convertible Notes
|
|
2.9
|
|
|
150.0
|
|
Term
Loan
|
|
250.0
|
|
|
-
|
|
Uncommitted
lines of credit
|
|
-
|
|
|
71.5
|
|
Foreign
credit facilities and other
|
|
33.3
|
|
|
15.6
|
|
Capital
lease obligations
|
|
2.5
|
|
|
2.4
|
|
Long-term
debt
|
$
|
628.4
|
|
$
|
489.2
|
|
The
Revolving Credit Facility provides up to $600.0 million of revolving bank
financing commitments through April 2010 and bears interest at rates based
on
LIBOR or an alternate base rate, plus an applicable margin. At September 30,
2006, we had $90.0 million outstanding and $485.8 million available under the
Revolving Credit Facility. This availability reflects a reduction of $24.2
million for standby letters of credit issued against the facility.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
Revolving Credit Facility provides back-up liquidity for our foreign credit
facilities and uncommitted lines of credit. We intend to use the availability
of
long-term financing under the Revolving Credit Facility to refinance any current
maturities related to such debt agreements that are not otherwise refinanced
on
a long-term basis in their respective markets. Accordingly, we have classified
such amounts as long-term debt.
The
5.25%
Notes are senior unsecured obligations of American Axle & Manufacturing,
Inc. (AAM, Inc.) and are fully and unconditionally guaranteed by Holdings.
Holdings has no significant assets other than its 100% ownership of AAM, Inc.
and no subsidiaries other than AAM, Inc.
The
2.00%
Convertible Notes due 2024 (2.00% Convertible Notes) are senior unsecured
obligations of Holdings and are fully and unconditionally guaranteed by AAM,
Inc. In the second quarter of 2006, the 2.00% Convertible Notes became
convertible into cash under the terms of the indenture. A total of $147.1
million of the notes were converted into cash through the third quarter of
2006
and $2.9 million of the notes remain outstanding as of September 30, 2006.
The
cash conversion rights on the outstanding notes remain in effect as of the
date
of this filing. We had been amortizing fees and expenses associated with the
2.00% Convertible Notes over the expected life of the notes. As a result of
the
conversions, we expensed the proportional amount of unamortized debt issuance
costs through the third quarter of 2006, which totaled $2.7 million.
In
the
second quarter of 2006, we entered into a $200.0 million senior unsecured term
loan (the “Term Loan”) that matures on April 12, 2010. In the third quarter of
2006, we borrowed an additional $50.0 million under the Term Loan. The
obligations of AAM, Inc. under the Term Loan are guaranteed by Holdings.
Proceeds from this financing were used for general corporate purposes and to
finance payments related to the cash conversion of the 2.00% Convertible Notes.
Borrowings under the Term Loan bear interest payable at rates based on LIBOR
or
an alternate base rate, plus an applicable margin.
Concurrent
with the Term Loan, we entered into an interest rate swap through April 2010.
The notional amount of the swap is $200.0 million, reducing to $100.0 million
on
December 28, 2008. This interest rate swap converts variable rate financing
based on 3-month LIBOR into fixed U.S. dollar rates.
In
the
third quarter of 2006, we had access to $60.0 million of uncommitted bank lines
of credit, all of which was available as of September 30, 2006.
The
weighted-average interest rate of our long-term debt outstanding at September
30, 2006 was 7.6% as compared to 4.7% at December 31, 2005.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EMPLOYEE
BENEFIT PLANS
The
components of net periodic benefit cost consist of the following:
|
|
Pension
Benefits
|
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
8.4
|
|
$
|
8.0
|
|
$
|
25.2
|
|
$
|
24.8
|
|
Interest
cost
|
|
|
8.4
|
|
|
7.8
|
|
|
25.1
|
|
|
23.6
|
|
Expected
asset return
|
|
|
(7.9
|
)
|
|
(7.6
|
)
|
|
(23.6
|
)
|
|
(22.8
|
)
|
Amortized
loss
|
|
|
1.4
|
|
|
1.2
|
|
|
4.0
|
|
|
3.4
|
|
Amortized
prior service cost
|
|
|
0.7
|
|
|
0.7
|
|
|
2.3
|
|
|
2.3
|
|
Net
periodic benefit cost
|
|
$
|
11.0
|
|
$
|
10.1
|
|
$
|
33.0
|
|
$
|
31.3
|
|
|
|
Other
Postretirement Benefits
|
|
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
10.3
|
|
$
|
9.5
|
|
$
|
30.9
|
|
$
|
28.6
|
|
Interest
cost
|
|
|
8.1
|
|
|
7.3
|
|
|
24.1
|
|
|
21.7
|
|
Amortized
loss
|
|
|
1.4
|
|
|
0.9
|
|
|
4.2
|
|
|
2.9
|
|
Amortized
prior service cost
|
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
(1.1
|
)
|
|
(0.6
|
)
|
Net
periodic benefit cost
|
|
$
|
19.4
|
|
$
|
17.5
|
|
$
|
58.1
|
|
$
|
52.6
|
|
We
have
no required funding obligations for our U.S. defined benefit pension plans
in
2006. Total funding for our defined benefit pension plans, including our
foreign plans, is expected to be less than $10 million in 2006. Our cash
outlay for other postretirement benefit (OPEB) obligations is expected to be
approximately $5 million in 2006.
In
the
third quarter of 2006, we amended our U.S. salaried defined benefit pension
and
OPEB plans. Depending on the plan, these amendments become effective on
December 31, 2006 or January 1, 2007. Under the amended defined benefit pension
plans, benefits for active participants as of December 31, 2006 who will be
eligible for early or normal retirement on or before December 1, 2011 will
be
frozen on December 31, 2011. Pension benefits for all other active
participants in the U.S. defined benefit pension plans will be frozen on
December 31, 2006. Under the amended salaried OPEB plan, future benefits for
associates hired prior to January 1, 2002 who retire after December 1, 2007
will
be reduced or eliminated.
These amendments resulted in a curtailment of
certain benefits under our salaried defined benefit pension and OPEB plans.
As a
result of the curtailment, the funded status of our U.S. salaried defined
benefit pension and OPEB plans was remeasured as of August 1, 2006. The
amendments are expected to result in a net curtailment gain of $6.6 million.
