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

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended September 30, 2004
   
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
36-3161171
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
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  x       No  o
 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  x      No  o
 
As of October 25, 2004, the latest practicable date, the number of shares of the registrant's Common Stock, par value $0.01 per share, outstanding was 49,629,138 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.
 
     
 
TABLE OF CONTENTS
 
CAUTIONARY STATEMENTS
PART I. FINANCIAL INFORMATION
    Item 1. Financial Statements
        CONDENSED CONSOLIDATED STATEMENTS OF INCOME
        CONDENSED CONSOLIDATED BALANCE SHEETS
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
     Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
PART II. OTHER INFORMATION
   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   Item 6. Exhibits
SIGNATURES
EXHIBIT INDEX
Ex. 10.44 Forms of Stock Option Agreement
Ex. 10.45 Forms of Restricted Stock Agreement
Ex. 31.1 Certification - CEO - Rule 13a-14(a)
Ex. 31.2 Certification - CFO - Rule 13a-14(a)
Ex. 32 Section 906 Certifications
 

 
     
 
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CAUTIONARY STATEMENTS

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:

·   adverse changes in the economic conditions or political stability of our principal markets (particularly North America, Europe, South America and Asia);
·   reduced demand for our customers’ products (particularly light trucks and sport-utility vehicles produced by General Motors Corporation and DaimlerChrysler Corporation);
·   reduced purchases of our products by General Motors Corporation, DaimlerChrysler Corporation or other customers;
·   our ability and our customers’ ability to successfully launch new product programs;
·   our ability to respond to changes in technology or increased competition;
·   supply shortages or price fluctuations in raw materials, utilities or other operating supplies;
·   our ability to attract and retain key associates;
·   our ability to maintain satisfactory labor relations and avoid work stoppages;
·   our customers’ ability to maintain satisfactory labor relations and avoid work stoppages;
·   risks of noncompliance with environmental regulations or risks of environmental issues that could result in unforeseen costs at our facilities;
·   liabilities arising from legal proceedings to which we are or may become a party or claims against us or our products;
·   availability of financing for working capital, capital expenditures, research and development or other general corporate purposes;
·   adverse changes in laws, government regulations or market conditions affecting our products or our customers’ products (including the Corporate Average Fuel Economy regulations);
·   other unanticipated events and conditions that hinder our ability to compete.

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

Item 1. Financial Statements

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

   
Three months ended
  
Nine months ended
  
   
September 30,
  
September 30,
  
   
2004
  
2003
  
2004
  
2003
  
   
(In millions, except per share data)
 
                           
Net sales
  
$
841.6
  
$
867.7
  
$
2,724.0
  
$
2,756.6
  
                           
Cost of goods sold
    
733.7
    
748.3
   
2,346.3
   
2,354.7
 
                           
Gross profit
    
107.9
    
119.4
   
377.7
    
401.9
 
                           
Selling, general and administrative
                          
expenses
    
47.0
   
49.7
   
140.7
   
147.1
 
     
   
   
   
 
Operating income
    
60.9
    
69.7
   
237.0
    
254.8
 
                           
Net interest expense
    
(5.9
)
  
(11.2
)
  
(20.2
)
  
(35.7
)
Debt refinancing and redemption costs
    
-
   
-
   
(23.5
)
  
-
 
Other income (expense), net
    
(0.9
)
  
1.0
   
1.0
   
1.9
 
                           
Income before income taxes
    
54.1
    
59.5
   
194.3
    
221.0
 
                           
Income taxes
    
17.7
   
20.8
   
66.1
   
77.3
 
                           
Net income
  
$
36.4
  
$
38.7
  
$
128.2
  
$
143.7
  
                           
Basic earnings per share
  
$
0.71
  
$
0.74
  
$
2.46
  
$
2.83
  
                           
Diluted earnings per share
  
$
0.68
  
$
0.71
  
$
2.37
  
$
2.71
  

 
See accompanying notes to condensed consolidated financial statements.
 
 
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AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

   
September 30,
  
December 31,
 
   
2004
  
2003
  
   
(Unaudited)
      
   
(In millions)
  
ASSETS
          
Current assets:
              
Cash and cash equivalents
  
$
4.5
  
$
12.4
  
Accounts receivable, net
    
431.7
    
339.2
 
Inventories, net
    
176.1
   
171.8
 
Prepaid expenses and other
    
37.0
    
24.0
 
Deferred income taxes
    
13.8
   
16.3
 
Total current assets
    
663.1
    
563.7
 
               
Property, plant and equipment, net
    
1,674.1
    
1,629.5
 
Deferred income taxes
    
6.8
   
6.9
 
Goodwill
    
147.8
    
147.8
 
Other assets and deferred charges
    
67.4
   
49.9
 
Total assets
  
$
2,559.2
  
$
2,397.8
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
              
Current liabilities:
              
Accounts payable
  
$
319.8
 
$
333.6
  
Trade payable program liability
    
53.7
   
2.1
 
Accrued compensation and benefits
    
119.2
    
164.8
 
Other accrued expenses
    
59.3
   
53.7
 
Total current liabilities
    
552.0
   
554.2
 
               
Long-term debt
    
533.0
   
449.7
 
Deferred income taxes
    
105.8
    
73.0
 
Postretirement benefits and other long-term liabilities
    
412.4
    
366.2
 
Total liabilities
    
1,603.2
    
1,443.1
 
               
Stockholders' equity:
              
Common stock, par value $0.01 per share
    
0.5
    
0.5
 
Paid-in capital
    
355.1
    
336.2
 
Retained earnings
    
794.1
   
681.4
 
Treasury stock at cost, 3.7 million and 0.1 million shares
              
  in 2004 and 2003, respectively
    
(131.7
)
  
(0.7
)
Accumulated other comprehensive loss, net of tax:
              
  Minimum pension liability adjustments
    
(56.1
)
  
(56.1
)
  Foreign currency translation adjustments
    
(6.0
)
  
(6.1
)
  Unrecognized gain (loss) on derivatives
    
0.1
   
(0.5
)
Total stockholders' equity
    
956.0
   
954.7
 
Total liabilities and stockholders' equity
  
$
2,559.2
  
$
2,397.8
  

See accompanying notes to condensed consolidated financial statements.

