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EX-32 - SECTION 906 CERTIFICATION OF THE CEO AND CFO - AMERICAN AXLE & MANUFACTURING HOLDINGS INCexhibit32.htm
EX-4.1 - WARRANT AGREEMENT - AMERICAN AXLE & MANUFACTURING HOLDINGS INCexhibit4-1.htm
EX-99.1 CHARTER - ACCESS AND SECURITY AGREEMENT - AMERICAN AXLE & MANUFACTURING HOLDINGS INCexhibit99-1.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - AMERICAN AXLE & MANUFACTURING HOLDINGS INCexhibit31-2.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - AMERICAN AXLE & MANUFACTURING HOLDINGS INCexhibit31-1.htm
EX-10.63 - GM SECOND LIEN TERM LOAN - AMERICAN AXLE & MANUFACTURING HOLDINGS INCexhibit10-63.htm
EX-10.62 - SETTLEMENT AND COMMERCIAL AGREEMENT - AMERICAN AXLE & MANUFACTURING HOLDINGS INCexhibit10-62.htm



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

FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarterly period ended September 30, 2009
   
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  þ   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  o    No   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   o     Accelerated filer   þ      Non-accelerated filer   o     Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes   o      No   þ

As of October 28, 2009, the latest practicable date, the number of shares of the registrant's Common Stock, par value $0.01 per share, outstanding was 55,565,873 shares.


Internet Website Access to Reports

The website for American Axle & Manufacturing Holdings, Inc. is www.aam.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.  The Securities and Exchange Commission also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
 
 

 

 
 
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2009
 
 
       
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    Ex. 10.62  Settlement and Commercial Agreement dated as of September 16, 2009, between American Axle & Manufacturing, Inc. and General Motors Company.        
    Ex. 10.63  Second Lien Term Credit Agreement dated as of September 16, 2009, between American Axle & Manufacturing, Inc. and General Motors Company, as lender.   Second Lien Collateral Agreement dated as of September 16, 2009, among American Axle & Manufacturing Holdings, Inc., American Axle & Manufacturing, Inc., certain subsidiaries of American Axle & Manufacturing, Inc. identified therein and General Motors Company.        
           
           
           
    Ex. 99.1  Access and Security Agreement dated as of September 16, 2009, between American Axle & Manufacturing, Inc. and General Motors Company.          
             
 
 
 

 


In this Quarterly Report on Form 10-Q, we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance.  Such statements are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 and relate to trends and events that may affect our future financial position and operating results.  The terms such as “will,” “may,” “could,” “would,” “plan,” “believe,” “expect,” “anticipate,” “intend,” “project,” and similar words of expressions, as well as statements in future tense, are intended to identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved.  Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and differ materially from those expressed in or suggested by the forward-looking statements.  Important factors that could cause such differences include, but are not limited to:

·  
our ability to comply with the definitive terms and conditions of various commercial and financing arrangements with GM;
·  
global economic conditions; 
·  
availability of financing for working capital, capital expenditures, R&D or other general corporate purposes, including our ability to comply with financial covenants;
·  
our customers’ and suppliers’ availability of financing for working capital, capital expenditures, R&D or other general corporate purposes;
·  
reduced purchases of our products by GM, Chrysler or other customers;
·  
reduced demand for our customers’ products (particularly light trucks and SUVs produced by GM and Chrysler);
·  
the impact on us and our customers of requirements imposed on, or actions taken by, our customers in response to the U.S. government’s ownership interest, the Troubled Asset Relief Program or similar programs;
·  
our ability to achieve cost reductions through ongoing restructuring actions;
·  
additional restructuring actions that may occur;
·  
our ability to achieve the level of cost reductions required to sustain global cost competitiveness;
·  
our ability to maintain satisfactory labor relations and avoid future work stoppages;
·  
our suppliers’, our customers’ and their suppliers’ ability to maintain satisfactory labor relations and avoid work stoppages;
·  
our ability to implement improvements in our U.S. labor cost structure;
·  
supply shortages or price increases in raw materials, utilities or other operating supplies;
·  
our ability and our customers’ and suppliers’ ability to successfully launch new product programs on a timely basis;
·  
our ability to realize the expected revenues from our new and incremental business backlog;
·  
our ability to attract new customers and programs for new products;
·  
our ability to develop and produce new products that reflect market demand;
·  
lower-than-anticipated market acceptance of new or existing products;
·  
our ability to respond to changes in technology, increased competition or pricing pressures;
·  
continued or increased high prices for or reduced availability of fuel;
·  
adverse changes in laws, government regulations or market conditions affecting our products or our customers’ products (such as the Corporate Average Fuel Economy regulations);
·  
adverse changes in the political stability of our principal markets (particularly North America, Europe, South America and Asia);
·  
liabilities arising from warranty claims, product liability and legal proceedings to which we are or may become a party;
·  
changes in liabilities arising from pension and other postretirement benefit obligations;
·  
risks of noncompliance with environmental regulations or risks of environmental issues that could result in unforeseen costs at our facilities;
·  
our ability to attract and retain key associates;
·  
other unanticipated events and conditions that may hinder our ability to compete.

