AXL-Q22012-10Q
 

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, 2012
 
 
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   þ         Accelerated filer  o           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 25, 2012, the latest practicable date, the number of shares of the registrant's Common Stock, par value $0.01 per share, outstanding was 74,839,567 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, 2012
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, including the impact of the current sovereign debt crisis in the Euro-zone; 
•
reduced purchases of our products by GM, Chrysler or other customers;
•
reduced demand for our customers' products (particularly light trucks and SUVs produced by GM and Chrysler);
•
liabilities arising from warranty claims, product recall, product liability and legal proceedings to which we are or may become a party;
•
our ability to realize the expected revenues from our new business backlog;
•
our ability or our customers' and suppliers' ability to successfully launch new product programs on a timely basis;
•
our ability to achieve the level of cost reductions required to sustain global cost competitiveness;
•
our ability to attract new customers and programs for new products;
•
supply shortages or price increases in raw materials, utilities or other operating supplies for us or our customers as a result of natural disasters or otherwise;
•
changes in liabilities arising from pension and other postretirement benefit obligations;
•
our ability to respond to changes in technology, increased competition or pricing pressures;
•
price volatility in, or reduced availability of, fuel;
•
our ability to maintain satisfactory labor relations and avoid work stoppages;
•
our suppliers', our customers' and their suppliers' ability to maintain satisfactory labor relations and avoid work stoppages;
•
risks inherent in our international operations (including adverse changes in political stability, taxes and other law changes, potential disruption of production and supply, and currency rate fluctuations);
•
availability of financing for working capital, capital expenditures, 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 develop and produce new products that reflect market demand;
•
lower-than-anticipated market acceptance of new or existing products;
•
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);
•
our ability to consummate and integrate acquisitions and joint ventures;
•
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 INCOME
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(in millions, except per share data)
 
 

 
 

 
 

 
 

Net sales
$
739.8

 
$
686.2

 
$
1,491.3

 
$
1,331.8

 
 
 
 
 
 
 
 
Cost of goods sold
654.0

 
555.7

 
1,266.3

 
1,085.9

 
 
 
 
 
 
 
 
Gross profit
85.8

 
130.5

 
225.0

 
245.9

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
55.5

 
58.8

 
117.3

 
115.5

 
 
 
 
 
 
 
 
Operating income
30.3

 
71.7

 
107.7

 
130.4

 
 
 
 
 
 
 
 
Interest expense
(23.4
)
 
(20.5
)
 
(47.4
)
 
(41.8
)
 
 
 
 
 
 
 
 
Investment income
0.1

 
0.3

 
0.4

 
0.6

 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
Debt refinancing and redemption costs
—

 
(3.1
)
 
—

 
(3.1
)
Other, net
(0.6
)
 
(0.7
)
 
(1.8
)
 
0.3

 
 
 
 
 
 
 
 
Income before income taxes
6.4

 
47.7

 
58.9

 
86.4

 
 
 
 
 
 
 
 
Income tax expense (benefit)
1.7

 
(0.2
)
 
3.9

 
1.9

 
 
 
 
 
 
 
 
Net income
4.7

 
47.9

 
55.0

 
84.5

 
 
 
 
 
 
 
 
Net loss attributable to the noncontrolling interests
—

 
1.3

 
0.9

 
2.4

 
 
 
 
 
 
 
 
Net income attributable to AAM
$
4.7

 
$
49.2

 
$
55.9

 
$
86.9

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.06

 
$
0.65

 
$
0.74

 
$
1.17

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.06

 
$
0.65

 
$
0.74

 
$
1.15

 
See accompanying notes to condensed consolidated financial statements.                   