The results of this remeasurement will be recognized in the fourth quarter
of 2006, three months after the remeasurement date, because we have an early
measurement date for our defined benefit pension and OPEB plans.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMPREHENSIVE
INCOME (LOSS)
Comprehensive
income consists of the following:
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(62.9
|
)
|
$
|
19.3
|
|
$
|
(33.9
|
)
|
$
|
51.5
|
|
Foreign
currency translation adjustments,
net
of tax
|
|
|
2.2
|
|
|
4.3
|
|
|
8.2
|
|
|
12.0
|
|
Unrecognized
gain (loss) on derivatives,
net
of tax
|
|
|
(1.2
|
)
|
|
0.2
|
|
|
(2.4
|
)
|
|
(0.4
|
)
|
Comprehensive
income (loss)
|
|
$
|
(61.9
|
)
|
$
|
23.8
|
|
$
|
(28.1
|
)
|
$
|
63.1
|
|
6. EARNINGS
(LOSS) PER SHARE (EPS)
The
following table sets forth the computation of our basic and diluted
EPS:
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(In
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(62.9
|
)
|
$
|
19.3
|
|
$
|
(33.9
|
)
|
$
|
51.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares outstanding -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding
|
|
|
50.3
|
|
|
50.2
|
|
|
50.3
|
|
|
50.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive
stock-based compensation
|
|
|
-
|
|
|
1.2
|
|
|
-
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
shares outstanding -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
weighted-average shares after assumed conversions
|
|
|
50.3
|
|
|
51.4
|
|
|
50.3
|
|
|
51.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(1.25
|
)
|
$
|
0.38
|
|
$
|
(0.67
|
)
|
$
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
(1.25
|
)
|
$
|
0.38
|
|
$
|
(0.67
|
)
|
$
|
1.01
|
|
Basic
and
diluted loss per share in the three and nine months ended September 30, 2006
are
the same because the effect of potential dilutive securities would have been
antidilutive. This effect would have been 1.0 million and 0.9 million
shares for the three and nine months ended September 30, 2006,
respectively.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. |
STOCK-BASED
COMPENSATION
|
Effective
January 1, 2006, we adopted FASB Statement No. 123(R), (SFAS 123R), “Share-Based
Payment.”
Prior to
the adoption of SFAS 123R, we accounted for our stock compensation plans
according to APB Opinion No. 25. (APB 25) “Accounting
for Stock Issued to Employees,”
and
related interpretations. We adopted the fair value recognition provisions of
SFAS 123R using the modified prospective transition method and, therefore,
did
not restate the prior periods’ results. Under this transition method,
stock-based compensation expense for the first quarter of 2006 included
compensation expense for all stock-based compensation awards granted prior
to,
but not yet vested as of, January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of FASB Statement No.
123,
(SFAS 123) “Accounting
for Stock-Based Compensation.”
Stock-based compensation expense for all share-based payment awards granted
after January 1, 2006 is based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R. We recognize these compensation
costs net of a forfeiture rate and recognize the compensation costs for only
those shares expected to vest on a straight-line basis over the requisite
service period of the award, which is generally the option vesting term of
three
years. We estimated the forfeiture rate based on our historical
experience.
Effective
December 31, 2005, we accelerated the vesting of approximately 1.8 million
“out
of the money” stock options, all of which became immediately exercisable in
full. The acceleration was intended to eliminate future compensation expense
with respect to the “out of the money” stock options that we would otherwise
have recognized upon our adoption of SFAS 123R on January 1, 2006.
On
March
15, 2006, we awarded approximately 0.3 million stock options to our executive
officers, which resulted in an immaterial amount of compensation expense
recorded in the first nine months of 2006. As a result of the accelerated
vesting effective December 31, 2005, substantially all stock options were fully
vested upon adoption of SFAS 123R. Therefore, the impact of adopting SFAS 123R
was not material for the first nine months of 2006.
As
of
September 30, 2006, unrecognized compensation cost related to nonvested stock
options totaled $1.6 million. The weighted average period over which this cost
is expected to be recognized is 2.3 years. The total intrinsic value of options
outstanding and exercisable as of September 30, 2006 was $15.3 million and
$14.8 million, respectively. The total intrinsic value of stock options
exercised for the first nine months of 2006 and 2005 was $0.5 million and $9.9
million, respectively.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The
following table illustrates the effect on net income after tax and net income
per common share as if we had applied the fair value recognition provisions
of
SFAS 123 to stock-based compensation during the three months and nine months
ended September 30, 2005:
|
Three
months ended
|
|
Nine
months ended
|
|
|
September
30,
|
|
September
30,
|
|
|
2005
|
|
2005
|
|
|
(In
millions, except per share data)
|
|
Net
income, as reported
|
$
|
19.3
|
|
$
|
51.5
|
|
Deduct:
Total employee stock option
|
|
|
|
|
|
|
expense determined under the fair value method, net of tax
|
|
(2.9
|
)
|
|
(9.2
|
)
|
Pro
forma net income
|
$
|
16.4
|
|
$
|
42.3
|
|
Basic
- as reported
|
$
|
0.38
|
|
$
|
1.03
|
|
Basic
- pro forma
|
$
|
0.33
|
|
$
|
0.84
|
|
Diluted
- as reported
|
$
|
0.38
|
|
$
|
1.01
|
|
Diluted
- pro forma
|
$
|
0.31
|
|
$
|
0.82
|
|
We
estimated the fair value of our employee stock options on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions:
|
|
2006
|
|
2005
|
|
Expected
volatility
|
|
|
41.31
|
%
|
|
41.64
|
%
|
Risk-free
interest rate
|
|
|
4.78
|
%
|
|
4.36
|
%
|
Dividend
yield
|
|
|
3.70
|
%
|
|
2.25
|
%
|
Expected
life of option
|
|
|
7
years
|
|
|
7
years
|
|
Weighted
average grant-date fair value
|
|
$
|
5.33
|
|
$
|
10.50
|
|
We
also
award performance accelerated restricted stock and restricted stock units (PARS
and RSUs, respectively) under our 1999 Stock Incentive Plan. Prior to the
adoption of SFAS 123R, the total amount of compensation expense associated
with
the PARS was recorded as unearned compensation and was presented as a separate
component of stockholders’ equity. In 2006, as required by SFAS 123R, the
remaining unearned compensation was eliminated against paid-in-capital. The
total amount of compensation expense associated with the RSUs is recorded as
an
accrued liability when incurred. The PARS and RSUs vest over three to five
years
contingent upon the satisfaction of future financial performance targets
specified by the plan. The unrecognized compensation is expensed over the
vesting period.
