AXL-Q22011-10Q
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended June 30, 2011
 
 
or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from  _____________ to _____________
 
 
Commission File Number:  1-14303
_______________________________________________________________________________

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)

 
Delaware
 
38-3161171
 
 
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
One Dauch Drive, Detroit, Michigan
 
48211-1198
 
 
(Address of Principal Executive Offices)
 
(Zip Code)
 
(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 R No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  R No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   o         Accelerated filer  þ           Non-accelerated filer   o                Smaller reporting company   o
                                                                                (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R

As of July 27, 2011, the latest practicable date, the number of shares of the registrant's Common Stock, par value $0.01 per share, outstanding was 75,334,588 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 (SEC).  The SEC 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.


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2011
TABLE OF CONTENTS
 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



FORWARD-LOOKING STATEMENTS

In this Quarterly Report on Form 10-Q (Quarterly 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,” and similar words of 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:

•
global economic conditions; 
•
our ability to comply with the definitive terms and conditions of various commercial and financing arrangements with General Motors Company (GM);
•
reduced purchases of our products by GM, Chrysler Group LLC (Chrysler) or other customers;
•
reduced demand for our customers’ products (particularly light trucks and sport utility vehicles ("SUVs") produced by GM and Chrysler);
•
availability of financing for working capital, capital expenditures, research and development ("R&D") or other general corporate purposes, including 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;
•
our ability to achieve cost reductions through ongoing restructuring actions;
•
our ability to achieve the level of cost reductions required to sustain global cost competitiveness;
•
our ability, our suppliers' ability and our customers' ability to avoid supply shortages as a result of recent events in Japan or otherwise;
•
our ability to maintain satisfactory labor relations and avoid future work stoppages;
•
our suppliers’, our customers’ and their suppliers’ ability to maintain satisfactory labor relations and avoid work stoppages;
•
additional restructuring actions that may occur;
•
our ability to continue to implement improvements in our U.S. labor cost structure;
•
supply shortages or price increases in raw materials, utilities or other operating supplies;
•
our ability to consummate and integrate acquisitions and joint ventures;
•
our ability or our customers’ and suppliers’ ability to successfully launch new product programs on a timely basis;
•
our ability to realize the expected revenues from our new and incremental business backlog;
•
our ability to attract new customers and programs for new products;
•
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 respond to changes in technology, increased competition or pricing pressures;
•
price volatility in, or reduced availability of, fuel;
•
adverse changes in laws, government regulations or market conditions affecting our products or our customers’ products (such as the Corporate Average Fuel Economy (“CAFE”) regulations);
•
risks inherent in our international operations (including adverse changes in the political stability, taxes and other law changes, potential disruption of production and supply, and currency rate fluctuations);
•
liabilities arising from warranty claims, product recall, product liability and legal proceedings to which we are or may become a party;
•
changes in liabilities arising from pension and other postretirement benefit obligations;
•
risks of noncompliance with environmental regulations or risks of environmental issues that could result in unforeseen costs at our facilities;
•
our ability to attract and retain key associates;
•
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. 
  

1


PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
 
(in millions, except per share data)
 
 

 
 

 
 

 
 

Net sales
$
686.2

 
$
559.6

 
$
1,331.8

 
$
1,081.5

 
 
 
 
 
 
 
 
Cost of goods sold
555.7

 
460.7

 
1,085.9

 
895.3

 
 
 
 
 
 
 
 
Gross profit
130.5

 
98.9

 
245.9

 
186.2

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
58.8

 
48.5

 
115.5

 
93.8

 
 
 
 
 
 
 
 
Operating income
71.7

 
50.4

 
130.4

 
92.4

 
 
 
 
 
 
 
 
Interest expense
(20.5
)
 
(22.6
)
 
(41.8
)
 
(45.3
)
 
 
 
 
 
 
 
 
Investment income
0.3

 
0.6

 
0.6

 
1.0

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Debt refinancing and redemption costs
(3.1
)
 
—

 
(3.1
)
 
—

Other, net
(0.7
)
 
(0.7
)
 
0.3

 
(2.2
)
 
 
 
 
 
 
 
 
Income before income taxes
47.7

 
27.7

 
86.4

 
45.9

 
 
 
 
 
 
 
 
Income tax expense (benefit)
(0.2
)
 
2.4

 
1.9

 
4.4

 
 
 
 
 
 
 
 
Net income
47.9

 
25.3

 
84.5

 
41.5

 
 
 
 
 
 
 
 
Net loss attributable to the noncontrolling interests
1.3

 
0.1

 
2.4

 
0.2

 
 
 
 
 
 
 
 
Net income attributable to AAM
$
49.2

 
$
25.4

 
$
86.9

 
$
41.7

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.65

 
$
0.36

 
$
1.17

 
$
0.58

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.65

 
$
0.34

 
$
1.15

 
$
0.56

 
See accompanying notes to condensed consolidated financial statements.                   