2


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2011
 
2012
 
2011
 
(in millions)
Net income
$
4.7

 
$
47.9

 
$
55.0

 
$
84.5

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
     Defined benefit plans
(0.5
)
 
0.4

 
(14.5
)
 
3.5

     Foreign currency translation adjustments
(22.5
)
 
8.3

 
(11.8
)
 
13.5

     Change in derivatives
(0.2
)
 
(0.1
)
 
5.4

 
1.1

Other comprehensive income (loss)
(23.2
)
 
8.6

 
(20.9
)
 
18.1

 
 
 
 
 
 
 
 
Comprehensive income (loss)
(18.5
)
 
56.5

 
34.1

 
102.6

 
 
 
 
 
 
 
 
     Net loss attributable to noncontrolling interests
—

 
1.3

 
0.9

 
2.4

Foreign currency translation adjustments attributable to noncontrolling interests
—

 
—

 
(0.2
)
 
(0.8
)
 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to AAM
$
(18.5
)
 
$
57.8

 
$
34.8

 
$
104.2


See accompanying notes to condensed consolidated financial statements.                   

3



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

 
 
June 30, 2012
 
December 31, 2011
 
 
(Unaudited)
 
 
Assets
 
(in millions)
Current assets
 
 
Cash and cash equivalents
 
$
85.2

 
$
169.2

Accounts receivable, net
 
474.2

 
333.3

Inventories, net
 
208.5

 
177.2

Prepaid expenses and other current assets
 
93.7

 
83.4

Total current assets
 
861.6

 
763.1

 
 
 

 
 

Property, plant and equipment, net
 
990.3

 
971.2

Goodwill
 
155.9

 
155.9

GM postretirement cost sharing asset
 
253.9

 
260.2

Other assets and deferred charges
 
179.5

 
178.3

Total assets
 
$
2,441.2

 
$
2,328.7

 
 
 

 
 

Liabilities and Stockholders’ Deficit
 
 

 
 

Current liabilities
 
 

 
 

Accounts payable
 
$
439.6

 
$
337.1

Accrued compensation and benefits
 
96.8

 
110.6

Deferred revenue
 
24.3

 
32.9

Accrued expenses and other current liabilities
 
131.2

 
95.5

Total current liabilities
 
691.9

 
576.1

 
 
 

 
 

Long-term debt
 
1,174.3

 
1,180.2

Deferred revenue
 
80.0

 
88.2

Postretirement benefits and other long-term liabilities
 
889.7

 
903.8

Total liabilities
 
2,835.9

 
2,748.3

 
 
 

 
 

Stockholders' deficit
 
 

 
 

Common stock, par value $0.01 per share
 
0.8

 
0.8

Paid-in capital
 
599.1

 
597.2

Accumulated deficit
 
(587.6
)
 
(643.5
)
Treasury stock at cost, 6.0 million shares as of June 30, 2012 and 5.5 million shares as of December 31, 2011
 
(182.1
)
 
(176.2
)
Accumulated other comprehensive income (loss), net of tax
 
 
 
 
Defined benefit plans
 
(230.1
)
 
(215.6
)
Foreign currency translation adjustments
 
5.3

 
17.3

Unrecognized loss on derivatives
 
(0.1
)
 
(5.5
)
Total AAM stockholders' deficit
 
(394.7
)
 
(425.5
)
Noncontrolling interest in subsidiaries
 
—

 
5.9

Total stockholders’ deficit
 
(394.7
)
 
(419.6
)
Total liabilities and stockholders' deficit
 
$
2,441.2

 
$
2,328.7

 
See accompanying notes to condensed consolidated financial statements. 

4


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
 
 
June 30,
 
 
2012
 
2011
 
 
(in millions)
Operating activities
 
 
 
 
Net income
 
$
55.0

 
$
84.5

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
 
Depreciation and amortization
 
73.7

 
68.8

Deferred income taxes
 
(1.1
)
 
22.3

Stock-based compensation
 
0.6

 
3.1

Pensions and other postretirement benefits, net of contributions
 
(29.5
)
 
1.6

Loss (gain) on disposal of property, plant and equipment, net
 
0.8

 
(6.5
)
Debt refinancing and redemption costs
 
—

 
1.8

Changes in operating assets and liabilities
 
 
 
 
Accounts receivable
 
(142.6
)
 
(50.3
)
Inventories
 
(34.2
)
 