 
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AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
Nine months ended
  
   
September 30,
  
   
2004
  
2003
  
   
(In millions)
  
Operating activities:
          
Net income
  
$
128.2
  
$
143.7
  
Adjustments to reconcile net income to net cash
             
provided by operating activities:
              
Depreciation and amortization
    
125.4
   
121.0
 
Deferred income taxes
    
35.2
   
28.2
 
Pensions and other postretirement benefits, net of contributions
    
48.7
    
35.7
  
Loss on retirement of equipment
    
2.0
    
1.1
  
Debt refinancing and redemption costs
    
23.5
    
-
 
Changes in operating assets and liabilities:
              
   Accounts receivable
    
(91.2
)
  
(86.0
)
   Inventories
    
(4.1
)
  
18.8
 
   Accounts payable and accrued expenses
    
(16.1
)
  
33.6
  
   Other assets and liabilities
    
(23.5
)
  
29.9
 
Net cash provided by operating activities
    
228.1
   
326.0
 
               
Investing activities:
              
Purchases of property, plant and equipment
    
(158.8
)
  
(172.9
)
Purchase buyouts of leased equipment
    
-
   
(3.0
)
Net cash used in investing activities
    
(158.8
)
  
(175.9
)
               
Financing activities:
              
Net repayments under revolving credit facilities
    
(2.2
)
  
(25.2
)
Proceeds from issuance of long-term debt
    
399.7
    
-
 
Redemption of 9.75% Notes
    
(314.6
)
  
-
 
Payments of long-term debt and capital lease obligations
    
(16.0
)
  
(137.9
)
Debt issuance costs
    
(9.7
)
  
-
 
Employee stock option exercises
    
12.0
   
17.4
  
Dividends paid
    
(15.5
)
  
-
  
Purchase of treasury stock
    
(131.0
)
  
-
 
Net cash used in financing activities
    
(77.3
)
  
(145.7
)
     
       
Effect of exchange rate changes on cash
    
0.1
   
0.5
 
               
Net (decrease) increase in cash and cash equivalents
    
(7.9
)
  
4.9
 
               
Cash and cash equivalents at beginning of period
    
12.4
   
9.4
 
               
Cash and cash equivalents at end of period
  
$
4.5
  
$
14.3
  
               
Supplemental cash flow information:
              
Interest paid
  
$
31.5
  
$
46.4
  
Income taxes paid, net of refunds
  
$
25.9
  
$
22.8
  
 
See accompanying notes to condensed consolidated financial statements.

 
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AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004

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 systems and related powertrain components and chassis modules for light trucks, sport utility vehicles (SUVs) and passenger cars. Driveline systems include components that transfer power from the transmission and deliver it to the drive wheels. Our driveline and related powertrain products include axles, chassis modules, driveshafts, chassis and st eering components, driving heads, crankshafts, transmission parts and metal formed products. In addition to our 14 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 and Scotland.

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, 2003 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, 2003.

EITF 04-08 In October 2004, the Emerging Issues Task Force (EITF) reached a consensus opinion on EITF 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The consensus opinion provides that contingently convertible debt instruments, commonly referred to as “Co-Cos,” are to be included in diluted earnings per share computations (if dilutive) regardless of whether the market price trigger (or other contingent feature) has been met. EITF 04-08 is effective for reporting periods ending after December 15, 2004, with retroactive application. The adoption of EITF 04-08 did not have any impact on our diluted earnings per share calculation because we gave notice of our irrevocable election to pay cash upon conversion of the 2.00% Convertible Notes on October 12, 2004 and the conditions for conversion have not been met.
 
 
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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 inventories and all of our 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 inventories exceed usage requirements, or if inventories become obsolete or otherwise not saleable, we record a provision for the loss as a component of our inventory accounts. This policy pre dominantly affects our accounting for indirect inventories.

Inventories consist of the following:
 
   
September 30,
  
December 31,
  
   
2004
  
2003
  
   
(Dollars in millions)
  
               
Raw materials and work-in-progress
  
$
171.5
  
$
161.4
  
Finished goods
    
32.7
   
35.6
 
Gross inventories
    
204.2
   
197.0
 
LIFO reserve
    
(12.2
)
  
(10.4
)
Other inventory valuation reserves
    
(15.9
)
  
(14.8
)
Inventories, net
  
$
176.1
  
$
171.8
  

3.    DEBT REFINANCING AND REDEMPTION COSTS

On January 9, 2004, we entered into a new senior unsecured revolving credit facility (Revolving Credit Facility) that provides up to $600.0 million of revolving bank financing commitments through January 2009. The Revolving Credit Facility bears interest at rates based on LIBOR or an alternate base rate, plus an applicable margin. Together with $109.0 million of uncommitted bank lines of credit, the Revolving Credit Facility is now our primary source of day-to-day liquidity.