2


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

 
 
June 30, 2011
 
December 31, 2010
 
 
(Unaudited)
 
 
Assets
 
(in millions)
Current assets
 
 
Cash and cash equivalents
 
$
250.3

 
$
244.6

Accounts receivable, net
 
199.0

 
146.6

Inventories, net
 
148.5

 
130.3

Prepaid expenses and other current assets
 
80.8

 
80.6

Total current assets
 
678.6

 
602.1

 
 
 

 
 

Property, plant and equipment, net
 
960.4

 
936.3

Goodwill
 
156.6

 
155.8

GM postretirement cost sharing asset
 
240.5

 
244.4

Other assets and deferred charges
 
159.3

 
176.1

Total assets
 
$
2,195.4

 
$
2,114.7

 
 
 

 
 

Liabilities and Stockholders’ Deficit
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
355.0

 
$
283.6

Accrued compensation and benefits
 
116.5

 
115.1

Deferred revenue
 
60.5

 
79.9

Accrued expenses and other current liabilities
 
96.5

 
90.5

Total current liabilities
 
628.5

 
569.1

 
 
 

 
 

Long-term debt
 
964.6

 
1,010.0

Deferred revenue
 
97.7

 
116.0

Postretirement benefits and other long-term liabilities
 
862.5

 
887.7

Total liabilities
 
2,553.3

 
2,582.8

 
 
 

 
 

Stockholders' deficit
 
 

 
 

Common stock, par value $0.01 per share
 
0.8

 
0.8

Paid-in capital
 
595.8

 
588.1

Accumulated deficit
 
(699.4
)
 
(786.3
)
Treasury stock at cost, 5.5 million shares as of June 30, 2011 and December 31, 2010
 
(176.2
)
 
(176.1
)
Accumulated other comprehensive income (loss), net of tax
 
 
 
 
Defined benefit plans
 
(148.6
)
 
(152.1
)
Foreign currency translation adjustments
 
57.5

 
44.8

Unrecognized gain on derivatives
 
2.4

 
1.3

Total AAM stockholders' deficit
 
(367.7
)
 
(479.5
)
Noncontrolling interest in subsidiaries
 
9.8

 
11.4

Total stockholders’ deficit
 
(357.9
)
 
(468.1
)
Total liabilities and stockholders' deficit
 
$
2,195.4

 
$
2,114.7

 
See accompanying notes to condensed consolidated financial statements. 

3


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
 
 
June 30,
 
 
2011
 
2010
 
 
(in millions)
Operating activities
 
 
 
 
Net income
 
$
84.5

 
$
41.5

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
68.8

 
64.4

Asset impairments and related indirect inventory obsolescence
 
—

 
8.7

Deferred income taxes
 
22.3

 
—

Stock-based compensation
 
3.1

 
4.9

Pensions and other postretirement benefits, net of contributions
 
1.6

 
(16.3
)
Loss (gain) on disposal of property, plant and equipment, net
 
(6.5
)
 
0.1

Debt refinancing and redemption costs
 
1.8

 
—

Changes in operating assets and liabilities
 
 
 
 
Accounts receivable
 
(50.3
)
 
(43.0
)
Inventories
 
(16.8
)
 
(26.6
)
Accounts payable and accrued expenses
 
67.3

 
117.1

Deferred revenue
 
(37.7
)
 
(29.6
)
Other assets and liabilities
 
(21.6
)
 
43.7

Net cash provided by operating activities
 
116.5

 
164.9

 
 
 

 
 

Investing activities
 
 

 
 

Purchases of property, plant and equipment
 
(71.6
)
 
(36.9
)
Proceeds from sale of property, plant and equipment
 
7.8

 
1.2

Purchase buyouts of leased equipment
 
—

 
(7.4
)
Redemption of short-term investments
 
—

 
1.6

Net cash used in investing activities
 
(63.8
)
 
(41.5
)
 
 
 

 
 

Financing activities
 
 

 
 

Net short-term borrowings (repayments) under revolving credit facilities
 
—

 
(60.0
)
Payments of long-term debt and capital lease obligations
 
(49.2
)
 