(16.8
)
Accounts payable and accrued expenses
 
135.3

 
67.3

Deferred revenue
 
(16.7
)
 
(37.7
)
Other assets and liabilities
 
(16.7
)
 
(21.6
)
Net cash provided by operating activities
 
24.6

 
116.5

 
 
 

 
 

Investing activities
 
 

 
 

Purchases of property, plant and equipment
 
(92.9
)
 
(71.6
)
Proceeds from sale of property, plant and equipment
 
1.2

 
7.8

Net cash used in investing activities
 
(91.7
)
 
(63.8
)
 
 
 

 
 

Financing activities
 
 

 
 

Net short-term repayments under credit facilities
 
(1.7
)
 
—

Payments of long-term debt and capital lease obligations
 
(18.0
)
 
(49.2
)
Proceeds from issuance of long-term debt
 
12.4

 
1.8

Debt issuance costs
 
—

 
(5.3
)
Purchase of noncontrolling interest
 
(4.0
)
 
—

Purchase of treasury stock
 
(5.9
)
 
(0.1
)
Employee stock option exercises
 
0.1

 
4.6

Net cash used in financing activities
 
(17.1
)
 
(48.2
)
 
 
 

 
 

Effect of exchange rate changes on cash
 
0.2

 
1.2

 
 
 

 
 

Net increase (decrease) in cash and cash equivalents
 
(84.0
)
 
5.7

 
 
 

 
 

Cash and cash equivalents at beginning of period
 
169.2

 
244.6

 
 
 

 
 

Cash and cash equivalents at end of period
 
$
85.2

 
$
250.3

 
 
 

 
 

Supplemental cash flow information
 
 

 
 

     Interest paid
 
$
43.1

 
$
38.2

     Income taxes paid, net of refunds
 
$
10.0

 
$
2.8

 
See accompanying notes to condensed consolidated financial statements.

5


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(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, transmission parts and metal-formed products. In addition to locations in the United States (U.S.) (Michigan, 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, 2011 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, 2011.

Effect of New Accounting Standards On January 1, 2012, we adopted new accounting guidance on the presentation of comprehensive income. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. We have elected to present the components of other comprehensive income in a separate statement immediately following the statement of income. The guidance eliminates the previous option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. Other than the change in presentation, the adoption of this new guidance has had no impact on our condensed consolidated financial statements.

On January 1, 2012, we also adopted new accounting guidance on testing goodwill for impairment. This new guidance allows us the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this amendment, we are not required to calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendment includes a number of events and circumstances to consider in conducting the qualitative assessment. We do not believe that the adoption of this new accounting guidance will have a significant effect on our goodwill impairment assessments in the future.









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

2. RESTRUCTURING ACTIONS

A summary of the restructuring related activity for the six months ended June 30, 2012 is shown below (in millions):
 
 
One-time
 
Asset
 
Other
 
 
 
 
Termination
 
Retirement
 
Restructuring
 
 
 
 
Benefits
 
Obligations
 
Actions
 
Total
Accrual as of December 31, 2011
 
$
0.3

 
$
0.6

 
$
—

 
$
0.9

    Charges
 
1.7

 
—

 
20.7

 
22.4

    Cash utilization
 
(1.2
)
 
—

 
(20.7
)
 
(21.9
)
    Accrual adjustments
 
(0.4
)
 
—

 
—

 
(0.4
)
Accrual as of June 30, 2012
 
$
0.4

 
$
0.6

 
$
—

 
$
1.0


In the six months ended June 30, 2012, we incurred charges for the redeployment of assets and other related costs associated with the closure of our Detroit Manufacturing Complex (DMC) and Cheektowaga Manufacturing Facility (CKMF). We expensed and paid $20.7 million in the first six months of 2012, related to these actions.

We expect to make payments of approximately $1.0 million during the remainder of 2012 related to the remaining restructuring accrual.