The Revolving Credit Facility is used for general corporate purposes, which included the refinancing of the previously existing senior secured bank credit facilities (1997 Bank Credit Facilities). We had been amortizing fees and expenses associated with the 1997 Bank Credit Facilities over the life of the agreement. In January 2004, the unamortized balance of such fees and expenses of $3.2 million was expensed when we terminated our bank financing commitments under the 1997 Bank Credit Facilities.

In February 2004, we issued $250.0 million of 5.25% Senior Notes due February 2014 (5.25% Notes) and $150.0 million of 2.00% Senior Convertible Notes due 2024 (2.00% Convertible Notes) in concurrent private offerings pursuant to Rule 144A of the Securities Act of 1933. We received net proceeds from these offerings of approximately $394.0 million, after deducting discounts and commissions of the initial purchasers and other expenses. We used a portion of the net proceeds to repurchase $63.0 million, or 1.59 million shares, of our common stock in privately negotiated transactions. The remainder of the net proceeds was used to

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

redeem all $300.0 million of the outstanding 9.75% Senior Subordinated Notes due March 2009 (9.75% Notes) at a cost of $314.6 million on March 1, 2004, and for other general corporate purposes. In the first quarter of 2004, the $14.6 million call premium and an additional $5.7 million of unamortized discounts and debt issuance costs were expensed as a result of this redemption.

In the second quarter 2004, the privately issued 5.25% Notes were exchanged for registered notes with substantially the same terms and conditions. In the third quarter 2004, the Securities and Exchange Commission declared effective the registration statement relating to the resale by the holders of the privately issued 2.00% Convertible Notes.

Debt refinancing and redemption costs expensed in the first quarter of 2004 are summarized as follows (dollars in millions):

Call premium on 9.75% Notes
  
$
14.6
  
Write-off of unamortized discount and debt issuance costs:
        
9.75% Notes
    
5.7
 
1997 Bank Credit Facilities
    
3.2
 
   
$
23.5
  

4.    LONG-TERM DEBT

Long-term debt consists of the following:
   
September 30,
  
December 31,
  
   
2004
  
2003
  
   
(Dollars in millions)
  
           
Revolving credit facilities
  
$
50.0
  
$
60.0
  
9.75% Notes, net of discount
    
-
   
298.8
 
5.25% Notes, net of discount
    
249.7
   
-
 
2.00% Convertible Notes
    
150.0
    
-
 
Capital lease obligations
    
4.5
   
6.3
 
Foreign credit facilities and other
    
78.8
   
84.6
 
Long-term debt
  
$
533.0
  
$
449.7
  
 
    The Revolving Credit Facility provides back-up liquidity for our foreign credit facilities and uncommitted bank 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.    
At September 30, 2004, we had $50.0 million outstanding and $538.5 million available under the Revolving Credit Facility. This availability reflected a reduction of $11.5 million for standby letters of credit issued against the facility. We also had $42.0 million outstanding and $67.0 million available on our uncommitted bank lines of credit at September 30, 2004.

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

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 are senior unsecured obligations of Holdings and are fully and unconditionally guaranteed by AAM, Inc. At the option of the holder, under certain conditions, these notes are convertible through 2024. The conversion rate is subject to adjustment for certain events, including the payment of dividends, change of control and other events specified in the indenture. On October 12, 2004, we gave notice of our irrevocable election to pay cash upon conversion of the 2.00% Convertible Notes.

The weighted average interest rate of our long-term debt outstanding at September 30, 2004 was 4.5% as compared to 8.2% at December 31, 2003.

5.    EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost consist of the following:

   
Pension Benefits
  
Other Benefits
  
   
Three months ended
  
Three months ended
  
   
September 30,
  
September 30,
  
   
2004
  
2003
  
2004
  
2003
  
   
(Dollars in millions)
  
                   
Service cost
  
$
8.3
  
$
7.0
  
$
9.5
  
$
8.1
  
Interest cost
    
7.1
   
5.9
   
6.3
   
5.2
 
Expected asset return
    
(6.6
)
  
(5.9
)
  
-
   
-
 
Amortized loss
    
1.0
   
0.5
   
1.3
   
0.6
 
Amortized prior service cost
    
0.8
   
0.4
   
(0.2
)
  
-
 
Net periodic benefit cost
  
$
10.6
  
$
7.9
  
$
16.9
  
$
13.9
  

In 2004, we expect our pension funding to range from $35.0 million to $40.0 million.

Medicare Prescription Drug, Improvement and Modernization Act of 2003 On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was signed into law. This Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of postretirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. We estimate that the effect of the subsidy will reduce our postretirement benefit obligation by approximately $24.9 million, which will be treated as an actuarial gain and amortized over the future service lives of active employees. The effect of the subsidy will be reflected in our 2004 annual disclosure based on the September 30, 2004 valuation results. Our net periodic postretirement benefit cost was reduced by $3.4 million in the first nine months of 2004 to recognize the effects of the subsidy.