(4.8
)
Proceeds from issuance of long-term debt
 
1.8

 
7.3

Debt issuance costs
 
(5.3
)
 
(2.2
)
Repurchase of treasury stock
 
(0.1
)
 
(1.3
)
Employee stock option exercises
 
4.6

 
—

Net cash used in financing activities
 
(48.2
)
 
(61.0
)
 
 
 

 
 

Effect of exchange rate changes on cash
 
1.2

 
(1.8
)
 
 
 

 
 

Net increase in cash and cash equivalents
 
5.7

 
60.6

 
 
 

 
 

Cash and cash equivalents at beginning of period
 
244.6

 
178.1

 
 
 

 
 

Cash and cash equivalents at end of period
 
$
250.3

 
$
238.7

 
 
 

 
 

Supplemental cash flow information
 
 

 
 

     Interest paid
 
$
38.2

 
$
20.3

     Income taxes paid (refunds received), net
 
$
2.8

 
$
(45.1
)
 
See accompanying notes to condensed consolidated financial statements.

4


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011
(Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization  American Axle & Manufacturing Holdings, Inc. (Holdings) and its subsidiaries (collectively, we, our, us or AAM) is a Tier I supplier to the automotive industry. We manufacture, engineer, design and validate driveline and drivetrain systems and related components and chassis modules for light trucks, sport utility vehicles (SUVs), passenger cars, crossover vehicles and commercial 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 products include axles, chassis modules, driveshafts, power transfer units, transfer cases, chassis and steering components, driveheads, crankshafts, transmission parts and metal-formed products. In addition to locations in the United States (U.S.) (Michigan, New York, Ohio, Indiana and Pennsylvania), we also have offices or facilities in Brazil, China, Germany, India, Japan, Luxembourg, Mexico, Poland, Scotland, South Korea, Sweden and Thailand.

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 normal recurring 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, 2010 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, 2010.

2. RESTRUCTURING ACTIONS

A summary of the restructuring related activity for the six months ended June 30, 2011 is shown below (in millions):
 
 
One-time
 
Asset
 
Contract
 
 
 
 
Termination
 
Retirement
 
Related
 
 
 
 
Benefits
 
Obligations
 
Costs
 
Total
Accrual as of December 31, 2010
 
$
1.2

 
$
1.4

 
$
12.2

 
$
14.8

    Cash utilization
 
(0.4
)
 
(0.1
)
 
(3.5
)
 
(4.0
)
    Accrual adjustments
 
—

 
0.1

 
—

 
0.1

Accrual as of June 30, 2011
 
$
0.8

 
$
1.4

 
$
8.7

 
$
10.9


We expect to make payments of approximately $6 million during the remainder of 2011 and $5 million in 2012 related to the remaining restructuring accrual.


5
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. INVENTORIES

We state our inventories at the lower of cost or market.  The cost of worldwide inventories is determined using the FIFO method.  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.

Inventories consist of the following: 
 
 
June 30, 2011
 
December 31, 2010
 
 
(in millions)
 
 
 
 
 
Raw materials and work-in-progress
 
$
155.7

 
$
137.7

Finished goods
 
23.2

 
20.3

Gross inventories
 
178.9

 
158.0

Inventory valuation reserves
 
(30.4
)
 
(27.7
)
Inventories, net
 
$
148.5

 
$
130.3

 
4. LONG-TERM DEBT

Long-term debt consists of the following:
 
 
 
June 30, 2011
 
December 31,
2010
 
 
(in millions)
 
 
 
 
 
Amended and Restated Revolving Credit Facility
 
$
—

 
$
—

9.25% Notes, net of discount
 
378.7

 
420.3

7.875% Notes
 
300.0

 
300.0

5.25% Notes, net of discount
 
249.9

 
249.9

2.00% Convertible Notes
 
—

 
0.4

Foreign credit facilities
 
29.5

 
32.6

Capital lease obligations
 
6.5

 
6.8

Long-term debt
 
$
964.6

 
$
1,010.0


On June 6, 2011, we voluntarily redeemed 10% of our 9.25% Notes outstanding at a redemption price of 103% of the principal amount. This resulted in a principal payment of $42.5 million and a $1.3 million payment for the redemption premium, as well as a payment related to accrued interest. Upon repayment, we expensed $1.4 million for the write off of a proportional amount of unamortized debt discount and issuance costs related to this debt. We had been amortizing the debt issuance costs and debt discount over the expected life of the borrowing.

