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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 March 31, 2005 |
| |
|
|
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 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 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 April 25, 2005, the latest practicable date, the number of shares of the
registrant's Common Stock, par value $0.01 per share, outstanding was
50,742,613
shares.
Internet
Website Access to Reports
The website for American Axle & Manufacturing Holdings, Inc. is
www.aam.com. Our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available
free of charge through our website as soon as reasonably practicable after they
are electronically filed with, or furnished to, the Securities and Exchange
Commission. The Securities and Exchange Commission also maintains a website at
www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC.
Certain
statements in this Quarterly Report on Form 10-Q (Quarterly Report) are
forward-looking in nature and relate to trends and events that may affect our
future financial position and operating results. Such statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms “will,” “expect,” “anticipate,” “intend,”
“project” and similar words or expressions are intended to identify
forward-looking statements. These statements speak only as of the date of this
Quarterly Report. The statements are based on our current expectations, are
inherently uncertain, are subject to risks and should be viewed with caution.
Actual results and experience may differ materially from the forward-looking
statements as a result of many factors, including, but not limited
to:
| · |
reduced
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; |
| · |
supply
shortages or price fluctuations in raw materials, utilities or other
operating supplies; |
| · |
our
ability to maintain satisfactory labor relations and avoid work stoppages;
|
| · |
our
customers’ ability to maintain satisfactory labor relations and avoid work
stoppages; |
| · |
our
ability to attract and retain key
associates; |
| · |
our
ability and our customers’ ability to successfully launch new product
programs; |
| · |
our
ability to respond to changes in technology or increased
competition; |
| · |
adverse
changes in laws, government regulations or market conditions affecting our
products or our customers’ products (including the Corporate Average Fuel
Economy regulations and fuel costs); |
| · |
adverse
changes in the economic conditions or political stability of our principal
markets (particularly North America, Europe, South America and
Asia); |
| · |
liabilities
arising from legal proceedings to which we are or may become a party or
claims against us or our products; |
| · |
risks
of noncompliance with environmental regulations or risks of environmental
issues that could result in unforeseen costs at our
facilities; |
| · |
availability
of financing for working capital, capital expenditures, research and
development or other general corporate purposes;
|
| · |
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.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
(Unaudited)
| |
|
Three
months ended |
|
| |
|
March
31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(In
millions, except per share data) |
|
| |
|
|
|
|
|
|
|
Net
sales |
|
$ |
818.9 |
|
$ |
952.8 |
|
| |
|
|
|
|
|
|
|
|
Cost
of goods sold |
|
|
746.6
|
|
|
816.4
|
|
| |
|
|
|
|
|
|
|
Gross
profit |
|
|
72.3
|
|
|
136.4
|
|
| |
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses |
|
|
46.6
|
|
|
49.5
|
|
| |
|
|
|
|
|
|
|
Operating
income |
|
|
25.7
|
|
|
86.9
|
|
| |
|
|
|
|
|
|
|
Net
interest expense |
|
|
(6.1 |
) |
|
(8.4 |
) |
| |
|
|
|
|
|
|
|
Other
income (expense) |
|
|
|
|
|
|
|
Debt
refinancing and redemption costs |
|
|
- |
|
|
(23.5 |
) |
|
Other,
net |
|
|
0.3
|
|
|
0.7
|
|
| |
|
|
|
|
|
|
|
Income
before income taxes |
|
|
19.9
|
|
|
55.7
|
|
| |
|
|
|
|
|
|
|
|
Income
taxes |
|
|
6.6
|
|
|
19.2
|
|
| |
|
|
|
|
|
|
|
|
Net
income |
|
$ |
13.3 |