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

6.    COMPREHENSIVE INCOME

Comprehensive income consists of the following:

   
Three months ended
  
Nine months ended
  
   
September 30,
  
September 30,
  
   
2004
  
2003
  
2004
  
2003
  
   
(Dollars in millions)
  
                   
Net income
  
$
36.4
  
$
38.7
  
$
128.2
  
$
143.7
  
Unrecognized gain (loss) on derivatives, net of tax 
    
0.2
   
(0.3
)
  
0.6
   
0.6
  
Foreign currency translation adjustments, net of tax
    
2.9
    
0.3
    
0.1
    
1.7
 
Comprehensive income
  
$
39.5
  
$
38.7
  
$
128.9
  
$
146.0
  

7.    EARNINGS 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,
  
   
2004
  
2003
  
2004
  
2003
  
   
(In millions, except per share data)
  
                   
Numerator:
                          
Net income
  
$
36.4
  
$
38.7
  
$
128.2
  
$
143.7
  
                           
Denominators:
                          
Basic shares outstanding -
                          
  Weighted-average shares outstanding
    
51.6
    
52.1
   
52.2
   
50.8
 
                           
Effect of dilutive securities:
                          
  Dilutive stock options
    
1.8
   
2.5
   
2.0
   
2.2
 
                           
Diluted shares outstanding -
                          
  Adjusted weighted-average shares after assumed conversions
    
53.4
   
54.6
   
54.2
   
53.0
 
                           
Basic EPS
  
$
0.71
  
$
0.74
  
$
2.46
  
$
2.83
  
                           
Diluted EPS
  
$
0.68
  
$
0.71
  
$
2.37
  
$
2.71
  
 
9
 
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AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
8.    STOCK-BASED COMPENSATION

As permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation,” we account for our employee stock options in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Although it is our practice to grant options with no intrinsic value, we measure compensation cost as the excess, if any, of the market price of our common stock at the date of grant over the amount our associat es must pay to acquire the stock.

Had we determined compensation cost based upon the fair value of the options at the grant date consistent with the alternative fair value method set forth in FASB Statement No. 123, our net income and EPS would have been adjusted to the pro forma amounts indicated below:

   
Three months ended
  
Nine months ended
  
   
September 30,
  
September 30,
  
   
2004
  
2003
  
2004
  
2003
  
   
(In millions, except per share data)
  
                   
Net income, as reported
  
$
36.4
  
$
38.7
  
$
128.2
  
$
143.7
  
Deduct: Total employee stock option
                          
  expense determined under the fair value method, net of tax
    
(4.4
)
  
(3.2
)
  
(12.4
)
  
(10.0
)
Pro forma net income
  
$
32.0
  
$
35.5
  
$
115.8
  
$
133.7
  
Basic EPS, as reported
  
$
0.71
  
$
0.74
  
$
2.46
  
$
2.83
  
Basic EPS, pro forma
  
$
0.62
  
$
0.68
  
$
2.22
  
$
2.63
  
Diluted EPS, as reported
  
$
0.68
  
$
0.71
  
$
2.37
  
$
2.71
  
Diluted EPS, pro forma
  
$
0.60
  
$
0.66
  
$
2.15
  
$
2.56
  

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:

 
2004
  
2003
Assumptions:
      
Expected volatility
44.04%
  
47.55%
Risk-free interest rate
3.70%
  
3.50%
Dividend yield
None
  
None
Expected life of option
7 years
  
7 years
Weighted average grant-date fair value
$19.83
  
$12.69
 
10
 
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AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.    LABOR RELATIONS

In the first half of 2004, we made lump-sum ratification payments totaling $37.5 million (including applicable payroll taxes) in accordance with new collective bargaining agreements with unions that represent our hourly associates in the U.S. These lump-sum payments relate to the future service of our hourly associates. In 2004, we will expense $7.5 million of these amounts, which represent the amount paid in lieu of an increase in 2004 base wages. The remaining $30.0 million will be amortized over 48 months and relates to amounts both parties agreed would be earned during the terms of the agreements. Of the $30.0 million that will be amortized, $6.2 million will also be recognized in 2004.

During the first half of 2004, we recognized a pre-tax charge of $12.7 million related to a voluntary separation program established with the UAW. Nearly 250 hourly associates participated in this voluntary program and terminated their employment with AAM.

 
11
 
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
    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, 2003.

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 systems and related powertrain components and chassis modules for light trucks, sport utility vehicles (SUVs) and passenger cars. Driveline systems include components that transfer power from the transmission and deliver it to the drive wheels. Our driveline and related powertrain products include axles, chassis modules, driveshafts, chassis and steering components, driving heads, crankshafts, transmission parts and metal formed products. In addition to our 14 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 and Scotland .

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 in the first three quarters of 2004. As a result of our Component Supply Agreement (CSA) and Lifetime Program Contracts with GM (LPCs), 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 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 will continue to compete, for future GM business upon the termination of the LPCs or the CSA.

We sell most of our products under long-term contracts with prices scheduled at the time the contracts are established. Some of our contracts require us to reduce our prices in subsequent years and most of our contracts allow us to adjust prices for engineering changes. Price reductions under long-term contracts are a common practice in the automotive industry. We do not believe that the price reductions we have committed to our customers will have a material adverse impact on our future operating results because we intend to offset such price reductions through purchased material cost reductions and other productivity improvements.

The majority of our sales contracts with our largest customer provide protection for metallic price fluctuations. Because we do not have such provisions with all of our customers for all of the parts that we sell, we are experiencing higher net costs for raw materials due to the escalating costs of metal products. Continuity of supply has not been adversely affected by these metal market conditions in 2004.
 
 
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  Sales to GM decreased 4% to $2,167.5 million in the first three quarters of 2004 as compared to $2,254.6 million in the first three quarters of 2003. Sales to GM represented approximately 80% of our total net sales in the first three quarters of 2004 as compared to 82% of our total net sales in the first three quarters of 2003 and 82% for the full-year 2003.