On June 30, 2011, we amended and restated the Credit Agreement dated as of January 9, 2004 (as amended and restated, the “Amended and Restated Revolving Credit Agreement” and the facility thereunder, the “Amended Revolving Credit Facility”). As of June 30, 2011, the Revolving Credit Facility provided up to $53.1 million of revolving bank financing commitments through December 2011, $86.9 million of such revolving bank financing commitments through June 2013 and $235.0 million of such revolving bank financing commitments through June 30, 2016.  At June 30, 2011, we had $345.0 million available under the Revolving Credit Facility.  This availability reflects a reduction of $30.0 million for standby letters of credit issued against the facility.

The Amended and Restated Revolving Credit Agreement, among other things, increased the aggregate commitments by approximately $79.0 million and extended the maturity of $235.0 million of the aggregate commitments to June 30, 2016. We paid debt issuance costs of $5.3 million in the second quarter of 2011 associated with the amendments and restatements of our Revolving Credit Facility.

6
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Borrowings under the Amended and Restated Revolving Credit Facility bear interest at rates based on adjusted LIBOR or an alternate base rate, plus an applicable margin. The applicable margin for LIBOR based loans for lenders who extended their maturities will be between 3.00% and 4.50%, depending upon the corporate ratings of the Company. The applicable margin for lenders who did not extend their maturities remains the same.

Under the Amended and Restated Revolving Credit Facility, we are required to comply with financial covenants related to secured indebtedness leverage, total net leverage, and cash interest expense coverage.  The Amended and Restated Revolving Credit Facility limits our ability to make certain investments, declare or pay dividends or distributions on capital stock, redeem or repurchase capital stock and certain debt obligations, incur liens, incur indebtedness, or merge, make acquisitions and sell assets.

The Amended and Restated Revolving Credit Facility is secured on a first priority basis by substantially all of the assets of Holdings, AAM Inc. and each guarantor party thereto, including a pledge of all capital stock of the U.S. subsidiaries of Holdings and each guarantor and a portion of the capital stock of AAM Inc. and each guarantor's first-tier foreign subsidiaries. In addition, obligations under the Amended and Restated Revolving Credit Facility are guaranteed by Holdings and AAM Inc.'s U.S. subsidiaries, all of which are directly owned by AAM Inc.

The Amended and Restated Revolving Credit Facility provides back-up liquidity for our foreign credit facilities.  We intend to use the availability of long-term financing under the Amended and Restated 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 local markets.

As part of the 2009 Settlement and Commercial Agreement with GM, we entered into certain agreements which, among other things, provided us with expedited payment terms of “net 10 days” in exchange for a 1% early payment discount and a Second Lien Term Loan Agreement through December 31, 2013. Pursuant to the terms of such agreements, we elected to terminate the expedited payment terms as well as the Second Lien Term Loan Agreement, effective June 30, 2011. As a result of these terminations, our Access and Security Agreement with GM is due to expire on September 28, 2011, barring the occurrence of certain specified events, which generally involve a material and imminent breach of our supply obligations at any specified facility.

We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries.  At June 30, 2011, $29.5 million was outstanding under these facilities with no additional availability.

The weighted-average interest rate of our long-term debt outstanding at June 30, 2011 was 8.1% and 8.2% as of December 31, 2010.  

5. FAIR VALUE

The fair value accounting guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”  The definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset.  This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:

•
Level 1:  Observable inputs such as quoted prices in active markets;
•
Level 2:  Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•
Level 3:  Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

7
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Financial instruments   The estimated fair value of our financial assets and liabilities that are recognized at fair value on a recurring basis, using available market information and other observable data, as of June 30, 2011, are as follows:
 
 
 
June 30, 2011
 
December 31, 2010
 
 
 
 
  Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Input
 
 
(in millions)
 
  (in millions)
 
 
Balance Sheet Classification
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
105.6

 
$
105.6

 
$
152.5

 
$
152.5

 
Level 1
Prepaid expenses and other current
    assets
 
 

 
 

 
 

 
 

 
 
Currency forward contracts
 
2.2

 
2.2

 
1.3

 
1.3

 
Level 2
Other assets and deferred charges
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
 
0.2

 
0.2

 
—

 
—

 
Level 2
 
The carrying value of our cash, accounts receivable, accounts payable and accrued liabilities approximates their fair values due to the short-term maturities of these instruments.  The carrying value of our borrowings under the foreign credit facilities approximates their fair value due to the frequent resetting of the interest rates.  We estimated the fair value of the amounts outstanding on our debt using available market information and other observable data, to be as follows:
 
 
 
June 30, 2011
 
December 31, 2010
 
 
 
 
Carrying  Amount
 
Fair Value
 
Carrying  Amount
 
Fair Value
 
 
Input
 
 
(in millions)
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
9.25% Notes
 
$
378.7

 
$
416.9

 
$
420.3

 
$
473.9

 
Level 2
7.875% Notes
 
300.0

 
300.0

 
300.0

 
306.0

 
Level 2
5.25% Notes
 
249.9

 
247.2

 
249.9

 
245.0

 
Level 2
 
6. DERIVATIVES

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 forward contracts  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.  As of June 30, 2011, we have forward contracts outstanding with a notional amount of $57.9 million that hedge our exposure to changes in foreign currency exchange rates for our payroll expenses.  