|
$ |
36.5 |
|
| |
|
|
|
|
|
|
|
|
Basic
earnings per share |
|
$ |
0.27 |
|
$ |
0.69 |
|
| |
|
|
|
|
|
|
|
|
Diluted
earnings per share |
|
$ |
0.26 |
|
$ |
0.66 |
|
See
accompanying notes to condensed consolidated financial statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
| |
|
March
31, |
|
December
31, |
|
| |
|
2005 |
|
2004 |
|
| |
|
(Unaudited) |
|
|
|
| |
|
(In
millions) |
Assets |
|
|
|
|
|
|
|
Current
assets |
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
3.3 |
|
$ |
14.4 |
|
Accounts
receivable, net |
|
|
367.2
|
|
|
334.9
|
|
Inventories,
net |
|
|
210.9
|
|
|
196.8
|
|
Prepaid
expenses and other |
|
|
49.7
|
|
|
39.1
|
|
|
Deferred
income taxes |
|
|
6.0
|
|
|
7.4
|
|
Total
current assets |
|
|
637.1
|
|
|
592.6
|
|
| |
|
|
|
|
|
|
|
Property,
plant and equipment, net |
|
|
1,743.6
|
|
|
1,713.0
|
|
Deferred
income taxes |
|
|
8.1
|
|
|
6.8
|
|
Goodwill |
|
|
147.8
|
|
|
147.8
|
|
|
Other
assets and deferred charges |
|
|
75.5
|
|
|
78.6
|
|
|
Total
assets |
|
$ |
2,612.1 |
|
$ |
2,538.8 |
|
| |
|
|
|
|
|
|
|
Liabilities and
Stockholders' Equity |
|
|
|
|
|
|
|
Current
liabilities |
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
316.7 |
|
$ |
349.3 |
|
Trade
payable program liability |
|
|
50.8
|
|
|
49.3
|
|
Accrued
compensation and benefits |
|
|
94.0
|
|
|
123.3
|
|
|
Other
accrued expenses |
|
|
57.8
|
|
|
58.6
|
|
Total
current liabilities |
|
|
519.3
|
|
|
580.5
|
|
| |
|
|
|
|
|
|
|
Long-term
debt |
|
|
550.6
|
|
|
448.0
|
|
Deferred
income taxes |
|
|
116.5
|
|
|
114.5
|
|
|
Postretirement
benefits and other long-term liabilities |
|
|
460.1
|
|
|
440.3
|
|
Total
liabilities |
|
|
1,646.5
|
|
|
1,583.3
|
|
| |
|
|
|
|
|
|
|
Stockholders'
equity |
|
|
|
|
|
|
|
Common
stock, par value $0.01 per share |
|
|
0.5
|
|
|
0.5
|
|
Paid-in
capital |
|
|
378.3
|
|
|
357.6
|
|
Retained
earnings |
|
|
823.8
|
|
|
817.9
|
|
Treasury
stock at cost, 5.1 million shares in 2005 and 2004 |
|
|
(171.7 |
) |
|
(171.7 |
) |
Unearned
compensation |
|
|
(16.7 |
) |
|
-
|
|
Accumulated
other comprehensive loss, net of tax |
|
|
|
|
|
|
|
Minimum pension liability adjustments |
|
|
(47.1 |
) |
|
(47.1 |
) |
Foreign currency translation adjustments |
|
|
(1.6 |
) |
|
(2.2 |
) |
|
Unrecognized gain on derivatives |
|
|
0.1 |
|
|
0.5
|
|
|
Total
stockholders' equity |
|
|
965.6
|
|
|
955.5
|
|
|
Total
liabilities and stockholders' equity |
|
$ |
2,612.1 |
|
$ |
2,538.8 |
|
See
accompanying notes to condensed consolidated financial statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
(Unaudited)
| |
|
Three
months ended |
|
| |
|
March
31, |
|
| |
|
2005 |
|
2004 |
|
|
|
(In
millions) |
Operating
activities |
|
|
|
|
|
|
|
Net
income |
|
$ |
13.3 |
|
$ |
36.5 |
|
Adjustments
to reconcile net income to net cash (used in) |
|
|
|
|
|
|
|
provided
by operating activities |
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
43.4
|
|
|
41.3
|
|
Deferred
income taxes |
|
|
3.3
|
|
|
6.6
|
|
Stock-based
compensation |
|
|
0.3
|
|
|
-
|
|
Pensions
and other postretirement benefits, |
|
|
|
|
|
|
|
net
of contributions |
|
|
17.1
|
|
|
26.8
|
|
Loss
on retirement of equipment |
|
|
0.9
|
|
|
1.1
|
|
Debt
refinancing and redemption costs |
|
|
-
|
|
|
23.5
|
|
Changes
in operating assets and liabilities |
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(32.7 |
) |
|
(109.4 |
) |
Inventories |
|
|
(14.4 |
) |
|
2.1
|
|
Accounts
payable and accrued expenses |
|
|
(59.6 |
) |
|
(0.7 |
) |
|
Other
assets and liabilities |
|
|
(5.7 |
) |
|
(23.4 |
) |
|
Net
cash (used in) provided by operating activities |
|
|
(34.1 |
) |
|
4.4
|
|
| |
|
|
|
|
|
|
|
Investing
activities |
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment |
|
|
(74.8 |
) |
|
(46.7 |
) |
|
Net
cash used in investing activities |
|
|
(74.8 |
) |
|
(46.7 |
) |
| |
|
|
|
|
|
|
|
Financing
activities |
|
|
|
|
|
|
|
Net
borrowings under revolving credit facilities |
|
|
104.3
|
|
|
20.9
|
|
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 |
|
|
(1.2 |
) |
|
(0.7 |
) |
Debt
issuance costs |
|
|
-
|
|