3. INVENTORIES

We state our inventories at the lower of cost or market.  The cost of our 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, 2012
 
December 31, 2011
 
 
(in millions)
 
 
 
 
 
Raw materials and work-in-progress
 
$
211.8

 
$
177.0

Finished goods
 
20.5

 
26.9

Gross inventories
 
232.3

 
203.9

Inventory valuation reserves
 
(23.8
)
 
(26.7
)
Inventories, net
 
$
208.5

 
$
177.2

 
4. LONG-TERM DEBT

Long-term debt consists of the following:
 
 
 
June 30, 2012
 
December 31,
2011
 
 
(in millions)
 
 
 
 
 
Revolving credit facility
 
$
—

 
$
—

9.25% Notes, net of discount
 
379.3

 
379.0

7.875% Notes
 
300.0

 
300.0

7.75% Notes
 
200.0

 
200.0

5.25% Notes, net of discount
 
249.9

 
249.9

Foreign credit facilities
 
39.3

 
45.2

Capital lease obligations
 
5.8

 
6.1

Long-term debt
 
$
1,174.3

 
$
1,180.2


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


As of June 30, 2012, the Revolving Credit Facility provided up to $86.8 million of revolving bank financing commitments through June 2013 and $235.0 million of additional revolving bank financing commitments through June 30, 2016.  At June 30, 2012, we had $296.9 million available under the Revolving Credit Facility.  This availability reflects a reduction of $24.9 million for standby letters of credit issued against the facility.

The Revolving Credit Facility provides back-up liquidity for our foreign credit facilities.  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 local markets.

We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries.  At June 30, 2012, $39.3 million was outstanding under these facilities and an additional $32.6 million was available.

The weighted-average interest rate of our long-term debt outstanding was 8.1% at June 30, 2012 and 8.0% as of December 31, 2011.  

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.

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, 2012, are as follows:
 
 
 
June 30, 2012
 
December 31, 2011
 
 
 
 
  Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Input
 
 
(in millions)
 
  (in millions)
 
 
Balance Sheet Classification
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
2.6

 
$
2.6

 
$
36.0

 
$
36.0

 
Level 1
Prepaid expenses and other current
    assets
 
 

 
 

 
 

 
 

 
 
Currency forward contracts
 
1.3

 
1.3

 
0.1

 
0.1

 
Level 2
Other assets and deferred charges
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
 
0.3

 
0.3

 
0.1

 
0.1

 
Level 2
Other accrued expenses
 
 
 
 
 
 
 
 
 
 
     Currency forward contracts
 
1.5

 
1.5

 
5.6

 
5.6

 
Level 2
 

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

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, 2012
 
December 31, 2011
 
 
 
 
Carrying  Amount
 
Fair Value
 
Carrying  Amount
 
Fair Value
 
 
Input
 
 
(in millions)
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
9.25% Notes
 
$
379.3

 
$
426.5

 
$
379.0

 
$
415.0

 
Level 2
7.875% Notes
 
300.0

 
309.8

 
300.0

 
295.5

 
Level 2
7.75% Notes
 
200.0

 
210.5

 
200.0

 
195.0

 
Level 2
5.25% Notes
 
249.9

 
256.9

 
249.9

 
243.8

 
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, Euro, Pound Sterling and Brazilian Real.  As of June 30, 2012, we have forward contracts outstanding with a notional amount of $54.8 million that hedge our exposure to changes in foreign currency exchange rates for our payroll expenses in Mexico.  

The following table summarizes the reclassification of pre-tax derivative gains into net income from accumulated other comprehensive income (loss):
 
 
Location of
 
Gain (Loss) Reclassified
 
Loss Expected to be
 
 
Gain (Loss)
 
Three Months Ended
 
Six Months Ended
 
Reclassified
 
 
  Reclassified into
 
June 30,
 
June 30,
 
During the
 
 
  Net Income
 
2012
 
2011
 
2012
 
2011
 
Next 12 Months
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency forward contracts
 
Cost of Goods Sold
 
$
(1.3
)
 
$
1.5

 
$
(1.5
)
 
$
2.2

 
$
(0.1
)
 

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

7. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost (credit) are as follows:

 
 
Pension Benefits
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Service cost
 