As
of
September 30, 2006, unrecognized compensation cost related to nonvested PARS
and
RSUs totaled $22.3 million. The weighted average period over which this cost
is
expected to be recognized is 2.2 years. The total fair market value of PARS
and
RSUs vested in the first nine months of 2006 was $0.4 million.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In
the
third quarter of 2006, we recognized approximately $2.8 million of expense
related to stock-based compensation awards as compared to $1.7 million in the
third quarter of 2005. In the first nine months of 2006, we recognized
approximately $8.0 million of expense related to stock-based compensation awards
as compared to $3.5 million in the first nine months of 2005.
8. |
Postemployment
Benefits
|
In
the
third quarter of 2006, we recorded a $91.2 million charge to cost of sales
relating to supplemental unemployment benefits (SUB) estimated to be payable
to
the United Automobile, Aerospace and Agricultural Implement Workers of America
(UAW) associates who are expected to be permanently idled through the end
of the
current contract period in February 2008. The collective bargaining agreement
between AAM and the UAW contains a SUB provision, pursuant to which we are
required to pay eligible idled workers certain benefits. In prior periods,
the
cost of SUB and related benefits paid to associates on layoff was expensed
as
incurred. In the third quarter of 2006, several factors have contributed
to a
condition in which future SUB costs became both probable and reasonably
estimable. These factors include the conclusion of mid-contract negotiations
with the UAW regarding SUB, the approval of a supplemental new hire agreement
with the UAW, the agreement with the UAW to offer a special attrition program,
plant loading decisions affecting future production programs included in
our new
and incremental business backlog and revised production schedules by both
General Motors Corporation and DaimlerChrysler Corporation on major
AAM platforms.
Due
to
the complexities inherent in estimating this liability, our actual costs
could
differ materially. Accordingly, we will continue to review our expected
liability and make adjustments as necessary.
We
also
recorded a charge to cost of sales of $1.9 million in the third quarter of
2006
related to future postemployment payments to associates in our European
operations.
The
charges disclosed above exclude costs for pension and OPEB. For further
discussion regarding these benefits, see Note 4 of the Notes to the Condensed
Consolidated Financial Statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Special
Attrition Program
On
October 4, 2006, we announced that we will offer a special attrition program
(SAP) to all UAW associates at AAM’s master agreement facilities in the fourth
quarter of 2006. AAM’s master agreement facilities are located in Detroit,
Michigan; Three Rivers, Michigan; Buffalo, New York; Tonawanda, New York;
and
Cheektowaga, New York. The program offers approximately 6,000 associates
retirement or buyout incentives designed to realign our workforce with actual
and projected production and current market conditions. These associates
have
until December 2006 to make their decision relative to the SAP. Depending
on the
acceptance rate of this program, it is possible that a curtailment of certain
benefits under our U.S. hourly defined benefit pension and OPEB plans will
occur. We will account for the results of this attrition program once the
results are known in the fourth quarter of 2006.
Salaried
Retirement Incentive Program
In
October 2006, we approved a program that will offer an incentive for eligible
salaried associates at the master agreement facilities and corporate offices
in
the U.S. to voluntarily retire. Salaried associates must be eligible to retire
by December 31, 2006 to be eligible for this incentive. These associates
will
have until December 2006 to accept the terms of this program. We will account
for the results of this program once the results are known in the fourth
quarter
of 2006.
In
the
third quarter of 2006, we recognized a favorable outcome of
$9.1
million,
associated
with the resolution of various legal proceedings and claims, net of costs
incurred to resolve these matters. A benefit of $9.8 million resulting from
this
outcome was recorded to Other Income; other costs incurred to resolve these
matters were recognized in cost of sales and selling, general and administrative
expenses.
This
management’s discussion and analysis (MD&A) should be read in conjunction
with the unaudited condensed consolidated financial statements and notes
appearing elsewhere in this Quarterly Report and our Annual Report on Form
10-K
for the year ended December 31, 2005.
Unless
the context otherwise requires, references to "we," "our," "us" or "AAM" shall
mean collectively (i) American Axle & Manufacturing Holdings, Inc.
(Holdings), a Delaware corporation, and (ii) American Axle & Manufacturing,
Inc. (AAM, Inc.), a Delaware corporation, and its direct and indirect
subsidiaries. Holdings has no subsidiaries other than AAM, Inc.
COMPANY
OVERVIEW
We
are a premier
Tier I supplier to the automotive industry and a worldwide leader in the
manufacture, engineering, design and validation of driveline and drivetrain
systems and related powertrain components and chassis modules for light trucks,
sport utility vehicles (SUVs), passenger cars and crossover vehicles. Driveline
and drivetrain systems include components that transfer power from the
transmission and deliver it to the drive wheels. Our driveline, drivetrain
and
related powertrain products include axles, chassis modules, driveshafts, power
transfer units, transfer cases, chassis and steering components, driving heads,
crankshafts, transmission parts and metal-formed products.
We
are
the principal supplier of driveline components to General Motors Corporation
(GM) for its rear-wheel drive (RWD) light trucks and SUVs manufactured in North
America, supplying substantially all of GM’s rear axle and front four-wheel
drive/all-wheel drive (4WD/AWD) axle requirements for these vehicle platforms.
Sales to GM were approximately 77% of our total net sales in the first nine
months of 2006 as compared to 78% for the full-year 2005.
We
are
the sole-source supplier to GM for certain axles and other driveline products
for the life of each GM vehicle program covered by a Lifetime Program Contract
(LPC). Substantially all of our sales to GM are made pursuant to the LPCs.
The
LPCs have terms equal to the lives of the relevant vehicle programs or their
respective derivatives, which typically run 6 to 12 years, and require us to
remain competitive with respect to technology, design and quality. We have
been
successful in competing, and we will continue to compete for future GM business
upon the expiration of the LPCs.