|
(9.7 |
) |
Employee
stock option exercises |
|
|
2.2
|
|
|
3.1
|
|
Dividends
paid |
|
|
(7.4 |
) |
|
-
|
|
|
Purchase
of treasury stock |
|
|
-
|
|
|
(63.0 |
) |
|
Net
cash provided by financing activities |
|
|
97.9
|
|
|
35.7
|
|
| |
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash |
|
|
(0.1 |
) |
|
0.2
|
|
| |
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents |
|
|
(11.1 |
) |
|
(6.4 |
) |
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period |
|
|
14.4
|
|
|
12.4
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period |
|
$ |
3.3 |
|
$ |
6.0 |
|
| |
|
|
|
|
|
|
|
Supplemental
cash flow information |
|
|
|
|
|
|
|
Interest
paid |
|
$ |
11.5 |
|
$ |
16.9 |
|
Income
taxes paid, net of refunds |
|
$ |
5.5 |
|
$ |
3.6 |
|
See
See accompanying notes to condensed consolidated financial
statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
March
31, 2005
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),
passenger cars and crossover vehicles.
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 locations in the United States (U.S.) (Michigan, New
York and Ohio), we also have offices or facilities in Brazil, China, England,
Germany, India, Japan, Mexico, Scotland and South Korea.
Basis
of Presentation We have
prepared the accompanying interim condensed consolidated financial statements in
accordance with the instructions to Form 10-Q under the Securities Exchange Act
of 1934. These condensed consolidated financial statements are unaudited but
include all adjustments which we consider necessary for a fair presentation of
the information set forth herein. Results of operations for the periods
presented are not necessarily indicative of the results for the full fiscal
year.
The
balance sheet at December 31, 2004 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.
We have
reclassified certain 2004 amounts to conform to the presentation of our 2005
condensed consolidated financial statements.
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,
2004.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
We state
our inventories at the lower of cost or market. The cost of our U.S. inventories
is determined principally using the last-in, first-out method (LIFO). The cost
of our foreign and indirect inventories is determined principally using the
first-in, first-out method (FIFO). We
classify indirect inventories, which include perishable tooling, repair parts
and other materials consumed in the manufacturing process but not incorporated
into our finished products, as raw materials. When we determine that our gross
inventories exceed usage requirements, or if inventories become obsolete or
otherwise not saleable, we record a provision for such loss as a component of
our inventory accounts. This policy predominantly affects our accounting for
indirect inventories. Inventories
consist of the following:
|
|
|
March
31, |
|
|
December
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars
in millions) |
| |
|
|
|
|
|
|
|
Raw
materials and work-in-progress |
|
$ |
212.3 |
|
$ |
196.1 |
|
|
Finished
goods |
|
|
29.3
|
|
|
27.6
|
|
Gross
inventories |
|
|
241.6
|
|
|
223.7
|
|
LIFO
reserve |
|
|
(14.7 |
) |
|
(14.3 |
) |
|
Other
inventory valuation reserves |
|
|
(16.0 |
) |
|
(12.6 |
) |
|
Inventories,
net |
|
$ |
210.9 |
|
$ |
196.8 |
|
3. LONG-TERM
DEBT
Long-term
debt consists of the following:
|
|
|
March
31, |
|
|
December
31, |
|
| |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars
in millions) |
| |
|
|
|
|
|
|
|
Revolving
credit facilities |
|
$ |
70.0 |
|
$ |
- |
|
5.25%
Notes, net of discount |
|
|
249.7
|
|
|
249.7
|
|
2.00%
Convertible Notes |
|
|
150.0 |
|
|
150.0 |
|
Capital
lease obligations |
|
|
3.6
|
|
|
4.2
|
|
Uncommitted
lines of credit |
|
|
40.7 |
|
|
- |
|
|
Foreign
credit facilities and other |
|
|
36.6
|
|
|
44.1
|
|
|
Long-term
debt |
|
$ |
550.6 |
|
$ |
448.0 |
|
On April
12, 2005 our Revolving Credit Facility was amended to extend the term of the
agreement and to lower the applicable margin added to the base rate of interest.