The following table summarizes the reclassification of pre-tax derivative gains into net income from accumulated other comprehensive income (loss):
 
 
Location of
 
Gain Reclassified
 
Gain Expected to be
 
 
Gain
 
Three Months Ended
 
Six Months Ended
 
Reclassified
 
 
  Reclassified into
 
June 30,
 
June 30,
 
During the
 
 
  Net Income
 
2011
 
2010
 
2011
 
2010
 
Next 12 Months
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
 
Cost of Goods Sold
 
$
1.5

 
$
—

 
$
2.2

 
$
—

 
$
2.2

 

8
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost are as follows:

 
 
Pension Benefits
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Service cost
 
$
1.1

 
$
1.3

 
$
2.2

 
$
2.5

Interest cost
 
9.2

 
9.2

 
18.4

 
18.5

Expected asset return
 
(7.9
)
 
(8.0
)
 
(15.8
)
 
(16.0
)
Amortized loss
 
1.1

 
0.6

 
2.2

 
1.2

Net periodic benefit cost
 
$
3.5

 
$
3.1

 
$
7.0

 
$
6.2

 
 
 
 
 
Other Postretirement Benefits
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(in millions)
 
 
 

 
 

 
 

 
 

Service cost
 
$
0.2

 
$
0.2

 
$
0.4

 
$
0.5

Interest cost
 
4.3

 
4.0

 
8.6

 
8.0

Amortized gain
 
0.1

 
(0.4
)
 
0.2

 
(0.7
)
Amortized prior service credit
 
(0.8
)
 
(0.7
)
 
(1.6
)
 
(1.5
)
Net periodic benefit cost
 
$
3.8

 
$
3.1

 
$
7.6

 
$
6.3


Our regulatory pension funding requirements in 2011 are approximately $25 million. We expect our cash outlay for other postretirement benefit obligations in 2011, net of GM cost sharing, to be approximately $15 million.



9
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.    PRODUCT WARRANTIES

We record a liability for estimated warranty obligations at the dates our product are sold.  These estimates are established using sales volumes and internal and external warranty data where there is no payment history and historical information about the average cost of warranty claims for customers with prior claims.  We adjust the liability as necessary.

As part of the 2009 Settlement and Commercial Agreement, AAM agreed to expanded warranty cost sharing with GM starting on January 1, 2011.

The following table provides a reconciliation of changes in the product warranty liability:

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
5.3

 
$
2.0

 
$
2.3

 
$
2.1

     Accruals
 
3.1

 
0.2

 
6.1

 
0.4

     Settlements
 
(0.3
)
 
(0.1
)
 
(0.4
)
 
(0.2
)
     Adjustment to prior period accruals
 
(0.1
)
 
(0.1
)
 
—

 
(0.2
)
     Foreign currency translation and other
 
0.1

 
—

 
0.1

 
(0.1
)
Ending balance
 
$
8.1

 
$
2.0

 
$
8.1

 
$
2.0



9. INCOME TAXES

  We are required to adjust our effective tax rate each quarter to consistently estimate our annual effective tax rate.  We must also record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.  In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate.  The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.

Income tax expense (benefit) was a benefit of $0.2 million in the three months ended June 30, 2011 and expense of $1.9 million in the first six months of 2011 as compared to expense of $2.4 million in the three months ended June 30, 2010 and expense of $4.4 million in the first six months of 2010.  Our effective income tax rate was negative 0.5% in the second quarter of 2011 and 2.2% in the first six months of 2011 as compared to 8.4% in the second quarter of 2010 and 9.5% in the first six months of 2010.  Our income tax expense (benefit) and effective tax rate for the three and six months ended June 30, 2011 reflects the effect of recognizing a net operating loss benefit against our taxable income in the U.S. Our income tax expense (benefit) for the three and six months ended June 30, 2011 also reflects net tax benefits of $2.8 million relating to the favorable resolution of income tax audits and the reversal of state deferred tax liabilities due to newly enacted Michigan tax legislation. Our income tax expense and effective tax rate for the three and six months ended June 30, 2010 reflected the effect of recording a valuation allowance against income tax benefits on U.S. losses.