We
are
also the principal supplier of driveline system products for the Chrysler
Group’s heavy-duty Dodge Ram full-size pickup trucks (Dodge Ram program) and its
derivatives. As part of this program, we supply a fully integrated
computer-controlled chassis system for the Dodge Ram Power Wagon. Sales to
DaimlerChrysler Corporation (DaimlerChrysler) were approximately 13% of our
total net sales in the first nine months of 2006 and 2005,
respectively.
In
addition to GM and DaimlerChrysler, we supply driveline systems and other
related components to PACCAR Inc., Volvo Group, Ford Motor Company, Ssangyong
Motor Company and other original equipment manufacturers (OEMs) and Tier I
supplier companies such as Magna International, Inc. and The Timken Company.
Our
net sales to customers other than GM in the first nine months of 2006 and 2005
were $561.4 million.
RESULTS
OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2005
Net
Sales
Net
sales were $701.2 million in the third quarter of 2006 as compared to $848.1
million in the third quarter of 2005. As compared to the third quarter of 2005,
our sales in the third quarter of 2006 reflect an estimated 5% decrease in
customer production volumes for the major full-size truck and SUV programs
we
currently support for GM and DaimlerChrysler and an estimated 54% decrease
in
products supporting GM’s mid-size light truck and SUV programs.
Our
content-per-vehicle (as measured by the dollar value of our products supporting
GM’s N.A. light truck platforms and the Dodge Ram program) was $1,204 in the
third quarter of 2006 as compared to $1,240 in the third quarter of 2005. This
decrease is due primarily to the decrease in our 4WD/AWD penetration rate,
which
was 58.0% in the third quarter of 2006 as compared to 65.9% in the third quarter
of 2005.
Gross
Profit (Loss)
Gross
profit (loss) was a loss of $62.0 million in the third quarter of 2006 as
compared to a profit of $83.3 million in the third quarter of 2005. Gross margin
was negative 8.8% in the third quarter of 2006 as compared to 9.8% in the third
quarter of 2005.
In
the
third quarter of 2006, we recorded a special charge of $91.2 million relating
to
supplemental unemployment benefits estimated to be payable to UAW associates
who
are expected to be permanently idled through the end of the current contract
period in February 2008. In addition to this special charge, we incurred $22.7
million of supplemental unemployment benefits and other related benefit costs
for associates on layoff in the third quarter of 2006 as compared to $11.4
million in the third quarter of 2005. We also recorded a special charge of
$1.9
million in the third quarter of 2006 related to future postemployment payments
to associates in our European operations.
The
decrease in gross profit in the third quarter of 2006 as compared to the third
quarter of 2005 also reflects lower production volumes as well as increases
in
non-cash expenses related to depreciation and amortization, pension and
post-retirement benefit costs and stock-based compensation costs.
Gross
profit in the third quarter of 2005 also reflects the favorable impact of a
$6.2
million retroactive metal market cost recovery reimbursement for costs incurred
in the first half of 2005.
Selling,
General and Administrative Expenses (SG&A) SG&A
(including research and development (R&D)) was $48.0 million or 6.8% of net
sales in the third quarter of 2006 as compared to $48.4 million or 5.7% of
net
sales in the third quarter of 2005. R&D spending increased 12.6% to $20.5
million in the third quarter of 2006 as compared to $18.2 million in the third
quarter of 2005. The decrease in SG&A reflects ongoing cost controls and the
favorable impact of cost recoveries related to expenses incurred in the first
half of 2006.
Operating
Income (Loss) Operating
income (loss) was a loss of $110.0 million in the third quarter of 2006 as
compared to income of $34.9 million in the third quarter of 2005. Operating
margin was negative 15.7% in the third quarter of 2006 as compared to 4.1%
in
the third quarter of 2005. The decreases in operating income and operating
margin were due to the factors discussed in Gross Profit and
SG&A.
Net
Interest
Expense
Net
interest expense was $11.7 million in the third quarter of 2006 as compared
to
$7.3 million in the third quarter of 2005. The increase in interest expense
was
principally due to higher average outstanding borrowings and higher interest
rates.
Debt
Refinancing Costs Debt
refinancing costs expensed in the third quarter of 2006 were $0.3 million.
The
details of the debt refinancing costs are more fully explained in the section
entitled “Liquidity and Capital Resources - Financing Activities.”
Other
Income Other
income in the third quarter of 2006 was $10.1 million compared to $1.2 million
in the third quarter of 2005. Other income in the third quarter of 2006 includes
$9.8 million associated with the resolution
of legal proceedings and claims during the third quarter of 2006, net of costs
incurred to resolve these matters.
Income
Tax Expense (Benefit)
Income
tax expense (benefit) was a $49.0 million benefit in the third quarter of 2006
as compared to a $9.5 million expense in the third quarter of 2005. Our
effective income tax rate was a benefit of 43.8% in the third quarter of 2006,
33.0% in the third quarter of 2005 and 33.0% for the full-year 2005. The change
in the tax rate is primarily a result of recognizing the income tax benefit
of
current year losses in the U.S. and the recognition of foreign tax credit
benefits. In addition, the tax rate reflects the impact of an increase in
foreign source income, which carries a lower overall effective tax rate than
U.S. income.
Net
Income (Loss) and Earnings Per Share (EPS)
Net
income (loss) was a loss of $62.9 million in the third quarter of 2006 as
compared to income of $19.3 million in the third quarter of 2005. Diluted
earnings (loss) per share was a loss of $1.25 in the third quarter of 2006
as
compared to earnings of $0.38 per share in the third quarter of 2005. Net income
(loss) and EPS for the second quarter of 2006 and 2005 were primarily impacted
by the factors discussed in Gross Profit and SG&A.
Earnings
Before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA)
EBITDA
was negative $47.3 million in the third quarter of 2006 as compared to $82.6
million in the third quarter of 2005. EBITDA for the third quarter of 2006
and
2005 was primarily impacted by the factors discussed in Gross Profit and
SG&A. For an explanation and reconciliation of EBITDA, refer to the section
entitled “Supplemental Financial Data.”