The Revolving Credit Facility, as amended, provides up to $600.0 million of
revolving bank financing commitments through April 2010 and bears interest at
rates based on LIBOR or an alternate base rate, plus an applicable margin.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March
31, 2005, we had $70.0 million outstanding and $510.5 million available under
the Revolving Credit Facility. This availability reflects a reduction of $19.5
million for standby letters of credit issued against the facility. Our current
availability under uncommitted lines of credit is $110.0 million.
The
Revolving Credit Facility provides back-up liquidity for our foreign credit
facilities and uncommitted lines of credit. We intend to use the availability of
long-term financing under the Revolving Credit Facility to refinance any current
maturities related to such debt agreements that are not otherwise refinanced on
a long-term basis in their respective markets. Accordingly, we have classified
such amounts as long-term debt.
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 the first quarter of 2004, we expensed debt
refinancing and redemption costs of $23.5 million related to these activities.
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. In
October 2004, we gave notice of our irrevocable election to pay cash for the
accreted principal portion of the securities upon conversion.
The
weighted-average interest rate of our long-term debt outstanding at March 31,
2005 was 4.8% as compared to 5.3% at December 31, 2004.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EMPLOYEE
BENEFIT PLANS
The
components of net periodic benefit cost are as follows:
|
|
|
Pension
Benefits |
|
Other
Benefits |
|
|
|
Three
months ended |
|
Three
months ended |
|
|
|
|
March
31, |
|
March
31, |
|
| |
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
|
(Dollars
in millions) |
|
| |
|
|
|
|
|
|
|
|
|
Service
cost |
|
$ |
8.4 |
|
$ |
7.9 |
|
$ |
9.6 |
|
$ |
10.2 |
|
Interest
cost |
|
|
7.9
|
|
|
6.7
|
|
|
7.2
|
|
|
6.7
|
|
Expected
asset return |
|
|
(7.6 |
) |
|
(6.6 |
) |
|
-
|
|
|
-
|
|
Amortized
loss |
|
|
1.1
|
|
|
1.0
|
|
|
1.0
|
|
|
1.6
|
|
Amortized
prior service cost |
|
|
0.8
|
|
|
0.4
|
|
|
(0.2 |
) |
|
-
|
|
|
Other |
|
|
- |
|
|
(0.2 |
) |
|
- |
|
|
- |
|
|
Net
periodic benefit cost |
|
$ |
10.6 |
|
$ |
9.2 |
|
$ |
17.6 |
|
$ |
18.5 |
|
In 2005,
we expect our pension funding to be in the range of $35.0 million to $40.0
million and our cash outlay for other postretirement benefit obligations to be
less than $5.0 million.
5. COMPREHENSIVE
INCOME
Comprehensive
income consists of the following:
|
|
Three
months ended |
|
|
|
March
31, |
| |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars
in millions) |
| |
|
|
|
|
|
|
|
Net
income |
|
$ |
13.3 |
|
$ |
36.5 |
|
Foreign
currency translation adjustments, net of tax |
|
|
0.6 |
|
|
(0.7 |
) |
|
Unrecognized
(loss) gain on derivatives, net of tax |
|
|
(0.4 |
) |
|
0.3
|
|
|
Comprehensive
income |
|
$ |
13.5 |
|
$ |
36.1 |
|
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EARNINGS
PER SHARE (EPS)
The
following table sets forth the computation of our basic and diluted
EPS:
|
|
Three
months ended |
|
|
|
March
31, |
| |
|
|
2005 |
|
|
2004 |
|
|
|
(In
millions, except per share data) |
Numerator |
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
13.3 |
|
$ |
36.5 |
|
| |
|
|
|
|
|
|
|
Denominators |
|
|
|
|
|
|
|
Basic
shares outstanding - |
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
49.9
|
|
|
52.8
|
|
| |
|
|
|
|
|
|
|
Effect
of dilutive securities |
|
|
|
|
|
|
|
|
Dilutive stock-based compensation |
|
|
1.2
|
|
|
2.5
|
|
| |
|
|
|
|
|
|
|
Diluted
shares outstanding - |
|
|
|
|
|
|
|
Adjusted weighted-average shares after |
|
|
|
|
|
|
|
|
assumed conversions |
|
|
51.1
|
|
|
55.3
|
|
| |
|
|
|
|
|
|
|
|
Basic
EPS |
|
$ |
0.27 |
|
$ |
0.69 |
|
| |
|
|
|
|
|
|
|
|
Diluted
EPS |
|
$ |
0.26 |
|
$ |
0.66 |
|
7. 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
associates must pay to acquire the stock.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 as follows:
|
|
Three
months ended |
|
|
|
March
31, |
| |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars
in millions, except per share data) |
| |
|
|
|
|
|
|
|
Net
income, as reported |
|
$ |
13.3 |
|
$ |
36.5 |
|
Deduct:
Total employee stock option expense determined |
|
|
|
|
|
|
|
|
under the fair value method, net of tax |
|
|
(3.2 |
) |
|
(4.3 |
) |
|
Pro
forma net income |
|
$ |
10.1 |
|
$ |
32.2 |
|
|
Basic
EPS, as reported |
|
$ |
0.27 |
|
$ |
0.69 |
|
|
Basic
EPS, pro forma |
|
$ |
0.21 |
|
$ |
0.61 |
|
|
Diluted
EPS, as reported |
|
$ |
0.26 |
|
$ |
0.66 |
|
|
Diluted