We also supply driveline systems and other related components to DaimlerChrysler Corporation (DaimlerChrysler), PACCAR Inc., Volvo Group, Ford Motor Company and other original equipment manufacturers (OEMs) and Tier I supplier companies such as Delphi Corporation, New Venture Gear, Inc. and The Timken Company. Our sales to customers other than GM increased 11% to $556.5 million in the first three quarters of 2004 as compared to $502.0 million in the first three quarters of 2003. The growth in our sales to customers other than GM was primarily due to continued strong sales of our products supporting the Chrysler Group’s heavy-duty Dodge Ram full-size pickup trucks (Dodge Ram program) as well as our 2003 launch of new driveshafts for the Dodge Durango program and the 200 4 launch of the Dodge Ram 4000 for the Mexican market. As a result of these sales gains, sales to DaimlerChrysler were nearly 11% of our total net sales in the first three quarters of 2004 as compared to 9% of our total net sales in the first three quarters of 2003 and 9% for the full-year 2003.

RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003

Net Sales Net sales were $841.6 million in the third quarter of 2004 as compared to $867.7 million in the third quarter of 2003. This 3% decrease in sales in the third quarter of 2004 compares to a nearly 1% decrease in North American (N.A.) light vehicle production and a 5% decrease in GM light truck production. Sales were positively impacted by a 5% increase in sales to customers other than GM. Sales also reflect the impact of price adjustments under metallic price fluctuation provisions in our contracts with our customers. These increases were more than offset by the impact of our customers’ ; lower production volumes.

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 $1,163 in the third quarter of 2004 as compared to $1,174 in the third quarter of 2003. This decrease was a result of a product mix shift from GM’s full-sized to mid-sized pick-up trucks and SUVs, which carry a lower-than-average content-per-vehicle. The penetration rate of our 4WD/AWD systems was 61.4% in both the third quarters of 2004 and 2003.

Gross Profit Gross profit was $107.9 million in the third quarter of 2004 as compared to $119.4 million in the third quarter of 2003. Gross margin was 12.8% of sales in the third quarter of 2004 as compared to 13.8% in the third quarter of 2003. Ongoing productivity improvements continued to positively impact our gross profit and gross margin in the third quarter of 2004. However, these gains were more than offset by the impact of lower production volumes and higher costs of purchased metal market commodities.

During the third quarter of 2003, we recognized $4.3 million in charges related to a power outage on August 14, 2003 and to adjust salaried workforce levels to meet current business conditions.

Selling, General and Administrative Expenses (SG&A) SG&A (including research and development (R&D)) was $47.0 million or 5.6% of net sales in the third quarter of 2004 as compared to $49.7 million or 5.7% of net sales in the third quarter of 2003. SG&A reflects an increase of $2.1 million in R&D spending offset by lower profit sharing expense due to decreased operating profits and changes to ou r executive incentive compensation plans implemented for 2004.
 
 
  13  
 
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R&D increased 14% to $17.7 million in the third quarter of 2004 as compared to $15.6 million in the third quarter of 2003. The focus of this increasing investment continues to be the expansion of our current product portfolio to serve the growing 4WD/AWD passenger car crossover vehicle segment and the development of new driveline and powertrain products. New products under development in this area include independent rear drive axles (IRDAs), independent rear suspension systems, independent front drive axles (IFDAs), power transfer units, transfer cases, driveline and transmission differentials and multi-piece driveshafts. We also continue to focus on electronic integration in our existing products. The most recent examples of these initiatives are the electronic SmartBarTM stabilizer bar-based active roll-control system, TracRite® GTL electronic differentials and TracRite® EL electronic locking differentials all featured in the Dodge Ram Power Wagon.

Operating Income Operating income was $60.9 million in the third quarter of 2004 as compared to $69.7 million in the third quarter of 2003. Operating margin was 7.2% in the third quarter of 2004 as compared to 8.0% in the third quarter of 2003. 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 decreased 47% to $5.9 million in the third quarter of 2004 as compared to $11.2 million in the third quarter of 2003. Interest expense decreased due to the favorable impact of our debt refinancing activities in the first quarter of 2004 and lower average outstanding borrowings.

Income Tax Expense Income tax expense was $17.7 million in the third quarter of 2004 as compared to $20.8 million in the third quarter of 2003. Our effective income tax rate was 32.7% in the third quarter of 2004, 35.0% in the third quarter of 2003 and 35.0% for the full-year 2003. The decrease in our effective tax rate from the full-year 2003 rate was primarily due to the implementation of tax planning strategies in accordance with recent federal tax legislation.

Net Income and Earnings Per Share (EPS) Net income was $36.4 million in the third quarter of 2004 as compared to $38.7 million in the third quarter of 2003. Diluted earnings per share were $0.68 in the third quarter of 2004 as compared to $0.71 in the third quarter of 2003.

Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization (EBITDA) EBITDA was $103.4 million in the third quarter of 2004 as compared to $111.4 million in the third quarter of 2003.

For an explanation and reconciliation of EBITDA, refer to the section entitled “Supplemental Financial Data.”


RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003

Net Sales Net sales were $2,724.0 million in the first three quarters of 2004 as compared to $2,756.6 million in the first three quarters of 2003. This slight decrease in sales in the first three quarters of 2004 compares to a 4% decrease in GM light truck production. Sales were positively impacted by an 11% increase in sales to customers other than GM, driven principally by our expanding driveline product portfolio supporting vehicle programs of DaimlerChrysler. Sales also reflect the impact of price adjustments under metallic price fluctuation provisions in our contracts with our customers. These increases were more than offset by the impact of our customers’ lower production vol umes.
 
14
 
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Our content-per-vehicle was $1,169 in the first three quarters of 2004 as compared to $1,171 in the first three quarters of 2003. The penetration rate of our 4WD/AWD systems increased to 62.1% in the first three quarters of 2004 as compared to 61.2% in the first three quarters of 2003. These changes were primarily a result of driveline system products supporting the Dodge Ram program partially offset by a product mix shift from GM’s full-sized to mid-sized pick-up trucks and SUVs.

Gross Profit Gross profit was $377.7 million in the first three quarters of 2004 as compared to $401.9 million in the first three quarters of 2003. Gross margin was 13.9% of sales in the first three quarters of 2004 as compared to 14.6% in the first three quarters of 2003. Ongoing productivity improvements continued to positively impact our gross profit and gross margin in the first three quarters of 2004. However, these gains were more than offset by the impact of lower production volumes and higher costs of purchased metal market commodities.

As a result of not reaching an agreement before the expiration of the national collective bargaining agreement with the UAW, we experienced a temporary work stoppage of less than two days at six of our North American manufacturing facilities. In the first three quarters of 2004, our operating results include costs and expenses of approximately $5.2 million related to overtime and other costs to recover lost production as a result of the work stoppage.

Lump-sum ratification payments totaling $37.5 million (including applicable payroll taxes) were made in the first half of 2004 in accordance with new collective bargaining agreements with unions that represent our hourly associates in the U.S. These lump-sum payments relate to the future service of our hourly associates. In 2004, we will expense $7.5 million of these amounts, which represent the amount paid in lieu of an increase in 2004 base wages. The remaining $30.0 million will be amortized over 48 months and relates to amounts both parties agreed would be earned during the terms of the agreements. Of the $30.0 million that will be amortized, $6.2 million will also be recognized in 2004.

In the first half of 2004, we also recognized a pre-tax charge of $12.7 million related to a voluntary separation program established with the UAW. Nearly 250 hourly associates participated in this voluntary program and terminated their employment with AAM.

In the first three quarters of 2003, we recognized charges totaling $8.8 million associated with lump-sum early retirement payments and a $2.2 million charge to adjust salaried workforce levels to meet current business conditions. We also recognized $4.6 million in charges resulting from a tornado that damaged a GM production facility in Oklahoma City, OK on May 8, 2003 and a power outage on August 14, 2003.

Selling, General and Administrative Expenses (SG&A) SG&A (including research and development (R&D)) was $140.7 million or 5.2% of net sales in the first three quarters of 2004 as compared to $147.1 million or 5.3% of net sales in the first three quarters of 2003. SG&A reflects an increase of $5.5 million in R&D spending offset by lower profit sharing expense as a result of lower earnings and changes to our executive incentive compensation plans implemented in 2004.

R&D increased 12% to $51.5 million in the first three quarters of 2004 as compared to $46.0 million in the first three quarters of 2003. The increase in our R&D in the first three quarters of 2004 as compared to the first three quarters of 2003 was primarily due to the factors discussed in the Results of Operations for the third quarter of 2004.
 
15
 
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  Operating Income Operating income was $237.0 million in the first three quarters of 2004 as compared to $254.8 million in the first three quarters of 2003. Operating margin was 8.7% in the first three quarters of 2004 as compared to 9.2% in the first three quarters of 2003. 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 decreased 43% to $20.2 million in the first three quarters of 2004 as compared to $35.7 million in the first three quarters of 2003. Interest expense decreased due to the favorable impact of our debt refinancing activities in the first quarter of 2004 and lower average outstanding borrowings.

Debt Refinancing and Redemption Costs Debt refinancing and redemption costs expensed in the first quarter of 2004 are summarized as follows (dollars in millions):

Call premium on 9.75% Notes
  
$
14.6
  
Write-off of unamortized discount and debt issuance costs:
        
9.75% Notes
    
5.7
 
1997 Bank Credit Facilities
    
3.2
 
   
$
23.5
  

The details of the debt refinancing and redemption costs are more fully explained in the section entitled “Liquidity - Financing Activities.”

Income Tax Expense Income tax expense was $66.1 million in the first three quarters of 2004 as compared to $77.3 million in the first three quarters of 2003. Our effective income tax rate was 34.0% in the first three quarters of 2004, 35.0% in the first three quarters of 2003 and 35.0% for the full-year 2003.

Net Income and Earnings Per Share (EPS) Net income was $128.2 million in the first three quarters of 2004 as compared to $143.7 million in the first three quarters of 2003. Diluted earnings per share were $2.37 in the first three quarters of 2004 as compared to $2.71 in the first three quarters of 2003.

Net income and EPS were adversely impacted in the first three quarters of 2004 by debt refinancing and redemption costs of $15.5 million, net of tax ($23.5 million before tax).

Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization (EBITDA) EBITDA was $340.2 million in the first three quarters of 2004 as compared to $378.2 million in the first three quarters of 2003.

EBITDA was adversely impacted in the first three quarters of 2004 by debt refinancing and redemption costs of $23.5 million.

For an explanation and reconciliation of EBITDA, refer to the section entitled “Supplemental Financial Data.”
 