RESULTS
OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 2005
Net
Sales
Net
sales were $2,410.6 million in the first nine months of 2006 as compared to
$2,534.7 million in the first nine months of 2005. As compared to the first
nine
months of 2005, our sales in the first nine months of 2006 reflect an estimated
2% increase in customer production volumes for the major full-size truck and
SUV
programs we currently support for GM and DaimlerChrysler and an estimated 30%
decrease in customer production volumes for the GM mid-size light truck and
SUV
programs.
Our
content-per-vehicle was $1,210 in the first nine months of 2006 as compared
to
$1,202 in the first nine months of 2005. New
AAM
content appearing on GM’s full-size utility vehicles, as well as production mix
shifts favoring the Dodge Ram and 4WD HUMMER H3 programs were the primary
drivers of content growth in the first nine months of 2006.
The
penetration rate of our 4WD/AWD systems was 60.9% in the first nine months
of
2006 as compared to 63.7% in the first nine months of 2005.
Gross
Profit
Gross
profit was $91.4 million
in the first nine months of 2006 as compared to $241.0 million in the first
nine
months of 2005. Gross margin was 3.8%
of
sales in the first nine months of 2006 as compared to 9.5% in the first nine
months of 2005.
In
the
third quarter of 2006, we recorded a special charge of $91.2 million relating
to
supplemental unemployment benefits estimated to be payable to UAW associates
who
are expected to be permanently idled through the end of the current contract
period in February 2008. In addition to this special charge, we incurred $58.6
million of supplemental unemployment benefits and other related benefit costs
for associates on layoff in the first nine months of 2006 as compared to $41.5
million in the first nine months of 2005. We also recorded a special charge
of
$1.9 million in the third quarter of 2006 related to future postemployment
payments to associates in our European operations.
The
decrease in gross profit in the first nine months of 2006 as compared to the
first nine months of 2005 also reflects lower production volumes and increases
in non-cash expenses related to depreciation and amortization, pension and
other
postretirement benefit costs and stock-based compensation costs. Ongoing
productivity improvements including material cost reductions and the favorable
impact of additional metal market agreements partially offset the decrease
in
our gross profit in the first nine months of 2006.
Gross
profit in the first nine months of 2005 also reflects an $8.9 million charge
related to lump-sum voluntary separation payments that did not recur in
2006.
Selling,
General and Administrative Expenses (SG&A) SG&A
(including research and development (R&D)) was $145.9 million or 6.1% of net
sales in the first nine months of 2006 as compared to $144.0 million or 5.7%
of
net sales in the first nine months of 2005. R&D increased 10.8% to $60.6
million in the first nine months of 2006 as compared to $54.7 million in the
first nine months of 2005. In addition to higher R&D spending, SG&A
reflects
increased non-cash pension and postretirement benefits and stock-based
compensation expense and higher costs to
support our strategic growth initiatives outside of the U.S., partially offset
by ongoing cost controls and reductions in other general and administrative
expenses.
Operating
Income (Loss)
Operating income (loss) was a loss of $54.5 million in the first nine months
of
2006 as compared to income of $97.0 million in the first nine months of 2005.
Operating margin was negative 2.3% in the first nine months of 2006 as compared
to 3.8% in the first nine months of 2005. The decreases in operating income
and
operating margin were due to the factors discussed in Gross Profit and
SG&A.
Net
Interest Expense
Net
interest expense was $27.0 million in the first nine months of 2006 as compared
to $20.0 million in the first nine months of 2005. The increase in interest
expense was principally due to higher average outstanding borrowings and higher
interest rates.
Debt
Refinancing Costs
Debt
refinancing costs expensed in the first nine months of 2006 were $2.7 million.
The details of the debt refinancing costs are more fully explained in the
section entitled “Liquidity and Capital Resources - Financing
Activities.”
Other
Income (Expense) Other
income (expense) in the first nine months of 2006 was income of $11.4 million
compared to expense of $0.2 million in the first nine months of 2005. Other
income in the first nine months of 2006 includes a $9.8 million benefit
associated with the resolution
of legal proceedings and claims during the third quarter of 2006, net of costs
incurred to resolve these matters.
Income
Tax Expense (Benefit)
Income
tax expense (benefit) was a benefit of $38.9 million in the first nine months
of
2006 as compared to an expense of $25.3 million in the first nine months of
2005. Our effective income tax rate was a benefit of 53.4% in the first nine
months of 2006, 33.0% in the first nine months of 2005 and 33.0% for the
full-year 2005. The change in the tax rate is primarily a result of recognizing
the income tax benefit of current year losses in the U.S. and the recognition
of
foreign tax credit benefits. In addition, the tax rate reflects the impact
of an increase in foreign source income, which carries a lower overall effective
tax rate than U.S. income.
Net
Income (Loss) and Earnings Per Share (EPS)
Net
income (loss) was a loss of $33.9 million in the first nine months of 2006
as
compared to income of $51.5 million in the first nine months of 2005. Diluted
earnings (loss) per share was a loss of $0.67 in the first nine months of 2006
as compared to earnings of $1.01 in the first nine months of 2005. Net income
(loss) and EPS for the first nine months of 2006 and 2005 were primarily
impacted by the factors discussed in Gross Profit and SG&A.
Earnings
Before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA)
EBITDA
was $107.6 million in the first nine months of 2006 as compared to $232.3
million in the first nine months of 2005. EBITDA for the first nine months
of
2006 and 2005 was primarily impacted by the factors discussed in Gross Profit
and SG&A. For an explanation and reconciliation of EBITDA, refer to the
section entitled “Supplemental Financial Data.”
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary liquidity needs are to fund capital expenditures, debt service
obligations, working capital investments and our quarterly cash dividend
program. There is also a potential funding requirement related to our
special attrition and salaried retirement incentive programs. We believe
that operating cash flow and borrowings under our Revolving Credit Facility
will
be sufficient to meet these needs in the foreseeable future.
Operating
Activities Net
cash
provided by operating activities was $161.7 million in the first nine months
of
2006 as compared to $143.4 million in the first nine months of 2005. The
primary factors impacting cash flow in the first nine months of 2006 as compared
to the first nine months of 2005 were:
· |
Lower
operating income;
|
· |
Lower
contributions to pension and other postretirement benefit
plans;
|
· |
Lower
profit sharing payout;
|
· |
Higher
tax payments; and
|
· |
Ongoing
productivity improvements including material cost
reductions.
|
Accounts
Receivable Accounts
receivable increased $24.5 million as of September 30, 2006 as compared to
year-end 2005. This increase was primarily due to increased sales activity
in
August and September of 2006 as compared to November and December of 2005.