EPS, pro forma |
|
$ |
0.20 |
|
$ |
0.59 |
|
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:
| |
|
|
2005 |
|
|
2004 |
|
Expected
volatility |
|
|
41.64 |
% |
|
44.04 |
% |
Risk-free
interest rate |
|
|
4.36 |
% |
|
3.70 |
% |
Dividend
yield |
|
|
2.25 |
% |
|
None |
|
Expected
life of options |
|
|
7
years |
|
|
7
years |
|
Weighted
average grant-date fair value |
|
$ |
21.58 |
|
$ |
19.83 |
|
On March
15, 2005, we awarded performance accelerated restricted stock and restricted
stock units to our officers and certain associates under our 1999 Stock
Incentive Plan, as amended. The performance accelerated restricted stock and
restricted stock units are subject to continued employment and a vesting
requirement of a minimum of three years contingent upon the satisfaction of
future financial performance targets. The total amount of compensation expense
associated with the awards has been recorded as unearned compensation and is
presented as a separate component of stockholders’ equity. The unearned
compensation will be expensed over the vesting period. As of March 31, 2005,
approximately $0.3 million of compensation expense has been recorded under these
awards. The EPS impact of these awards was not significant for the first quarter
of 2005.
In
December 2004, the FASB issued Statement No. 123(R), “Share-Based
Payment.” FASB
Statement No. 123(R) replaces FASB Statement No. 123, “Accounting
for Stock-Based Compensation” and
supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees.” The
revised statement requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements and measured on the
fair value of the equity or liability instruments issued. Effective April 14,
2005, the Securities and Exchange Commission issued a new rule that amends the
compliance dates for companies to implement the revised statement to the
beginning of their next fiscal year after June 15, 2005, which for AAM is
January 1, 2006.
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, 2004.
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, SUVs, passenger cars and
crossover vehicles.
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 locations in the U.S. (Michigan, New York and Ohio), we
also have offices or facilities in Brazil, China, England, Germany, India,
Japan, Mexico, Scotland and South Korea.
We are
the principal supplier of driveline components to General Motors Corporation
(GM) for its rear-wheel drive (RWD) light trucks and SUVs manufactured in North
America, supplying substantially all of GM’s rear axle and front four-wheel
drive/all-wheel drive (4WD/AWD) axle requirements for these vehicle platforms.
Sales to GM were approximately 79% of our total net sales in the first quarter
of 2005 as compared to 80% for the full-year 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 expiration of the LPCs or the CSA.
We are
also the principal supplier of driveline system products for the Chrysler
Group’s heavy-duty Dodge Ram full-size pickup trucks (Dodge Ram program) and its
derivatives. Sales to DaimlerChrysler Corporation (DaimlerChrysler) were 11% of
our total net sales in both the first quarter of 2005 and the full-year 2004.
In
addition to GM and DaimlerChrysler, we supply driveline systems and other
related components to 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. In the second
quarter of 2005, we will launch independent rear drive axles (IRDAs) and
independent front drive axles (IFDAs) for South Korean automaker Ssangyong Motor
Corporation.
Price
reductions are a common practice in the automotive industry. 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. 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 continue offsetting such price
reductions through purchased material cost reductions and other productivity
improvements.
Recent
worldwide market conditions have resulted in significant increases in steel and
other metallic material prices. We are focused on mitigating the impact of this
trend through commercial agreements with our customers, strategic sourcing
arrangements with suppliers and technology advancements that will allow us to
use less metallic materials in the manufacture of our products.
The
majority of our sales contracts with our largest customer provide price
adjustment provisions for metal market 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. These escalating
prices have come in the form of metal market adjustments, base price increases
and surcharges. We also have contracts with our steel suppliers that ensure
continuity of supply. Additionally, our validation and testing capabilities
enable us to strategically utilize steel sources on a global basis.