In the second quarter of 2011, we settled our 2004 through 2007 U.S. federal income tax audits. As a result of the settlement, in addition to a favorable tax benefit adjustment of $1.3 million included above, our gross unrecognized tax benefits were reduced by $28.7 million, our deferred tax assets were reduced by $22.3 million and our income tax payable increased by $5.1 million.


 


10
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. COMPREHENSIVE INCOME

Comprehensive income consists of the following:

 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Net income
 
$
47.9

 
$
25.3

 
$
84.5

 
$
41.5

Defined benefit plans, net of tax
 
0.4

 
(0.3
)
 
3.5

 
2.0

Foreign currency translation adjustments, net of tax
 
8.3

 
(2.8
)
 
13.5

 
(8.0
)
Change in derivatives, net of tax
 
(0.1
)
 
0.1

 
1.1

 
0.1

Comprehensive income
 
$
56.5

 
$
22.3

 
$
102.6

 
$
35.6

Net loss attributable to noncontrolling interests
 
1.3

 
0.1

 
2.4

 
0.2

Foreign currency translation adjustments related to noncontrolling interests
 
—

 
(0.1
)
 
(0.8
)
 
—

Comprehensive income attributable to AAM
 
$
57.8

 
$
22.3

 
$
104.2

 
$
35.8


11. EARNINGS PER SHARE (EPS)

 The following table sets forth the computation of our basic and diluted EPS:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2011
 
2010
 
2011
 
2010
 
 
(in millions, except per share data)
Numerator
 
 
 
 
 
 
 
 
Net income attributable to AAM
 
$
49.2

 
$
25.4

 
$
86.9

 
$
41.7

 
 
 

 
 

 
 

 
 

Denominator
 
 

 
 

 
 

 
 

Basic shares outstanding -
 
 

 
 

 
 

 
 

   Weighted-average shares outstanding
 
75.4

 
71.5

 
74.5

 
71.5

 
 
 

 
 

 
 

 
 

Effect of dilutive securities
 
 

 
 

 
 

 
 

   Dilutive stock-based compensation
 
—

 
0.1

 
0.2

 
0.1

   Dilutive GM warrants
 
—

 
2.9

 
0.7

 
2.9

 
 
 

 
 

 
 

 
 

Diluted shares outstanding -
 
 

 
 

 
 

 
 

   Adjusted weighted-average shares after assumed conversions
 
75.4

 
74.5

 
75.4

 
74.5

 
 
 

 
 

 
 

 
 

Basic EPS
 
$
0.65

 
$
0.36

 
$
1.17

 
$
0.58

 
 
 

 
 

 
 

 
 

Diluted EPS
 
$
0.65

 
$
0.34

 
$
1.15

 
$
0.56

 
Certain exercisable stock options were excluded in the computations of diluted EPS because the exercise price of these options was greater than the average period market prices. The number of stock options outstanding, which were not included in the calculation of diluted EPS, was 4.1 million at June 30, 2011 and 4.8 million at June 30, 2010. The ranges of exercise prices related to the excluded exercisable stock options were $15.56 - $40.83 at June 30, 2011 and $10.08 - $40.83 at June 30, 2010.

11
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


As part of the 2009 Settlement and Commercial Agreement, we issued to GM five year warrants, which entitled GM to purchase 4.1 million shares of AAM's common stock at an exercise price of $2.76 per share. In the first quarter of 2011, GM exercised these warrants. In accordance with the cashless exercise option available in the agreement, we issued 3.3 million net shares of common stock to GM.

12. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Holdings has no significant assets other than its 100% ownership in AAM, Inc. and no direct subsidiaries other than AAM, Inc.  Holdings fully and unconditionally guarantees the 5.25% Notes and 7.875% Notes, which are senior unsecured obligations of AAM, Inc.  The 2.00% Convertible Notes are senior unsecured obligations of Holdings and are fully and unconditionally guaranteed by AAM, Inc.
 
The following Condensed Consolidating Financial Statements are included in lieu of providing separate financial statements for Holdings and AAM, Inc. These Condensed Consolidating Financial Statements are prepared under the equity method of accounting whereby the investments in subsidiaries are recorded at cost and adjusted for the parent’s share of the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other equity changes.

12
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidating Statements of Operations
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Holdings
 
AAM Inc.
 