Inventory
Inventory increased $29.7 million as of September 30, 2006 as compared to
year-end 2005. This increase was driven primarily by an increase in indirect
inventory to support new programs, in-transit inventory and the cost of raw
materials.
Accrued
Compensation and Benefits
Accrued
compensation and benefits increased by $77.4 million as of September 30, 2006
as
compared to year-end 2005. This increase primarily reflects the liability
recorded in the third quarter of 2006 for supplemental unemployment benefits.
Deferred
Income Taxes
Net
deferred income taxes decreased in 2006 due to the recognition of a deferred
tax
asset related to the liability recorded in the third quarter of 2006 for
supplemental unemployment benefits, the recognition of foreign tax credits
and a
reduction in our foreign deferred tax liabilities. A significant portion of
the foreign tax credits will result in carryforward credits, the benefit of
which is reflected on our balance sheet as a deferred tax asset on
September 30, 2006.
Pension
and Other Postretirement Benefit Obligations
The
adjustment to net operating cash flow related to pension and other
postretirement benefits was $82.1 million in the first nine months of 2006
as
compared to $50.4 million in the first nine months of 2005. This change
primarily reflects a decrease in pension funding, which was $5.8 million in
the first nine months of 2006 as compared to $29.1 million in the first nine
months of 2005. We
have
no required funding obligations for our U.S. defined benefit pension plans
in
2006. Total funding for our defined benefit pension plans, including our
foreign plans, is expected to be less than $10 million in 2006. Our cash
outlay in 2006 for other postretirement benefit (OPEB) obligations is expected
to be approximately $5 million.
TABLE OF CONTENTS
In
the
third quarter of 2006, we amended our U.S. salaried defined benefit pension
and
OPEB plans. Depending on the plan, these amendments become effective on
December 31, 2006 or January 1, 2007. Under the amended defined benefit pension
plans, benefits for active participants as of December 31, 2006 who will be
eligible for early or normal retirement on or before December 1, 2011 will
be
frozen on December 31, 2011. Pension benefits for all other active
participants in the U.S. defined benefit pension plans will be frozen on
December 31, 2006. Under the amended salaried OPEB plan, future benefits for
associates hired prior to January 1, 2002 who retire after December 1, 2007
will
be reduced or eliminated.
These amendments resulted in a curtailment of
certain benefits under our salaried defined benefit pension and OPEB plans.
As a
result of the curtailment, the funded status of our U.S. salaried defined
benefit pension and OPEB plans was remeasured as of August 1, 2006. The
amendments are expected to result in a net curtailment gain of $6.6 million.
The results of this remeasurement will be recognized in the fourth quarter
of 2006, three months after the remeasurement date, because we have an early
measurement date for our defined benefit pension and OPEB plans.
Special
Attrition Program On
October 4, 2006, we announced that we will offer a special attrition program
(SAP) to all UAW associates at AAM’s master agreement facilities in the fourth
quarter of 2006. AAM’s master agreement facilities are located in Detroit,
Michigan; Three Rivers, Michigan; Buffalo, New York; Tonawanda, New York; and
Cheektowaga, New York. The program offers approximately 6,000 associates
retirement or buyout incentives designed to realign our workforce with actual
and projected production and current market conditions. These associates have
until December 2006 to make their decision relative to the SAP.
Depending on the acceptance rate of this program, it is possible that a
curtailment of certain benefits under our U.S. hourly defined benefit pension
and OPEB plans will occur. We will account for the results of this attrition
program once the results are known in the fourth quarter of 2006. We
expect
to make a majority of the payments related to this program in the fourth quarter
of 2006. We intend to fund the program with cash provided from operations in
the
fourth quarter of 2006 and may also utilize funds available under our
Revolving Credit Facility.
Salaried
Retirement Incentive Program
In
October 2006, we approved a program that will offer an incentive for eligible
salaried associates at the master agreement facilities and corporate offices
in
the U.S. to voluntarily retire. Salaried associates must be eligible to retire
by December 31, 2006 to be eligible for this incentive. These associates will
have until December 2006 to accept the terms of this program. We will account
for the results of this program once the results are known in the fourth quarter
of 2006.
In
conjunction with the SAP and the salaried retirement incentive program, we
expect to initiate additional restructuring actions in 2006 to realign our
production capacity and cost structure to current and projected operational
and
market requirements. These actions are expected to include salaried workforce
reductions, the redeployment of machinery and equipment to support new programs,
other steps to rationalize underutilized capacity. We currently expect to incur
special charges of as much as $150 million to $250 million for
restructuring activities in 2006. This range includes $93.1 million of special
charges recorded in the third quarter of 2006 and a possible fourth quarter
curtailment of certain benefits under our defined benefit pension and OPEB
plans
related to these actions.
Investing
Activities
Capital
expenditures were $243.5 million in the first
nine months
of 2006
as compared to $243.6 million in the first
nine months
of 2005.
We
expect
our capital spending in 2006 to be in the range of $280
million
to $300
million
supporting the 2006 and 2007 model year launch of the GMT-900 program and other
major customer programs. We expect to have expenditures in 2006 that will
continue to support our selective global expansion initiatives with new regional
manufacturing facilities in China and Poland and new equipment to enhance our
testing and validation capabilities at our European Headquarters in Bad Homburg,
Germany. Other major capital projects include the expansion of our Colfor
Manufacturing operations in Minerva, Ohio and expenditures to support passenger
car and crossover vehicle programs in our new and incremental business
backlog.
We
lease
certain machinery and equipment under operating leases with various expiration
dates. Pursuant to these operating leases, we have the option to purchase
the underlying machinery and equipment on specified dates. In the second
quarter of 2006, we exercised our purchase options for $19.5 million of such
equipment and renewed equipment leases in the amount of $10.4
million. In
the
third quarter of 2006, we renewed equipment leases in the amount of $23.2
million and elected to exercise our purchase option for $52.5 million of assets
in the fourth quarter of 2006.