$
0.8

 
$
1.1

 
$
1.6

 
$
2.2

Interest cost
 
8.8

 
9.2

 
17.6

 
18.4

Expected asset return
 
(8.0
)
 
(7.9
)
 
(16.0
)
 
(15.8
)
Amortized loss
 
1.8

 
1.1

 
3.6

 
2.2

Net periodic benefit cost
 
$
3.4

 
$
3.5

 
$
6.8

 
$
7.0

 
 
 
 
 
Other Postretirement Benefits
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions)
 
 
 

 
 

 
 

 
 

Service cost
 
$
0.1

 
$
0.2

 
$
0.2

 
$
0.4

Interest cost
 
3.9

 
4.3

 
7.8

 
8.6

Amortized loss
 
0.2

 
0.1

 
0.4

 
0.2

Amortized prior service credit
 
(0.5
)
 
(0.8
)
 
(1.0
)
 
(1.6
)
Curtailment
 
—

 
—

 
(21.8
)
 
—

Settlement
 
(5.2
)
 
—

 
(5.2
)
 
—

Net periodic benefit cost (credit)
 
$
(1.5
)
 
$
3.8

 
$
(19.6
)
 
$
7.6


In the first quarter of 2012, we recorded a gain of $21.8 million in cost of goods sold for the curtailment of certain other postretirement benefits (OPEB). This resulted primarily from the reduction in the expected future OPEB related to the DMC and CKMF hourly associates who have terminated employment from AAM as a result of our plant closures. These curtailment gains resulted in an increase in our accumulated other comprehensive loss of $21.8 million.

In the second quarter of 2012, we notified hourly associates of the termination of a benefit plan, which provided legal services to certain eligible hourly associates represented by the International UAW. As a result of terminating this plan, we recorded a settlement gain of $5.2 million in cost of goods sold in the second quarter of 2012. Recognition of this settlement gain reduced our postretirement benefits and other long-term liabilities by $4.7 million and also reduced our accumulated other comprehensive loss by $0.5 million.

Our regulatory pension funding requirements in 2012 are approximately $35 million. This funding requirement does not include any potential funding relief provided by the July 2012 enactment of the Moving Ahead for Progress in the 21st Century Act (MAP-21), or any additional regulatory funding required as a result of the closure of our Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility.

We expect our cash outlay for other postretirement benefit obligations in 2012, net of GM cost sharing, to be approximately $16 million.

10
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 our liability as necessary to reflect changes in estimates as additional information is gathered as part of our active management of warranty exposure with our customers.

As part of the 2009 Settlement and Commercial Agreement, AAM agreed to expanded warranty cost sharing with GM, which began 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,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions)
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
16.8

 
$
5.3

 
$
13.4

 
$
2.3

     Accruals
 
10.7

 
3.1

 
14.4

 
6.1

     Settlements
 
(0.1
)
 
(0.3
)
 
(0.4
)
 
(0.4
)
     Adjustment to prior period accruals
 
(2.8
)
 
(0.1
)
 
(2.8
)
 
—

     Foreign currency translation and other
 
(0.1
)
 
0.1

 
(0.1
)
 
0.1

Ending balance
 
$
24.5

 
$
8.1

 
$
24.5

 
$
8.1



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 expense of $1.7 million in the three months ended June 30, 2012 as compared to a benefit of $0.2 million in the three months ended June 30, 2011.  Our effective income tax rate was 25.9% in the second quarter of 2012 as compared to negative 0.5% in the second quarter of 2011.  

Income tax expense (benefit) was expense of $3.9 million in the first six months of 2012 as compared to expense of $1.9 million in the first six months of 2011.  Our effective income tax rate was 6.6% in the first six months of 2012 as compared to 2.2% in the first six months of 2011. 

Our income tax expense and effective tax rate for the three and six months ended June 30, 2012 reflect the effect of recognizing a net operating loss benefit against our taxable income in the U.S. Our income tax expense for the three and six months ended June 30, 2012 also reflects a net tax expense of $1.3 million related to the amendment of state income tax returns as a result of the settlement of federal income tax audits for the tax years 2004 through 2007.