All Others
 
Elims
 
Consolidated
2011
 
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
 
 
 
External
 
$
—

 
$
219.3

 
$
466.9

 
$
—

 
$
686.2

Intercompany
 
—

 
6.4

 
54.3

 
(60.7
)
 
—

Total net sales
 
—

 
225.7

 
521.2

 
(60.7
)
 
686.2

Cost of goods sold
 
—

 
203.8

 
412.6

 
(60.7
)
 
555.7

Gross profit
 
—

 
21.9

 
108.6

 
—

 
130.5

Selling, general and administrative expenses
 
—

 
48.3

 
10.5

 
—

 
58.8

Operating income (loss)
 
—

 
(26.4
)
 
98.1

 
—

 
71.7

Non-operating income (expense), net
 
—

 
(25.0
)
 
1.0

 
—

 
(24.0
)
Income (loss) before income taxes
 
—

 
(51.4
)
 
99.1

 
—

 
47.7

Income tax expense (benefit)
 
—

 
(2.3
)
 
2.1

 
—

 
(0.2
)
Earnings from equity in subsidiaries
 
49.2

 
47.9

 
—

 
(97.1
)
 
—

Net income (loss) before royalties and dividends
 
49.2

 
(1.2
)
 
97.0

 
(97.1
)
 
47.9

Royalties and dividends
 
—

 
50.4

 
(50.4
)
 
—

 
—

Net income after royalties and dividends
 
49.2

 
49.2

 
46.6

 
(97.1
)
 
47.9

Net loss attributable to noncontrolling interests
 
—

 
—

 
1.3

 
—

 
1.3

Net income attributable to AAM
 
$
49.2

 
$
49.2

 
$
47.9

 
$
(97.1
)
 
$
49.2

 
 
 
 
 
 
 
 
 
 
 
2010
 
 

 
 

 
 

 
 

 
 

Net sales
 
 

 
 

 
 

 
 

 
 

External
 
$
—

 
$
136.7

 
$
422.9

 
$
—

 
$
559.6

Intercompany
 
—

 
7.4

 
45.1

 
(52.5
)
 
—

Total net sales
 
—

 
144.1

 
468.0

 
(52.5
)
 
559.6

Cost of goods sold
 
—

 
134.0

 
379.2

 
(52.5
)
 
460.7

Gross profit
 
—

 
10.1

 
88.8

 
—

 
98.9

Selling, general and administrative expenses
 
—

 
44.5

 
4.0

 
—

 
48.5

Operating income (loss)
 
—

 
(34.4
)
 
84.8

 
—

 
50.4

Non-operating expense, net
 
—

 
(22.0
)
 
(0.7
)
 
—

 
(22.7
)
Income (loss) before income taxes
 
—

 
(56.4
)
 
84.1

 
—

 
27.7

Income tax expense
 
—

 
0.5

 
1.9

 
—

 
2.4

Earnings from equity in subsidiaries
 
25.4

 
62.5

 
—

 
(87.9
)
 
—

Net income before royalties and dividends
 
25.4

 
5.6

 
82.2

 
(87.9
)
 
25.3

Royalties and dividends
 
—

 
19.8

 
(19.8
)
 
—

 
—

Net income after royalties and dividends
 
25.4

 
25.4

 
62.4

 
(87.9
)
 
25.3

Net loss attributable to noncontrolling interests
 
—

 
—

 
0.1

 
—

 
0.1

Net income attributable to AAM
 
$
25.4

 
$
25.4

 
$
62.5

 
$
(87.9
)
 
$
25.4

 

13
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidating Statements of Operations
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Holdings
 
AAM Inc.
 
All Others
 
Elims
 
Consolidated
2011
 
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
 
 
 
External
 
$
—

 
$
414.9

 
$
916.9

 
$
—

 
$
1,331.8

Intercompany
 
—

 
12.3

 
102.0

 
(114.3
)
 
—

Total net sales
 
—

 
427.2

 
1,018.9

 
(114.3
)
 
1,331.8

Cost of goods sold
 
—

 
386.6

 
813.6

 
(114.3
)
 
1,085.9

Gross profit
 
—

 
40.6

 
205.3

 
—

 
245.9

Selling, general and administrative expenses
 
—

 
96.0

 
19.5

 
—

 
115.5

Operating income (loss)
 
—

 
(55.4
)
 
185.8

 
—

 
130.4

Non-operating income (expense), net
 
—

 
(47.0
)
 
3.0

 
—

 
(44.0
)
Income (loss) before income taxes
 
—

 
(102.4
)
 
188.8

 
—

 
86.4

Income tax expense (benefit)
 