It is not possible to foresee or identify all such factors and we make no commitment to update any forward-looking statement or to disclose any facts, events or circumstances after the date hereof that may affect the accuracy of any forward-looking statement.
 
1



AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
(Unaudited)

    Three months ended  
Nine months ended
   
    September 30,  
September 30,
   
    2009    
2008
    2009
2008
 
 
    (in millions, except per share data)    
                                 
Net sales
  $ 409.6     $ 528.1     $ 1,057.6     $ 1,606.2  
               
Cost of goods sold    
321.1
      906.5       1,157.1       2,499.8    
                               
Gross profit (loss)    
88.5
      (378.4 )     (99.5 )     (893.6 )  
                               
Selling, general and administrative expenses    
44.0
      43.0       133.3       137.3    
                               
Operating income (loss)    
44.5
      (421.4 )     (232.8 )     (1,030.9 )  
                               
Interest expense    
(20.3
)     (18.0 )     (60.4 )     (48.4 )  
                               
Investment income (loss)
    0.8       (3.7 )     2.8       0.5  
                               
Other income (expense), net
    0.1       (1.4 )     (3.6 )     0.2  
                               
Income (loss) before income taxes
    25.1       (444.5 )     (294.0 )     (1,078.6 )
                   
Income tax expense (benefit)
    5.5       (3.4 )     7.8       33.8  
               
Net income (loss)
  $ 19.6     $ (441.1 )   $ (301.8 )   $ (1,112.4 )
               
  Add: Net loss attributable to noncontrolling interests
    -       0.2       0.1       0.2  
               
Net income (loss) attributable to AAM
  $ 19.6     $ (440.9 )   $ (301.7 )   $ (1,112.2 )
             
Basic earnings (loss) per share
  $ 0.35     $ (8.54 )   $ (5.83 )   $ (21.55 )
               
Diluted earnings (loss) per share
  $ 0.35     $ (8.54 )   $ (5.83 )   $ (21.55 )
               
Dividends declared per share
  $ -     $ 0.02     $ -     $ 0.32  

    See accompanying notes to condensed consolidated financial statements.
 
2

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
 
 
(Unaudited)
       
Assets
 
(in millions)
 
Current assets
     
Cash and cash equivalents
  $ 173.1     $ 198.8  
Short-term investments
    9.1       77.1  
Accounts receivable, net
    151.2       186.9  
2008 AAM-GM Agreement receivable
    -       60.0  
Inventories, net
    88.0       111.4  
Prepaid expenses and other current assets
    60.6       61.1  
Total current assets
    482.0       695.3  
                 
Property, plant and equipment, net
    950.3       1,064.2  
Goodwill
    147.8       147.8  
GM postretirement cost sharing asset
    240.9       221.2  
Other assets and deferred charges
    132.0       119.2  
Total assets
  $ 1,953.0     $ 2,247.7  
                 
Liabilities and Stockholders’ Deficit
               
Current liabilities
               
Current portion of long-term debt
  $ 36.3     $ -  
Accounts payable
    189.3       250.9  
Accrued compensation and benefits
    99.1       127.5  
Deferred revenue
    75.7       66.7  
Accrued expenses and other current liabilities
    48.5       72.6  
Total current liabilities
    448.9       517.7  
                 
Long-term debt
    1,142.8       1,139.9  
Deferred revenue
    209.3       178.2  
Postretirement benefits and other long-term liabilities
    891.6       847.4  
Total liabilities
    2,692.6       2,683.2  
                 