RESULTS
OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2005 AS COMPARED TO THREE MONTHS
ENDED MARCH 31, 2004
Net
Sales Net
sales were $818.9 million in the first quarter of 2005 as compared to $952.8
million in the first quarter of 2004. This 14% decrease in sales in the first
quarter of 2005 compares to a 4% decrease in North American (N.A.) light vehicle
production, an 18% decrease in GM light truck production and a 17% decrease in
Dodge Ram pickup truck production.
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 $1,183 in the
first quarter of 2005 as compared to $1,182 in the first quarter of 2004. The
penetration rate of our 4WD/AWD systems was 63.4% in the first quarter of 2005
as compared to 64.5% in the first quarter of 2004.
Gross
Profit Gross
profit was $72.3 million in the first quarter of 2005 as compared to $136.4
million in the first quarter of 2004. Gross margin was 8.8% in the first quarter
of 2005 as compared to 14.3% in the first quarter of 2004. Our gross profit in
the first quarter of 2005 includes the favorable impact related to voluntary
separation programs executed in 2004. However, these gains were more than offset
by lower production volumes and increased metal market costs absorbed by our
company in the first quarter of 2005 as compared to the first quarter of 2004.
In the first quarter of 2004, a temporary work stoppage at six of our North
American manufacturing facilities adversely impacted gross profit by $5.2
million.
Selling,
General and Administrative Expenses (SG&A) SG&A
(including research and development (R&D)) was $46.6 million or 5.7% of net
sales in the first quarter of 2005 as compared to $49.5 million or 5.2% of net
sales in the first quarter of 2004. The decrease in SG&A was primarily the
result of lower profit sharing expense due to lower profits. R&D
increased 4.1% to $17.6 million in the first quarter of 2005 as compared to
$16.9 million in the first quarter of 2004.
Operating
Income
Operating income was $25.7 million in the first quarter of 2005 as compared to
$86.9 million in the first quarter of 2004. Operating margin was 3.1% in the
first quarter of 2005 as compared to 9.1% in the first quarter of 2004. 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 27% to $6.1 million in the first quarter of 2005 as
compared to $8.4 million in the first quarter of 2004. The decrease in interest
expense was principally due to lower interest rates resulting from our debt
refinancing activities in the first quarter of 2004.
Debt
Refinancing and Redemption Costs Debt
refinancing and redemption costs expensed in the first quarter of 2004 were
$23.5 million. The
details of the debt refinancing and redemption costs are more fully explained in
the section entitled “Liquidity and Capital Resources - Financing Activities.”
Income
Tax Expense Income
tax expense was $6.6 million in the first quarter of 2005 as compared to $19.2
million in the first quarter of 2004. Our effective income tax rate was 33.0% in
the first quarter of 2005, 34.5% in the first quarter of 2004 and 32.4% for the
full-year 2004.
Net
Income and Earnings Per Share (EPS) Net
income was $13.3 million in the first quarter of 2005 as compared to $36.5
million in the first quarter of 2004. Diluted earnings per share were $0.26 in
the first quarter of 2005 as compared to $0.66 in the first quarter of
2004. Net
income and EPS for the first quarter of 2005 and 2004 were
primarily impacted by the factors discussed in Gross Profit and
SG&A.
Additionally, in the first quarter of 2004, net income and EPS include
the impact of a one-time charge related to debt refinancing and redemption costs
of $15.4 million, net of tax ($23.5 million before tax).
Earnings
Before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA) EBITDA
was $69.6 million in the first quarter of 2005 as compared to $105.6 million in
the first quarter of 2004. EBITDA
for the first quarter of 2005 and 2004 was primarily impacted by the
factors discussed in Gross Profit and SG&A.
Additionally, in the first quarter of 2004, EBITDA includes the impact of
a one-time charge of $23.5 million related to debt refinancing and redemption
costs.
For an
explanation and reconciliation of EBITDA, refer to the section entitled
“Supplemental Financial Data.”
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary liquidity needs are to fund capital expenditures, debt service
obligations, working capital investments and our quarterly cash dividend
program. We believe that operating cash flow and borrowings under our Revolving
Credit Facility will be sufficient to meet these needs in the foreseeable
future.