—

 
(2.0
)
 
3.9

 
—

 
1.9

Earnings from equity in subsidiaries
 
86.9

 
87.9

 
—

 
(174.8
)
 
—

Net income (loss) before royalties and dividends
 
86.9

 
(12.5
)
 
184.9

 
(174.8
)
 
84.5

Royalties and dividends
 
—

 
99.4

 
(99.4
)
 
—

 
—

Net income after royalties and dividends
 
86.9

 
86.9

 
85.5

 
(174.8
)
 
84.5

Net loss attributable to noncontrolling interests
 
—

 
—

 
2.4

 
—

 
2.4

Net income attributable to AAM
 
$
86.9

 
$
86.9

 
$
87.9

 
$
(174.8
)
 
$
86.9

 
 
 
 
 
 
 
 
 
 
 
2010
 
 

 
 

 
 

 
 

 
 

Net sales
 
 

 
 

 
 

 
 

 
 

External
 
$
—

 
$
255.0

 
$
826.5

 
$
—

 
$
1,081.5

Intercompany
 
—

 
14.4

 
84.5

 
(98.9
)
 
—

Total net sales
 
—

 
269.4

 
911.0

 
(98.9
)
 
1,081.5

Cost of goods sold
 
—

 
262.7

 
731.5

 
(98.9
)
 
895.3

Gross profit
 
—

 
6.7

 
179.5

 
—

 
186.2

Selling, general and administrative expenses
 
—

 
86.3

 
7.5

 
—

 
93.8

Operating income (loss)
 
—

 
(79.6
)
 
172.0

 
—

 
92.4

Non-operating expense, net
 
—

 
(44.5
)
 
(2.0
)
 
—

 
(46.5
)
Income (loss) before income taxes
 
—

 
(124.1
)
 
170.0

 
—

 
45.9

Income tax expense
 
—

 
0.2

 
4.2

 
—

 
4.4

Earnings from equity in subsidiaries
 
41.7

 
127.5

 
—

 
(169.2
)
 
—

Net income before royalties and dividends
 
41.7

 
3.2

 
165.8

 
(169.2
)
 
41.5

Royalties and dividends
 
—

 
38.5

 
(38.5
)
 
—

 
—

Net income after royalties and dividends
 
41.7

 
41.7

 
127.3

 
(169.2
)
 
41.5

Net loss attributable to noncontrolling interests
 
—

 
—

 
0.2

 
—

 
0.2

Net income attributable to AAM
 
$
41.7

 
$
41.7

 
$
127.5

 
$
(169.2
)
 
$
41.7

 


 

14
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidating Balance Sheets
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Holdings
 
AAM Inc.
 
All Others
 
Elims
 
Consolidated
June 30, 2011
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
—

 
$
62.0

 
$
188.3

 
$
—

 
$
250.3

Accounts receivable, net
 
—

 
37.4

 
161.6

 
—

 
199.0

Inventories, net
 
—

 
41.8

 
106.7

 
—

 
148.5

Prepaid expense and other current assets
 
—

 
31.3

 
49.5

 
—

 
80.8

Total current assets
 
—

 
172.5

 
506.1

 
—

 
678.6

Property, plant and equipment, net
 
—

 
248.5

 
711.9

 
—

 
960.4

Goodwill
 
—

 
—

 
156.6

 
—

 
156.6

Other assets and deferred charges
 
—

 
302.5

 
97.3

 
—

 
399.8

Investment in subsidiaries
 
—

 
991.2

 
—

 
(991.2
)
 
—

Total assets
 
$
—

 
$
1,714.7

 
$
1,471.9

 
$
(991.2
)
 
$
2,195.4

Liabilities and stockholders’ equity (deficit)
 
 

 
 

 
 

 
 

 
 

Current liabilities
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
106.8

 
$
248.2

 
$
—

 
$
355.0

Accrued expenses and other current liabilities
 
—

 
194.7

 
78.8

 
—

 
273.5

Total current liabilities
 
—

 
301.5

 
327.0

 
—

 
628.5

Intercompany payable (receivable)
 
320.7

 
(351.1
)
 
30.4

 
—

 
—

Long-term debt
 
—

 
928.6

 
36.0

 
—

 
964.6

Investment in subsidiaries obligation
 
47.0

 
—

 
—

 
(47.0
)
 
—

Other long-term liabilities
 
—

 
882.7

 
77.5

 
—

 
960.2

Total liabilities
 
367.7

 
1,761.7

 
470.9

 
(47.0
)
 
2,553.3