Stockholders' deficit
               
Common stock, par value $0.01 per share
    0.6       0.6  
Paid-in capital
    467.5       426.7  
Accumulated deficit
    (950.3 )     (648.6 )
Treasury stock at cost, 5.3 million shares as of September 30, 2009
               
   and 5.2 million shares as of December 31, 2008
    (174.3 )     (173.9 )
Accumulated other comprehensive income (loss), net of tax
               
     Defined benefit plans
    (115.4 )     (29.3 )
     Foreign currency translation adjustments
    34.2       0.2  
     Unrecognized loss on derivatives
    (2.7 )     (11.4 )
Total AAM stockholders' deficit
    (740.4 )     (435.7 )
Noncontrolling interests in subsidiaries
    0.8       0.2  
Total stockholders’ deficit
    (739.6 )     (435.5 )
Total liabilities and stockholders' deficit
  $ 1,953.0     $ 2,247.7  
 
See accompanying notes to condensed consolidated financial statements.
 
3

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
 
   
Nine months ended
 
   
September 30,
 
   
2009
   
2008
 
   
(in millions)
 
Operating activities
           
Net loss
  $ (301.8 )   $ (1,112.4 )
Adjustments to reconcile net loss to net cash used in operating activities
               
    Depreciation and amortization
    102.8       165.2  
    Asset impairments and related indirect inventory obsolescence
    151.6       581.1  
    Deferred income taxes
    (2.9 )     22.7  
    Stock-based compensation
    10.9       9.4  
    Pensions and other postretirement benefits, net of contributions
    (65.2 )     25.6  
    Loss (gain) on retirement of equipment
    1.1       (1.1 )
    Changes in operating assets and liabilities
               
        Accounts receivable
    97.4       7.5  
        Deferred revenue, net
    40.1       87.6  
        Inventories
    22.0       18.0  
        Accounts payable and accrued expenses
    (71.4 )     63.0  
        Other assets and liabilities
    (4.3 )     36.1  
Net cash used in operating activities
    (19.7 )     (97.3 )
                 
Investing activities
               
Purchases of property, plant and equipment
    (112.0 )     (102.8 )
Payments of deposits for acquisition of property and equipment
    (3.5 )     -  
Proceeds from sale of equipment
    0.5       2.3  
Investment in joint venture
    (10.2 )     -  
Redemption (reclass) of short-term investments
    68.0       (117.2 )
Net cash used in investing activities
    (57.2 )     (217.7 )
                 
Financing activities
               
Net borrowings under revolving credit facilities
    38.5       444.4  
Payments of debt and capital lease obligations
    (10.3 )     (10.4 )
Proceeds from issuance of long-term debt
    4.6       8.9  
Debt issuance costs     (18.2     -  
Proceeds from issuance of warrants to GM
    30.3       -  
Repurchase of treasury stock
    (0.3 )     (0.1 )
Employee stock option exercises
    1.0       0.7  
Tax benefit on stock option exercises
    -       0.2  
Dividends paid
    -       (17.3 )
Net cash provided by financing activities
    45.6       426.4  
                 
Effect of exchange rate changes on cash
    5.6       (0.8 )
                 
Net increase (decrease) in cash and cash equivalents
    (25.7 )     110.6  
                 
Cash and cash equivalents at beginning of period
    198.8       343.6  
                 
Cash and cash equivalents at end of period
  $ 173.1     $ 454.2  
                 
Supplemental cash flow information
               
     Interest paid
  $ 67.0     $ 56.9  
     Income taxes paid, net of refunds
  $ 3.0     $ 3.1  
See    
    See accompanying notes to condensed consolidated financial statements.
           
 
4


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
SEPTEMBER 30, 2009
(Unaudited)

1.     ORGANIZATION AND BASIS OF PRESENTATION

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

Basis of Presentation We have prepared the accompanying interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934.  These condensed consolidated financial statements are unaudited but include all normal recurring adjustments, which we consider necessary for a fair presentation of the information set forth herein.  Results of operations for the periods presented are not necessarily indicative of the results for the full fiscal year.

The balance sheet at December 31, 2008 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, 2008.

        Effect of New Accounting Standards   On January 1, 2009, we adopted new accounting guidance on determining whether instruments granted in share-based payment transactions are participating securities.  This new guidance concludes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method.  The new guidance was effective for us retrospectively on January 1, 2009.  In accordance with the accounting guidance for accounting changes and error corrections, the change in accounting principle has been retrospectively applied to all prior periods presented herein.