Operating
Activities Net cash
used in operating activities was $34.1 million in the first quarter of 2005
as compared to net cash provided by operating activities of $4.4 million in the
first quarter of 2004. The primary factors impacting cash flow in the first
quarter of 2005 as compared to the first quarter of 2004 were:
| · |
Lower
profit sharing payout; |
| · |
Increased
accounts receivable primarily due to steel and other metallic material
prices; |
| · |
Increased
inventory due to the launch preparation of several new product programs,
increased steel costs, steel purchases in advance of usage needs to
protect continuity of supply, and increased in-transit inventory levels
for our global sourcing initiatives; |
| · |
Lump-sum
payments of $8.3 million made in lieu of base wage increases in the
first quarter of 2005 and lump-sum payments of $36.3 million made in the
first quarter of 2004 relating to the future service of our hourly
associates in accordance with collective bargaining agreements with
unions that represent our hourly associates at six of our locations in the
U.S.; and |
| · |
Payments totaling
$10.0 million in the first quarter of 2005 in
connection with a voluntary separation program established with the UAW.
|
Pension
and postretirement benefit obligations The net
cash impact of our pension and postretirement benefit plans was $17.1
million in the first quarter of 2005 as compared to $26.8 million in the first
quarter of 2004. This change primarily reflects a timing difference of the
amounts funded in the first quarter of 2005 as compared to the first quarter of
2004. We expect our pension funding in 2005 to be in the range of $35.0 million
to $40.0 million and our cash outlay for other
postretirement benefit obligations to be less than $5.0 million in
2005.
Allowances Our
accounts receivable allowances were $2.4 million at March 31, 2005 as compared
to $2.5 million at year-end 2004. Our inventory valuation allowances were $16.0
million at March 31, 2005 as compared to $12.6 million at year-end 2004. The
change in our inventory valuation allowances was primarily due to increased
reserves for excess and obsolete inventory.
Investing
Activities Capital
expenditures were $74.8 million in the first quarter of 2005 as compared to
$46.7 million in the first quarter of 2004. We expect
our capital spending in 2005 to be in the range of $260.0 million to $280.0
million supporting the 2006 and 2007 model year launch of the GMT-900 program
and other major customer programs. Other major capital projects expected in 2005
include expenditures for the 2005 launch of IRDAs and IFDAs to support our
lifetime production contract for new business with South Korean automaker
Ssangyong Motor Corporation and the expansion and increased capacity of our
Guanajuato Gear & Axle manufacturing facility. We are also adding equipment
and capacity to make an electronic vehicle stability and enhancement system
standard in the axles for GM’s full-size and mid-size SUVs. Additionally, we
expect to have expenditures in 2005 for new business to provide precision
machined transmission components for a major OEM in North America and
Europe.
Net
Operating Cash Flow and Free Cash Flow For an explanation and
reconciliation of net operating cash flow and free cash flow, refer to the
section entitled “Supplemental Financial Data.”
Financing
Activities Net cash provided by financing activities was $97.9 million
in the first quarter of 2005 as compared to $35.7 million in the first quarter
of 2004. Total long-term debt outstanding increased $102.6 million in the first
quarter of 2005 to $550.6 million as compared to $448.0 million at year-end 2004
primarily due to seasonal adjustments in working capital investments and
increased capital expenditures. We paid dividends of $7.4 million to our
stockholders in the first quarter of 2005. Our dividend program was initiated in
the second quarter of 2004.
At March 31, 2005, we had $70.0 million outstanding and
$510.5 million available under the Revolving Credit Facility. This availability
reflects a reduction of $19.5 million for standby letters of credit issued
against the facility. Our current availability under uncommitted lines of credit
is $110.0 million.
In
February 2004, we issued $250.0 million of 5.25% Notes and $150.0 million of
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% Notes at a cost of $314.6 million on
March 1, 2004, and for other general corporate purposes. In the first quarter of
2004, we expensed debt refinancing and redemption costs of $23.5 million related
to these activities.
The
weighted-average interest rate of our long-term debt outstanding in the first
quarter of 2005 was 5.2% as compared to 4.8% for the year ended December 31,
2004.
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. We will continue to closely monitor our environmental conditions to
ensure that we are in compliance with all laws, regulations and ordinances. GM
has agreed to indemnify and hold us harmless against certain environmental
conditions existing prior to our purchase of the assets from GM on March 1,
1994. GM’s indemnification obligations terminated on March 1, 2004 with respect
to any new claims that we may have against GM. We have made, and will continue
to make, capital and other expenditures (including recurring administrative
costs) to comply with environmental requirements. Such expenditures were not
significant in the first quarter of 2005, and we do not expect such expenditures
to have a material adverse impact in our financial condition, results of
operations or cash flows for the remainder of 2005.