Our income tax expense (benefit) and effective tax rate for the three and six months ended June 30, 2011 reflect 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.


 


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

10. 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,
 
 
2012
 
2011
 
2012
 
2011
 
 
(in millions, except per share data)
Numerator
 
 
 
 
 
 
 
 
Net income attributable to AAM
 
$
4.7

 
$
49.2

 
$
55.9

 
$
86.9

 
 
 

 
 

 
 

 
 

Denominator
 
 

 
 

 
 

 
 

Basic shares outstanding -
 
 

 
 

 
 

 
 

   Weighted-average shares outstanding
 
75.1

 
75.4

 
75.1

 
74.5

 
 
 

 
 

 
 

 
 

Effect of dilutive securities
 
 

 
 

 
 

 
 

   Dilutive stock-based compensation
 
—

 
—

 
—

 
0.2

   Dilutive GM warrants
 
—

 
—

 
—

 
0.7

 
 
 

 
 

 
 

 
 

Diluted shares outstanding -
 
 

 
 

 
 

 
 

   Adjusted weighted-average shares after assumed conversions
 
75.1

 
75.4

 
75.1

 
75.4

 
 
 

 
 

 
 

 
 

Basic EPS
 
$
0.06

 
$
0.65

 
$
0.74

 
$
1.17

 
 
 

 
 

 
 

 
 

Diluted EPS
 
$
0.06

 
$
0.65

 
$
0.74

 
$
1.15

 
Certain exercisable stock options were excluded from 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 3.3 million at June 30, 2012 and 4.1 million at June 30, 2011. The ranges of exercise prices related to the excluded exercisable stock options were $15.58 - $40.83 at June 30, 2012 and $15.56 - $40.83 at June 30, 2011.
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.

11. INVESTMENT IN JOINT VENTURES

In the first quarter of 2012, we paid $4.0 million to acquire the remaining shares of e-AAM Driveline Systems AB (e-AAM). e-AAM, previously a joint venture between AAM and Saab Automobile AB (Saab), was created to design and commercialize electric all-wheel-drive (eAWD) systems designed to improve fuel efficiency, reduce CO2 emissions and provide all-wheel-drive capability.

Under the purchase agreement, Saab's bankruptcy estate sold its minority ownership (33% of the shares) in the joint venture to AAM. e-AAM is now a wholly-owned subsidiary of AAM and continues to be a fully consolidated entity. As a result, AAM has 100% ownership and control of the business operation and will continue the full scope of engineering, developing and commercializing eAWD hybrid driveline systems for passenger cars and crossover vehicles.


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

12. CONTINGENCIES

In February 2012, the International UAW filed suit in the United States District Court for the Eastern District of Michigan, alleging that AAM violated certain provisions of the collective bargaining agreement covering represented hourly associates at the Detroit Manufacturing Complex and Cheektowaga Manufacturing Facility related to pension and postretirement benefits. As a result of the potential impact from the enactment of MAP-21 on this litigation, we recorded an actuarially determined expense of $28.1 million in cost of goods sold in the second quarter of 2012.  This charge represents our actuarial estimate of the cost of the pension and postretirement benefits that would have to be provided to eligible UAW associates if the International UAW were to prevail in this litigation. 

AAM disputes these claims and continues to defend the lawsuit vigorously. Additional facts and circumstances may continue to develop in the future that could have a significant impact on our estimates, including changes in discount rates and other actuarial assumptions.


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

13. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

Holdings has no significant asset other than its 100% ownership in AAM, Inc. and no direct subsidiaries other than AAM, Inc. Holdings fully and unconditionally guarantees the 7.875% Notes and 5.25% Notes, which are senior unsecured obligations of AAM, Inc. The 9.25% Notes are senior secured obligations of AAM Inc. and the 7.75% Notes are senior unsecured obligations of AAM Inc.; both of which are fully and unconditionally guaranteed by Holdings and substantially all domestic subsidiaries of 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.
 