        We have presented the effects of the adoption of this new accounting guidance for the inclusion of unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents in the computation of EPS for the three months ended September 30, 2009 below.  Adoption of this staff position did not increase basic and diluted shares outstanding for the three months ended September 30, 2008 or the nine months ended September 30, 2008 and 2009 as we were in a loss position and the effect would have been antidilutive because the participating securities are not obligated to fund losses.

Earnings (loss) per share (EPS)
 
As calculated prior to new accounting guidance
   
Adjustments
   
As reported
 
for the three months ended September 30, 2009
 
(in millions, except per share data)
 
Numerator
                 
Net income attributable to AAM
  $ 19.6     $ -     $ 19.6  
Denominators
                       
Basic shares outstanding
    51.9       3.5       55.4  
Diluted shares outstanding
    53.6       2.2       55.8  
Basic EPS
  $ 0.38     $ (0.03 )   $ 0.35  
Diluted EPS
  $ 0.36     $ (0.01 )   $ 0.35  
                         

5


AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
         In December 2007, the FASB issued new accounting guidance on noncontrolling interests in consolidated financial statements.  This new guidance establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  We adopted the new guidance on January 1, 2009 and have retrospectively revised the financial statement presentation of our noncontrolling interests accordingly.

        In February 2008, the FASB issued new accounting guidance which defers the effective date of a previously issued accounting standard for the fair value measurement of nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis.  We adopted the new accounting guidance on January 1, 2009 and it did not have a material impact on our financial statements.

In May 2008, the FASB issued new accounting guidance for the treatment of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), which requires issuers of convertible debt securities within its scope to separate these securities into a debt component and an equity component, resulting in the debt component being recorded at fair value without consideration given to the conversion feature. This new guidance was effective for us on January 1, 2009 and the impact was not material.
 
In December 2008, the FASB issued new accounting guidance for employers’ disclosures about postretirement benefit plan assets.  This new guidance requires annual disclosure about the assets held in postretirement benefit plans, including a breakdown by the level of the assets and a reconciliation of any change in Level 3 assets during the year.  It requires disclosures about investment policies and strategies, asset categories, inputs and valuation techniques used to measure the fair value of plan assets, and significant concentrations of risk within plan assets.  This new guidance is effective for periods ending after December 15, 2009 and we will revise our disclosures accordingly.
 
In April 2009, the FASB issued new accounting guidance which expands the frequency of fair value disclosures for publicly traded entities about the fair value of certain financial instruments not recognized at fair value in the statement of financial position to include interim reporting periods.  We adopted this new guidance in the second quarter of 2009 and we have included the expanded disclosures accordingly.

        In May 2009, the FASB issued new accounting guidance on subsequent events.  The new guidance requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued.  We adopted this new guidance in the second quarter of 2009 and we have included the required disclosure accordingly.

        In July 2009, the FASB issued new accounting guidance which establishes the FASB Accounting Standards Codification (ASC) as the official source of GAAP, and its use is effective for periods ending after September 15, 2009.  We adopted this new guidance in the third quarter of 2009.

2.  
2009 SETTLEMENT AND COMMERCIAL AGREEMENT

        In the third quarter of 2009, we negotiated with GM and our senior lenders to revise key commercial agreements and financing arrangements in order to address short-term liquidity issues, including debt covenant violations.  On September 16, 2009, AAM and GM entered into a settlement and commercial agreement (2009 Settlement and Commercial Agreement) and we amended and restated our Revolving Credit Facility and Term Loan agreements.  We believe these actions have resolved our short-term liquidity issues.  See Note 3 – Debt Amendments for more detail on our amended and restated loan agreements.

        As part of the 2009 Settlement and Commercial Agreement, we received $110.0 million from GM in consideration for cure costs associated with contracts assumed and/or terminated by Motors Liquidation Company in its chapter 11 bankruptcy cases; resolution of outstanding commercial obligations between AAM and GM (including, but not limited to, AAM retaining the  programs currently sourced to AAM, AAM amending its standard terms and conditions to be more consistent with GM’s standard terms and conditions with other Tier 1 suppliers, GM’s right to resource one previously awarded program, and GM’s acceptance of its obligation to AAM under the GM postretirement cost sharing agreement); and adjustment of installed capacity levels reserved for existing and awarded programs to reflect new estimates of market demand as agreed between the parties.