EFFECT
OF NEW ACCOUNTING STANDARDS
FASB
Statement No. 123 (revised 2004) In
December 2004, the FASB issued Statement No. 123(R), “Share-Based
Payment.” FASB
Statement No. 123(R) replaces FASB Statement No. 123, “Accounting
for Stock-Based Compensation” and
supersedes APB Opinion No. 25, “Accounting
for Stock Issued to Employees.” The
revised statement requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements and measured on the
fair value of the equity or liability instruments issued. Effective April 14,
2005, the Securities and Exchange Commission issued a new rule that amends the
compliance dates for companies to implement the revised statement to the
beginning of their next fiscal year after June 15, 2005, which for AAM is
January 1, 2006.
SUPPLEMENTAL
FINANCIAL DATA
The
following supplemental financial data presented for the three months ended March
31, 2005 and 2004 are reconciliations of non-GAAP financial measures, which are
intended to facilitate analysis of our business and operating performance. This
information is not and should not be viewed as a substitute for financial
measures determined under GAAP. Other companies may calculate these non-GAAP
financial measures differently.
Earnings
Before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA)
|
|
Three
months ended |
|
|
March
31, |
| |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars
in millions) |
| |
|
|
|
|
|
|
|
Net
income |
|
$ |
13.3 |
|
$ |
36.5 |
|
Interest
expense |
|
|
6.3 |
|
|
8.6 |
|
Income
taxes |
|
|
6.6 |
|
|
19.2
|
|
|
Depreciation
and amortization |
|
|
43.4 |
|
|
41.3
|
|
|
EBITDA |
|
$ |
69.6 |
|
$ |
105.6 |
|
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.
Net
Operating Cash Flow and Free Cash Flow
|
|
Three
months ended |
|
|
|
March
31, |
| |
|
|
2005 |
|
|
2004 |
|
|
|
(Dollars
in millions) |
| |
|
|
|
|
|
|
|
Net
cash (used in) provided by operating activities |
|
$ |
(34.1 |
) |
$ |
4.4 |
|
|
Less:
Purchases of property, plant and equipment |
|
|
74.8 |
|
|
46.7 |
|
Net
operating cash flow |
|
|
(108.9 |
) |
|
(42.3 |
) |
|
Less:
Dividends paid |
|
|
7.4 |
|
|
-
|
|
|
Free
cash flow |
|
$ |
(116.3 |
) |
$ |
(42.3 |
) |
We believe net operating
cash flow and free cash flow are meaningful measures as they are commonly
utilized by management and investors to assess our ability to generate cash flow
from business operations to repay debt and return capital to our stockholders.
Net operating cash flow is also a key metric used in our calculation of
incentive compensation.
MARKET
RISK
Our
business and financial results are affected by fluctuations in world financial
markets, including interest rates and currency exchange rates. Our hedging
policy has been developed to manage these risks to an acceptable level based on
management’s judgment of the appropriate trade-off between risk, opportunity and
cost. We do not hold financial instruments for trading or speculative
purposes.
Currency
Exchange Risk Because
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 Euro, Mexican Peso, Pound Sterling,
Brazilian Real and Canadian Dollar. At March 31, 2005, we had currency forward
contracts with a notional amount of $24.2 million outstanding.
Future
business operations and opportunities, including the expansion of our business
outside North America, may further increase the risk that cash flows resulting
from these activities may be adversely affected by changes in currency exchange
rates. If and when appropriate, we intend to manage these risks by utilizing
local currency funding of these expansions and various types of foreign exchange
contracts.
Interest
Rate Risk We are
exposed to variable interest rates on certain credit facilities. The pre-tax
earnings and cash flow impact of a one-percentage-point increase in interest
rates (approximately 20.8% of our weighted-average interest rate at March 31,
2005) on our long-term debt outstanding at March 31, 2005 would be approximately
$1.5 million on an annualized basis.
Under the
direction of our Chief Executive Officer and Chief Financial Officer, we
evaluated our disclosure controls and procedures and internal control over
financial reporting and concluded that (1) our disclosure controls and
procedures were effective as of March 31, 2005, and (2) no change in internal
control over financial reporting occurred during the quarter ended March 31,
2005 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
|
(a) |
Exhibits
required by Item 601 of Regulation S-K are listed in the Exhibit
Index. |
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
(Registrant)
| |
|
|
|
By: |
/s/ Thomas
L. Martin |
| |
|
| |
Thomas
L. Martin |
| |
Vice
President - Finance & |
| |
Chief
Financial Officer |
| |
(also
in the capacity of Chief Accounting Officer) |
| |
May
3, 2005 |
|
Number |
|
Description
of Exhibit |
| |
|
|
|
*10.47 |
|
Amendment
No. 1 to the Credit Agreement dated as of April 12,
2005** |
| |
|
|
|
*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