Condensed Consolidating Statements of Income
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Holdings
 
AAM Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elims
 
Consolidated
2012
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
External
 
$
—

 
$
182.1

 
$
54.8

 
$
502.9

 
$
—

 
$
739.8

Intercompany
 
—

 
3.8

 
59.4

 
6.4

 
(69.6
)
 
—

Total net sales
 
—

 
185.9

 
114.2

 
509.3

 
(69.6
)
 
739.8

Cost of goods sold
 
—

 
206.4

 
100.7

 
416.5

 
(69.6
)
 
654.0

Gross profit (loss)
 
—

 
(20.5
)
 
13.5

 
92.8

 
—

 
85.8

Selling, general and administrative expenses
 
—

 
46.5

 
—

 
9.0

 
—

 
55.5

Operating income (loss)
 
—

 
(67.0
)
 
13.5

 
83.8

 
—

 
30.3

Non-operating income (expense), net
 
—

 
(24.5
)
 
0.4

 
0.2

 
—

 
(23.9
)
Income (loss) before income taxes
 
—

 
(91.5
)
 
13.9

 
84.0

 
—

 
6.4

Income tax expense (benefit)
 
—

 
1.2

 
—

 
0.5

 
—

 
1.7

Earnings (loss) from equity in subsidiaries
 
4.7

 
52.0

 
(12.7
)
 
—

 
(44.0
)
 
—

Net income (loss) before royalties and dividends
 
4.7

 
(40.7
)
 
1.2

 
83.5

 
(44.0
)
 
4.7

Royalties and dividends
 
—

 
45.4

 
—

 
(45.4
)
 
—

 
—

Net income after royalties and dividends
 
4.7

 
4.7

 
1.2

 
38.1

 
(44.0
)
 
4.7

Net loss attributable to noncontrolling interests
 
—

 
—

 
—

 
—

 
—

 
—

Net income attributable to AAM
 
$
4.7

 
$
4.7

 
$
1.2

 
$
38.1

 
$
(44.0
)
 
$
4.7

Other comprehensive (loss)
 
(23.2
)
 
(23.2
)
 
(21.4
)
 
(21.8
)
 
66.4

 
(23.2
)
Comprehensive income (loss) attributable to AAM
 
$
(18.5
)
 
$
(18.5
)
 
$
(20.2
)
 
$
16.3

 
$
22.4

 
$
(18.5
)


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

 
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
Holdings
 
AAM Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elims
 
Consolidated
2011
 
 

 
 

 
 

 
 

 
 

 
 

Net sales
 
 

 
 

 
 

 
 

 
 

 
 

External
 
$
—

 
$
219.3

 
$
49.2

 
$
417.7

 
$
—

 
$
686.2

Intercompany
 
—

 
6.4

 
52.0

 
2.3

 
(60.7
)
 
—

Total net sales
 
—

 
225.7

 
101.2

 
420.0

 
(60.7
)
 
686.2

Cost of goods sold
 
—

 
203.8

 
86.3

 
326.3

 
(60.7
)
 
555.7

Gross profit
 
—

 
21.9

 
14.9

 
93.7

 
—

 
130.5

Selling, general and administrative expenses
 
—

 
48.3

 
—

 
10.5

 
—

 
58.8

Operating income (loss)
 
—

 
(26.4
)
 
14.9

 
83.2

 
—

 
71.7

Non-operating income (expense), net
 
—

 
(25.0
)
 
0.2

 
0.8

 
—

 
(24.0
)
Income (loss) before income taxes
 
—

 
(51.4
)
 
15.1

 
84.0

 
—

 
47.7

Income tax expense (benefit)
 
—

 
(2.3
)
 
—

 
2.1

 
—

 
(0.2
)
Earnings (loss) from equity in subsidiaries
 
49.2

 
47.9

 
(6.2
)
 
—

 
(90.9
)
 
—

Net income (loss) before royalties and dividends
 
49.2

 
(1.2
)
 
8.9

 
81.9

 
(90.9
)
 
47.9

Royalties and dividends
 
—

 
50.4

 
—

 
(50.4
)
 