        We also agreed to expedited payment terms of “net 10 days” through June 30, 2011, in exchange for a 1.0% early payment discount to GM.  After June 30, 2011, we will have the right to elect to continue to receive expedited payment terms through December 31, 2013.
     
6

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
        
         Under the 2009 Settlement and Commercial Agreement, GM also agreed to make available to AAM a Second Lien Term Loan Facility of up to $100.0 million. Borrowings under this facility, if any, will bear interest at LIBOR (with a 2% floor) plus 12%.  The Second Lien Term Loan Facility is not prepayable until June 30, 2011, unless the source of such prepayment is cash generated in AAM’s ordinary course business operations and is subject to an intercreditor agreement with existing senior lenders and cannot be terminated prior to June 30, 2011. Until then, if we require additional liquidity that cannot be satisfied by utilizing a combination of the expedited payment terms, proceeds from sales of common equity, proceeds from the issuance of equity-linked securities, cash generated from ordinary course business operations, availability under existing credit facilities (including certain permitted indebtedness), or a permitted refinancing (as set forth in the Second Lien Term Loan Facility), we will be required to borrow under the Second Lien Term Loan Facility.  As of September 30, 2009, there were no borrowings under this facility.
     
        Also, as part of the 2009 Settlement and Commercial Agreement, we granted GM with a contingent right of access to certain of our facilities as collateral under the agreement.  In addition, we granted GM a security interest in certain operating assets, certain real estate and intellectual property used in production of GM component parts.  Upon the occurrence of certain specified events, which generally involve a material and imminent breach of our supply obligations at a particular facility, GM may elect to access and use the operating assets and real estate used to manufacture, process and ship GM component parts produced at specified AAM facilities for a period of up to 360 days after invoking its right of access.  GM would also have the right to resource component part production to alternative suppliers. The right of access would continue for ninety days following the later of repayment and termination of the Second Lien Term Loan Facility and termination of the expedited payment terms.  If we do not achieve compliance with the Secured Debt Leverage Ratio under the Amended Revolving Credit Facility as of March 31, 2011 (without regard to a waiver, amendment, forbearance or modification of such covenant granted by the Amended Revolving Credit Facility lenders), the right of access will be extended through March 31, 2012.  
 
        We also issued to GM five year warrants, which entitle GM to purchase 4.1 million shares of AAM’s common stock at an exercise price of $2.76 per share.  If we borrow against the Second Lien Term Loan Facility, we will issue GM additional warrants to purchase a pro rata portion of up to an additional 12.5% of AAM’s outstanding common stock at an exercise price of $2.76 per share based upon the amount drawn under the Facility.  These warrants will expire on September 16, 2014.

We estimated the fair value of the initial warrants issued to GM on September 16, 2009 using the Black-Scholes option-pricing model with the following assumptions:

   
2009
 
Stock price
  $ 8.13  
Expected volatility
    120.12 %
Risk-free interest rate
    3.47 %
Expected life of options
 
5 years
 
Dividend yield   0.00 %
Weighted-average grant-date fair value
  $ 7.40  

        We are also subject to certain limitations on executive compensation and “golden parachute” agreements until ninety days following the later of repayment and termination of the Second Lien Term Loan Facility and termination of the expedited payment terms.  Other terms and conditions of the 2009 Settlement and Commercial Agreement modified the supply relationship between AAM and GM to be more consistent with GM’s relationship with other suppliers.  These terms and conditions include commercial revisions to the metal market program, cost transparency requirements, warranty cost sharing, cost reduction programs, productivity commitments and payment terms.

        In the third quarter of 2009, we recorded $79.7 million of deferred revenue related to the 2009 Settlement and Commercial Agreement.  This includes the $110.0 million of cash received pursuant to the 2009 Settlement and Commercial Agreement net of $30.3 million, which represents the fair value of the initial warrants issued to GM.  As of September 30, 2009, our deferred revenue related to the 2009 Settlement and Commercial Agreement is $79.4 million, $8.0 million of which is classified as current and $71.4 million of which is recorded as noncurrent on our Condensed Consolidated Balance Sheet.  We will recognize this deferred revenue into revenue on a straight-line basis over 120 months, which is the period that we expect GM will benefit under the 2009 Settlement and Commercial Agreement.  We recorded revenue of $0.3 million for the three and nine months ended September 30, 2009, related to this agreement.
 