Net
Operating Cash Flow and Free Cash Flow
For an
explanation and reconciliation of net operating cash flow and free cash flow,
refer to the section entitled “Supplemental Financial Data.”
Financing
Activities
Net cash
provided by financing activities was $111.4
million
in the first nine months of 2006 as compared to $92.3
million
in the first nine months of 2005. Total long-term debt outstanding increased
$139.2
million
in the first nine months of 2006 to $628.4
million
as compared to $489.2 million at year-end 2005 due to increased working capital
requirements resulting from our customers’ seasonal production requirements.
In
the
first nine
months of 2006, the 2.00% Convertible Notes due 2024 became convertible into
cash under terms of the indenture. A total of $147.1 million of the notes was
converted into cash through the third quarter of 2006 and $2.9 million of the
notes remain outstanding as of September 30, 2006. The cash conversion rights
remain in effect as of the date of this filing. We had been amortizing fees
and
expenses associated with the 2.00% Convertible Notes over the expected life
of
the notes. As a result of these conversions, we expensed the proportional amount
of unamortized debt issuance costs through the third quarter of 2006, which
totaled $2.7 million.
In
the
second quarter of 2006, we entered into a $200.0 million senior unsecured term
loan (Term Loan) that matures on April 12, 2010. In the third quarter of 2006,
we borrowed an additional $50.0 million under the Term Loan. The
obligations of AAM, Inc. under the Term Loan are guaranteed by Holdings.
Proceeds from this financing were used for general corporate purposes and to
finance payments related to the cash conversion of the 2.00% Convertible Notes.
Borrowings under the Term Loan bear interest payable at rates based on LIBOR
or
an alternate base rate, plus an applicable margin.
At
September 30, 2006, we had $90.0
million
outstanding and $485.8 million available under the Revolving Credit Facility.
This availability reflects a reduction of $24.2
million
for standby letters of credit issued against the facility. We also utilize
foreign credit facilities and uncommitted lines of credit to finance working
capital needs. At September 30, 2006, $33.3
million
was outstanding and $89.9
million
was available under such agreements.
The
weighted-average interest rate of our long-term debt outstanding was
6.4%
for the
first nine months of 2006 as compared to 5.0% for the year ended December 31,
2005.
CYCLICALITY
AND SEASONALITY
Our
operations are cyclical because they are directly related to worldwide
automotive production, which is itself cyclical and dependent on general
economic conditions and other factors. Our business is also moderately seasonal
as our major OEM customers historically have a two-week shutdown of operations
in July and an approximate one-week shutdown in December. In addition, our
OEM
customers have historically incurred lower production rates in the third quarter
as model changes enter production. Accordingly, our third quarter and fourth
quarter results may reflect these trends.
LITIGATION
AND ENVIRONMENTAL MATTERS
In
the
third quarter of 2006, we recognized a favorable outcome of $9.1 million
associated with the resolution of legal proceedings and claims during the
quarter, net of costs incurred to resolve these matters.
We
are
involved in various legal proceedings incidental to our business. Although
the
outcome of these matters cannot be predicted with certainty, we do not believe
that any of these matters, individually or in the aggregate, will have a
material adverse effect on our financial condition, results of operations or
cash flows.
We
are
subject to various federal, state, local and foreign environmental and
occupational safety and health laws, regulations and ordinances, including
those
regulating air emissions, water discharge, waste management and environmental
cleanup. We will continue to closely monitor our environmental conditions to
ensure that we are in compliance with all laws, regulations and ordinances.
GM
has agreed to indemnify and hold us harmless against certain environmental
conditions existing prior to our purchase of the assets from GM on March 1,
1994. GM’s indemnification obligations terminated on March 1, 2004 with respect
to any new claims that we may have against GM. We have made, and will continue
to make, capital and other expenditures (including recurring administrative
costs) to comply with environmental requirements. Such expenditures were not
significant in the first nine months of 2006, and we do not expect such
expenditures to be significant for the remainder of 2006.
EFFECT
OF NEW ACCOUNTING STANDARDS
In
December 2004, the FASB issued Statement No. 123(R), (SFAS 123R) “Share-Based
Payment.”
SFAS
123R replaced FASB Statement No. 123, “Accounting
for Stock-Based Compensation”
and
superseded APB Opinion No. 25, “Accounting
for Stock Issued to Employees.”
The
revised statement requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements and measured on
the
fair value of the equity or liability instruments issued. We adopted SFAS 123R
on January 1, 2006, and the adoption did not have a material impact for the
first nine months of 2006. We expect that our stock-based compensation expense
will increase by approximately $6 million in 2006.
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes,” (FIN
48).
FIN 48 clarifies the criteria for recognition of income tax benefits in
accordance with SFAS No. 109, “Accounting
for Income Taxes.”
The
effective date for this interpretation is January 1, 2007. We are currently
assessing the impact of this interpretation.
In
September 2006, the FASB issued Statement No. 158, (SFAS 158) “Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans.”
This
statement amends FASB Statement Nos. 87, 88, 106 and 132R. This statement
requires an employer to recognize in its statement of financial position an
asset for a plan’s overfunded status or a liability for a plan’s underfunded
status, measure a plan’s assets and obligations that determine its funded status
as of the end of the employer’s fiscal year and recognize changes in the funded
status of a defined benefit postretirement plan in other comprehensive income
in
the year in which the changes occur.
The
effective date for balance sheet recognition of the funded status of pension
and
OPEB plans and disclosure provisions is December 31, 2006. We expect the
adoption of SFAS 158 to result in an increase of our liabilities for pension
and
OPEB on December 31, 2006, as compared to the current standards. The effective
date for plan assets and benefit obligations to be measured as of the date
of
the fiscal year-end statement of financial position is January 1, 2008. We
are
considering the early adoption of the measurement date provisions as of December
31, 2006. Adoption of this provision will require a transition adjustment of
the
opening retained earnings balance for the net periodic benefit cost for the
period between the measurement date that is used for the immediately preceding
fiscal year-end and the beginning of the fiscal year that the measurement date
provisions are applied.
SUPPLEMENTAL
FINANCIAL DATA
The
following supplemental financial data presented for the three and nine months
ended September 30, 2006 and 2005 are reconciliations of non-GAAP financial
measures, which are intended to facilitate analysis of our business and
operating performance. This information is not and should not be viewed as
a
substitute for financial measures determined under GAAP. Other companies may
calculate these non-GAAP financial measures differently.