—

 
—

Net income after royalties and dividends
 
49.2

 
49.2

 
8.9

 
31.5

 
(90.9
)
 
47.9

Net loss attributable to noncontrolling interests
 
—

 
—

 
—

 
1.3

 
—

 
1.3

Net income attributable to AAM
 
$
49.2

 
$
49.2

 
$
8.9

 
$
32.8

 
$
(90.9
)
 
$
49.2

Other comprehensive income (loss)
 
8.6

 
8.6

 
8.5

 
8.6

 
(25.7
)
 
8.6

Comprehensive income attributable to AAM
 
$
57.8

 
$
57.8

 
$
17.4

 
$
41.4

 
$
(116.6
)
 
$
57.8


15
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidating Statements of Income
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Holdings
 
AAM Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elims
 
Consolidated
2012
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
External
 
$
—

 
$
380.4

 
$
109.3

 
$
1,001.6

 
$
—

 
$
1,491.3

Intercompany
 
—

 
11.4

 
120.1

 
12.2

 
(143.7
)
 
—

Total net sales
 
—

 
391.8

 
229.4

 
1,013.8

 
(143.7
)
 
1,491.3

Cost of goods sold
 
—

 
380.4

 
200.6

 
829.0

 
(143.7
)
 
1,266.3

Gross profit
 
—

 
11.4

 
28.8

 
184.8

 
—

 
225.0

Selling, general and administrative expenses
 
—

 
98.2

 
—

 
19.1

 
—

 
117.3

Operating income (loss)
 
—

 
(86.8
)
 
28.8

 
165.7

 
—

 
107.7

Non-operating income (expense), net
 
—

 
(48.8
)
 
1.2

 
(1.2
)
 
—

 
(48.8
)
Income (loss) before income taxes
 
—

 
(135.6
)
 
30.0

 
164.5

 
—

 
58.9

Income tax expense
 
—

 
0.3

 
—

 
3.6

 
—

 
3.9

Earnings (loss) from equity in subsidiaries
 
55.9

 
99.3

 
(26.2
)
 
—

 
(129.0
)
 
—

Net income (loss) before royalties and dividends
 
55.9

 
(36.6
)
 
3.8

 
160.9

 
(129.0
)
 
55.0

Royalties and dividends
 
—

 
92.5

 
—

 
(92.5
)
 
—

 
—

Net income after royalties and dividends
 
55.9

 
55.9

 
3.8

 
68.4

 
(129.0
)
 
55.0

Net loss attributable to noncontrolling interests
 
—

 
—

 
—

 
0.9

 
—

 
0.9

Net income attributable to AAM
 
$
55.9

 
$
55.9

 
$
3.8

 
$
69.3

 
$
(129.0
)
 
$
55.9

Other comprehensive income (loss)
 
(20.9
)
 
(20.9
)
 
(11.3
)
 
(6.8
)
 
39.0

 
(20.9
)
Foreign currency translation adjustments attributable to noncontrolling interests
 
(0.2
)
 
(0.2
)
 
—

 
(0.2
)
 
0.4

 
(0.2
)
Comprehensive income attributable to AAM
 
$
34.8

 
$
34.8

 
$
(7.5
)
 
$
62.3

 
$
(89.6
)
 
$
34.8

 

16
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Holdings
 
AAM Inc.
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Elims
 
Consolidated
2011
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
External
 
$
—

 
$
414.9

 
$
100.2

 
$
816.7

 
$
—

 
$
1,331.8

Intercompany
 
—

 
12.3

 
97.0

 
5.0

 
(114.3
)
 
—

Total net sales
 
—

 
427.2

 
197.2

 
821.7

 
(114.3
)
 
1,331.8

Cost of goods sold
 
—

 
386.6

 
169.6

 
644.0

 
(114.3
)
 
1,085.9

Gross profit
 
—

 
40.6

 
27.6

 
177.7

 
—

 
245.9

Selling, general and administrative expenses
 
—

 
96.0

 
—

 
19.5

 
—

 
115.5

Operating income (loss)