7

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
3.  
 DEBT AMENDMENTS

On September 16, 2009, we entered into a Revolving Credit Amendment and Restatement Agreement under which the Credit Agreement dated as of January 9, 2004 was amended and restated (Amended Revolving Credit Facility).  Under the Amended Revolving Credit Facility, we will be required to comply with revised financial covenants related to secured indebtedness leverage and cash interest expense coverage.  We will also be required to maintain an average daily minimum liquidity of $85 million until June 30, 2010. The Amended Revolving Credit Facility limits our ability to make certain investments, declare or pay dividends or distributions on capital stock, redeem or repurchase capital stock and certain debt obligations, incur liens, incur indebtedness, or merge, make acquisitions and sell assets. Borrowings under the Amended Revolving Credit Facility will continue to bear interest at rates based on adjusted LIBOR or an alternate base rate, plus an applicable margin. The applicable margin for a LIBOR based loan for lenders with commitments under the class A loan facility, which expires December 2011, is currently 6% and the applicable margin for lenders with commitments under the class B loan facility, which expires April 2010, is currently 2.5%. Borrowings under the Amended Revolving Credit Facility will be subject to a collateral coverage test after June 30, 2010.

On September 16, 2009, we entered into a Term Loan Amendment and Restatement Agreement under which the Credit Agreement dated as of June 14, 2007 was amended and restated (Amended Term Loan).  The Amended Term Loan agreement, among other things, replicates substantially all of the covenants and events of default in the Amended Revolving Credit Facility as described above.  Loans under the Amended Term Loan will bear interest at rates based on adjusted LIBOR (with a 3% floor) plus 7%.  The Amended Term Loan matures on June 14, 2012 and is prepayable at any time.

As of September 30, 2009, we were in compliance with all of our debt covenants.

4.  
INDUSTRY RISKS AND UNCERTAINTIES

In 2008, and continuing in 2009, the domestic automotive industry experienced a severe downturn.  The collapse of the U.S. housing market, the global financial crisis, a lack of available consumer credit and financing options, rising unemployment, exceptionally low consumer confidence and wildly fluctuating fuel and commodity prices, among other factors, resulted in a sudden and major drop in industry production and sales volumes.  These difficult market conditions exacerbated the financial pressure on the entire domestic automotive industry, and especially the domestic OEMs.

In the first nine months of 2009, our two largest customers, GM and Chrysler, filed for bankruptcy protection in the U.S. Southern District of New York.  Post-bankruptcy GM and Chrysler were both purchased out of bankruptcy in the first nine months of 2009.  Our sales to GM and Chrysler were approximately 85% of our total net sales for the nine months ended September 30, 2009.  We have collected substantially all of our pre-bankruptcy receivables from GM and Chrysler and we do not anticipate collection issues with any subsequent receivable balances.  See Note 2 – 2009 Commercial and Settlement Agreement for more detail on GM’s acceptance of certain contracts and definitive contract terms.  Chrysler has assumed our pre-bankruptcy contracts.

In the second quarter of 2009, GM began an extended summer production shutdown for many of the facilities we support.  Chrysler also temporarily idled their manufacturing operations for a significant portion of the second quarter through its exit from bankruptcy.  The extended production shutdowns at GM and Chrysler significantly reduced production volumes, revenues and gross profit in the second and third quarters of 2009.

As previously described in Note 2 – 2009 Settlement and Commercial Agreement and Note 3 – Debt Amendments, we took actions in the third quarter of 2009 that we believe have resolved our short-term liquidity issues.  However, risks and uncertainties continue to exist regarding general economic conditions, the health of the global and domestic automotive industry and the viability of our major customers.  We have made adjustments to our business plan, global manufacturing footprint, and our cost structure and operating breakeven level to adapt to lower industry production volumes.  We also continue to focus on improving our liquidity position and diversifying our customer base and revenue concentrations.  We will continue to monitor these risks and uncertainties and will react appropriately. 

8

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

In the nine months ended September 30, 2009, we incurred restructuring charges related to one-time termination benefits, asset impairments, indirect inventory obsolescence, contract related costs and other ongoing restructuring actions.