16
 
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LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to fund capital expenditures and to support working capital requirements in our business. We rely principally upon operating cash flow and borrowings under our Revolving Credit Facility to meet these needs. We believe that cash flow available from these sources will be sufficient to meet our projected capital expenditures, working capital requirements and debt service obligations in the foreseeable future.

Operating Activities Net cash provided by operating activities was $228.1 million in the first three quarters of 2004 as compared to $326.0 million in the first three quarters of 2003.

A significant factor adversely impacting our cash flow from operating activities in the first three quarters of 2004 as compared to the first three quarters of 2003 was the lump-sum ratification payments totaling $37.5 million made in accordance with new collective bargaining agreements with unions that represent our hourly associates in the U.S.

The net cash impact associated with our pension and postretirement benefit plans increased to a source of cash of $48.7 million in the first three quarters of 2004 as compared to $35.7 million in the first three quarters of 2003. We contributed $32.5 million to our pension plans in the first three quarters of 2004 as compared to $33.6 million in the first three quarters of 2003. For the full-year 2004, we expect our pension funding to range from $35.0 million to $40.0 million. Our cash outlay for postretirement healthcare obligations was $1.8 million in the first three quarters of 2004 as compared to $3.0 million for the first three quarters of 2003. We expect our funding of such postretirement healthcare obligations to be less than $5.0 million for the full-year 2004.

Deferred income taxes were $35.2 million in the first three quarters of 2004 as compared to $28.2 million in the first three quarters of 2003. Our operating cash flow for these periods benefited from accelerated depreciation and other tax planning strategies offset by the timing of the deductibility of our postretirement benefit obligations for tax purposes. The tax benefit associated with the exercise of stock options and the utilization of federal tax credits in the first three quarters of 2004 and 2003 also positively impacted our operating cash flow. Additionally, our cash flow from operating activities in 2003 benefited from the collection of certain state tax credits.

Accounts receivable increased $92.5 million at September 30, 2004 as compared to year-end 2003. This increase was primarily due to increased sales activity in August and September of 2004 as compared to November and December of 2003 and increased receivables related to billings for metallic price adjustments. Our accounts receivable allowances were $2.6 million at September 30, 2004 as compared to $2.8 million at year-end 2003.

At September 30, 2004, inventories were $176.1 million as compared to $171.8 million at year-end 2003. There were no significant changes in our inventory valuation allowances affecting our operating results in the first three quarters of 2004.

Accounts payable and accrued expenses reflected a use of cash of $16.1 million in the first three quarters of 2004 as compared to a source of cash of $33.6 million in the first three quarters of 2003. Accrued compensation and benefits were lower in the first three quarters of 2004 primarily due to lower profit sharing accruals as compared to the first three quarters of 2003 partially offset by increased accounts payable for higher costs of purchased metal market commodities.
 
 
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Table of Contents
Investing Activities Capital expenditures were $158.8 million in the first three quarters of 2004 as compared to $172.9 million in the first three quarters of 2003. We expect our capital spending for the full-year 2004 to be approximately $250 million.

In addition to ongoing cost and productivity initiatives, our largest capital projects in 2004 include initial investments for advanced process development equipment for the GMT-900 program (GM’s next generation full-size truck and SUV platform currently projected to launch in the first quarter of 2006) and expenditures to support the model year 2005 launch of the Hummer H3. Additionally, we will have capital expenditures in 2004 to support the lifetime production contract for new business with Korean automaker Ssangyong Motors to supply independent front and independent rear-drive axles. Other capital expenditures include investments to support new production awards for various components to other major OEM suppliers.

Financing Activities Net cash used in financing activities was $77.3 million in the first three quarters of 2004 as compared to $145.7 million in the first three quarters of 2003. Total long-term debt outstanding increased $83.3 million in the first three quarters of 2004 to $533.0 million as compared to $449.7 million at year-end 2003.

On January 9, 2004, we entered into a new senior unsecured revolving credit facility (Revolving Credit Facility) that provides up to $600.0 million of revolving bank financing commitments through January 2009. The Revolving Credit Facility bears interest at rates based on LIBOR or an alternate base rate, plus an applicable margin. Together with $109.0 million of uncommitted bank lines of credit, the Revolving Credit Facility is now our primary source of day-to-day liquidity.

The Revolving Credit Facility is used for general corporate purposes, which included the refinancing of the previously existing senior secured bank credit facilities (1997 Bank Credit Facilities). We had been amortizing fees and expenses associated with the 1997 Bank Credit Facilities over the life of the agreement. In January 2004, the unamortized balance of such fees and expenses of $3.2 million was expensed when we terminated our bank financing commitments under the 1997 Bank Credit Facilities.

In February 2004, we issued $250.0 million of 5.25% Senior Notes due February 2014 (5.25% Notes) and $150.0 million of 2.00% Senior Convertible Notes due 2024 (2.00% Convertible Notes) in concurrent private offerings pursuant to Rule 144A of the Securities Act of 1933. We received net proceeds from these offerings of approximately $394.0 million, after deducting discounts and commissions of the initial purchasers and other expenses. We used a portion of the net proceeds to repurchase $63.0 million, or 1.59 million shares, of our common stock in privately negotiated transactions. The remainder of the net proceeds was used to redeem all $300.0 million of the outstanding 9.75% Senior Subordinated Notes due March 2009 (9.75% Notes) at a cost of $314.6 million on March 1, 2004, and for other general corporate purposes. In t he first quarter of 2004, the $14.6 million call premium and an additional $5.7 million of unamortized discounts and debt issuance costs were expensed as a result of this redemption.