Earnings
Before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA)
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(62.9
|
)
|
$
|
19.3
|
|
$
|
(33.9
|
)
|
$
|
51.5
|
|
Interest
expense
|
|
|
11.8
|
|
|
7.6
|
|
|
27.2
|
|
|
20.5
|
|
Income
tax expense (benefit)
|
|
|
(49.0
|
)
|
|
9.5
|
|
|
(38.9
|
)
|
|
25.3
|
|
Depreciation
and amortization
|
|
|
52.8
|
|
|
46.2
|
|
|
153.2
|
|
|
135.0
|
|
EBITDA
|
|
$
|
(47.3
|
)
|
$
|
82.6
|
|
$
|
107.6
|
|
$
|
232.3
|
|
We
believe EBITDA is a meaningful measure of performance as it is 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, together with other measures, to measure our operating
performance relative to other Tier I automotive suppliers. EBITDA should not
be
construed as income (loss) from operations, net income (loss) or cash flow
from
operating activities as determined under GAAP.
Net
Operating Cash Flow and Free Cash Flow
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Dollars
in millions)
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
161.7
|
|
$
|
143.4
|
|
Less:
Purchases of property, plant and equipment
|
|
|
243.5
|
|
|
243.6
|
|
Net
operating cash flow
|
|
|
(81.8
|
)
|
|
(100.2
|
)
|
Less:
Dividends paid
|
|
|
23.3
|
|
|
22.7
|
|
Free
cash flow
|
|
$
|
(105.1
|
)
|
$
|
(122.9
|
)
|
We
believe net operating cash flow and free cash flow are meaningful measures
as
they are commonly utilized by management and investors to assess our ability
to
generate cash flow from business operations to repay debt and return capital
to
our stockholders. Net operating cash flow is also a key metric used in our
calculation of incentive compensation.
MARKET
RISK
Our
business and financial results are affected by fluctuations in world financial
markets, including interest rates and currency exchange rates. Our hedging
policy has been developed to manage these risks to an acceptable level based
on
management’s judgment of the appropriate trade-off between risk, opportunity and
cost. We do not hold financial instruments for trading or speculative
purposes.
Currency
Exchange Risk Because
a
majority of our business is denominated in U.S. dollars, we do not currently
have significant exposures relating to currency exchange risk. From time to
time, we use foreign currency forward contracts to reduce the effects of
fluctuations in exchange rates, primarily relating to the Mexican Peso, Euro,
Pound Sterling, Brazilian Real and Canadian Dollar. At September 30, 2006,
we
had currency forward contracts with a notional amount of $51.3 million
outstanding.
Future
business operations and opportunities, including the expansion of our business
outside North America, may further increase the risk that cash flows resulting
from these activities may be adversely affected by changes in currency exchange
rates. If and when appropriate, we intend to manage these risks by utilizing
local currency funding of these expansions and various types of foreign exchange
contracts.
Interest
Rate Risk We
are
exposed to variable interest rates on certain credit facilities. From time
to
time, we use interest rate hedging to reduce the effects of fluctuations in
market interest rates. Generally, we designate interest rate swaps as effective
cash flow hedges of the related debt and reflect the net cost of such agreements
as an adjustment to interest expense over the lives of the debt agreements.
We
have hedged a portion of our interest rate risk by entering into an interest
rate swap with a notional amount of $200.0 million, reducing to $100.0 million
on December 28, 2008. This interest rate swap converts variable rate
financing based on 3-month LIBOR into fixed U.S. dollar rates. The
pre-tax earnings and cash flow impact of a one-percentage-point increase in
interest rates (approximately 13% of our weighted-average interest rate at
September 30, 2006) on our long-term debt outstanding at September 30, 2006
would be approximately $1.7 million on an annualized basis.
Under
the
direction of our Chief Executive Officer and Chief Financial Officer, we
evaluated our disclosure controls and procedures and internal control over
financial reporting and concluded that (1) our disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934 (the “Exchange Act”)) were
effective as of September 30, 2006, and (2) no change in internal control over
financial reporting occurred during the quarter ended September 30, 2006 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
In
the
third quarter of 2006, we recognized a favorable outcome of $9.1 million
associated with the resolution of various legal proceedings and claims during
the quarter, net of costs incurred to resolve these matters.
In
the
third quarter of 2006, we identified the following additional risk factor
not
included in our December 31, 2005 Form 10-K.
Our
business may be adversely affected by a violation of financial
covenants
Our
Revolving Credit Facility contains financial covenants which require us
to
comply with a leverage ratio and maintain a minimum level of net worth.
A violation of either of these covenants could result in a default under
our Revolving Credit Facility, which would permit the lenders to accelerate
the
repayment of any borrowings outstanding under the facility. A default or
acceleration under our Revolving Credit Facility may result in defaults
under
our other debt agreements and may adversely affect our business.
(a)
|
Exhibits
required by Item 601 of Regulation S-K are listed in the Exhibit
Index.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
(Registrant)
|
By:
/s/
Michael K. Simonte
|
|
Vice
President - Finance &
|
Chief
Financial Officer
(also
in
the capacity of Chief Accounting Officer)
October
27, 2006
TABLE OF CONTENTS
Number
|
Description
of Exhibit
|
|
|
*10.53
|
Credit
Agreement dated as of June 28, 2006, amended as of August 9, 2006,
among
American Axle & Manufacturing, Inc., American Axle & Manufacturing
Holdings, Inc., and JPMorgan Chase Bank, N.A., and Bank of America,
N.A.
|
|
|
|
|
|
|
*31.1
|
Certification
of Richard E. Dauch, Co-Founder, Chairman of the Board & Chief
Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange
Act
|
|
|
|
|
*31.2
|
Certification
of Michael K. Simonte, Vice President - Finance & Chief
Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange
Act
|
|
|
|
|
*32
|
Certifications
of Richard E. Dauch, Co-Founder, Chairman of the Board & Chief
Executive Officer and Michael K. Simonte, Vice President - Finance
&
Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
(All
other exhibits are not applicable.)
* Filed
herewith