In the second quarter 2004, the privately issued 5.25% Notes were exchanged for registered notes with substantially the same terms and conditions. In the third quarter 2004, the Securities and Exchange Commission declared effective the registration statement relating to the resale by the holders of the privately issued 2.00% Convertible Notes.

Including the common stock we acquired in connection with our first quarter debt refinancing activities, we have repurchased approximately 3.6 million shares of our common stock for $131.0 million under our stock repurchase program in the first three quarters of 2004.
 
 
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In April 2004, AAM’s Board of Directors declared our first quarterly cash dividend as a public company. As of September 30, 2004, $15.5 million has been paid to stockholders of record under the quarterly cash dividend program. On an annualized basis, the dividend payout is $0.60 per share.

At September 30, 2004, we had $50.0 million outstanding and $538.5 million available under the Revolving Credit Facility. This availability reflected a reduction of $11.5 million for standby letters of credit issued against the facility. We also had $42.0 million outstanding and $67.0 million available on our uncommitted bank lines of credit at September 30, 2004.

The weighted average interest rate of our total debt outstanding in the first three quarters of 2004 was 4.9% as compared to 5.9% for the year ended December 31, 2003. The weighted average interest rate on our total debt outstanding at September 30, 2004 was reduced to 4.5% as a result of the debt refinancing discussed above.

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

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. 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 three quarters of 2004, and we do not expect the expenditures to have a material adverse impact on our financial condition, results of operations or cash flows for the remainder of 2004.

EFFECT OF NEW ACCOUNTING STANDARDS

EITF 04-08 In October 2004, the Emerging Issues Task Force (EITF) reached a consensus opinion on EITF 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share.” The consensus opinion provides that contingently convertible debt instruments, commonly referred to as “Co-Cos,” are to be included in diluted earnings per share computations (if dilutive) regardless of whether the market price trigger (or other contingent feature) has been met. EITF 04-08 is effective for reporting periods ending after December 15, 2004, with retroactive application. The adoption of EITF 04-08 did not have any impact on our diluted earnings per share calculation because we gave notice of our irrevocable election to pay cash upon conversion of the 2.00% Convertible Notes on October 12, 2004 and the conditions for conversion have not been met.
 
 
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SUPPLEMENTAL FINANCIAL DATA

The following supplemental financial data presented for the three and nine months ended September 30, 2004 and 2003 is a reconciliation of EBITDA, a non-GAAP financial measure, which is 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 this non-GAAP financial measure differently.

   
Three months ended
  
Nine months ended
  
   
September 30,
  
September 30,
  
   
2004
  
2003
  
2004
  
2003
  
   
(Dollars in millions)
  
                   
Net income
  
$
36.4
  
$
38.7
  
$
128.2
  
$
143.7
  
Interest expense
    
5.9
   
11.3
   
20.5
    
36.2
  
Income taxes
    
17.7
    
20.8
   
66.1
    
77.3
 
Depreciation and amortization
    
43.4
    
40.6
   
125.4
    
121.0
  
EBITDA
  
$
103.4
  
$
111.4
  
$
340.2
  
$
378.2
  
 
    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 from operations, net income or cash flow from operating activities as determined under GAAP.
 
20
 
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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 most 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, Pound Sterling, Brazilian Real and Canadian Dollar. At September 30, 2004, we had currency forward contracts with a notional amount of approximately $10.8 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 forward contracts.

Interest Rate Risk We are exposed to variable interest rates on our primary bank credit facilities. The annual pre-tax earnings and cash flow impact of a one-percentage-point increase in interest rates (approximately 22.2% of our weighted average interest rate at September 30, 2004) on our long-term debt outstanding at September 30, 2004 would be approximately $1.3 million.

Item 4. Controls and Procedures

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 were effective as of September 30, 2004, and (2) no change in internal control over financial reporting occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On February 3, 2004, our Board of Directors approved a stock repurchase program under which we were able to repurchase up to 2.5 million shares of our common stock in the open market or in privately negotiated transactions from time to time over the next two years. In July 2004, the remaining 325,900 shares of our common stock were repurchased under the stock repurchase program in open market transactions pursuant to Rule 10b-18.
 
On August 12, 2004, our Board of Directors approved an additional 3.0 million shares for repurchase under the stock repurchase program, bringing the aggregate program total to 5.5 million shares.

The following table provides information about our equity security repurchases during the quarter ended September 30, 2004 that are registered pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES

Period
Total Number of Shares (or Units) Purchased
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July, 2004
325,900
$34.07
325,900
-
August, 2004
799,487
$33.34
799,487
2,200,513
September, 2004
313,040
$30.48
313,040
1,887,473
 

Item 6. Exhibits

(a) Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index.

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SIGNATURES


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/ Thomas L. Martin
 
  Thomas L. Martin
  Vice President - Finance & 
  Chief Financial Officer 
  (also in the capacity of Chief Accounting Officer) 
  November 1, 2004 
 
 
 
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EXHIBIT INDEX

Number
  
Description of Exhibit
     
*10.44
  
Forms of Stock Option Agreement under 1999 Stock Incentive Plan**
     
*10.45
  
Forms of Restricted Stock Agreement under 1999 Stock Incentive Plan**
     
*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 Thomas L. Martin, 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 Thomas L. Martin, 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

**   Shown only in the original filed with the Securities and Exchange Commission


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