A summary of the restructuring related activity for the nine months ended September 30, 2009 is shown below (in millions):

   
One-time
         
Indirect
   
Asset
   
Contract
   
Other
       
   
Termination
   
Asset
   
Inventory
   
Retirement
   
Related
   
Restructuring
       
   
Benefits
   
Impairments
   
Obsolescence
   
Obligations
   
Costs
   
Actions
   
Total
 
Accrual as of December 31, 2008
  $ 42.1     $ -     $ -     $ 0.4     $ 5.3     $ -     $ 47.8  
Charges
    8.9       147.8       3.9       1.0       21.1       10.0       192.7  
Cash utilization
    (40.6 )     -       -       (0.1 )     (3.3 )     (10.0 )     (54.0 )
Non-cash utilization
    -       (147.8 )     (3.9 )     -       -       -       (151.7 )
Accrual adjustments
    1.1       -       -       -       -       -       1.1  
Accrual as of September 30, 2009
  $ 11.5     $ -     $ -     $ 1.3     $ 23.1     $ -     $ 35.9  

One-time Termination Benefits  In 2009, we have reduced our worldwide salaried workforce by approximately 600 positions.  We recorded expense of $8.9 million in the nine months ended September 30, 2009 in connection with the estimated postemployment benefits provided to certain associates in the U.S. and various statutory requirements for our foreign locations.

Asset Impairments  In the second quarter of 2009, we identified the following impairment indicators:

·  
new capacity rationalization actions taken by GM and Chrysler as a result of their bankruptcy filings and subsequent reorganization plans, including extended production shutdowns, for many of the programs we currently support; and
·  
changes in our operating plans, including the idling and consolidation of a significant portion of our Detroit Manufacturing Complex, made necessary by extended production shutdowns and other program delays and sourcing decisions taken by our customers in the second quarter of 2009.

 We recorded asset impairment charges of $147.8 million in the nine months ended September 30, 2009, associated with the permanent idling of certain assets and the writedown of the carrying value of certain assets that were “held for use” to their estimated fair value.

 Indirect Inventory Obsolescence  As a result of the reduction in the projected usage of machinery and equipment due to the impairment indicators discussed above, certain indirect inventory was determined to be obsolete.  We recorded a charge of $3.9 million in the nine months ended September 30, 2009, related to the write down of the net book value of these assets to their estimated net realizable value.

 Contract Related Costs  Contract related costs recorded in the nine months ended September 30, 2009 of $21.1 million related to the estimated fair value of obligations for leased assets that were permanently idled in the first nine months of 2009.  

 Other In the nine months ended September 30, 2009, we incurred $10.0 million of charges related to the redeployment of assets to support capacity utilization initiatives and other related activities.

 We expect to make payments of approximately $6 million in the fourth quarter of 2009, $15 million in 2010, $10 million in 2011 and $5 million in 2012 related to the restructuring accrual of $35.9 million as of September 30, 2009.

6.  
 BUYDOWN PROGRAM

 In the third quarter of 2008, we recorded expense of $51.9 million for the estimated amount of total Buydown Program (BDP) payments related to permanently idled UAW-represented associates throughout the term of the 2008 labor agreements at our original U.S. locations.  This represented management’s best estimate of the portion of the total BDP payments that would not result in a future benefit to AAM.

 Due to new capacity rationalization actions taken by GM and Chrysler as a result of their bankruptcy filings and subsequent reorganization plans and changes in our operating plans in the second quarter of 2009, we increased the estimated number of UAW-represented associates at our original U.S. locations that we expect to be permanently idled throughout the term of the 2008 labor agreements or to voluntarily elect to accelerate their remaining buydown payments and terminate employment.  As a result of this change in estimate, we recorded expense of $22.5 million in the nine months ended September 30, 2009, which represents the estimated additional BDP payments that will not result in a future benefit to AAM.
 
9

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

 We state our inventories at the lower of cost or market.  The cost of worldwide inventories is determined using the FIFO method.  When we determine that our gross inventories exceed usage requirements, or if inventories become obsolete or otherwise not saleable, we record a provision for such loss as a component of our inventory accounts.

 Inventories consist of the following:
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(in millions)
 
             
Raw materials and work-in-progress
  $ 100.8     $ 116.9  
Finished goods
    20.4       22.8  
Gross inventories
    121.2       139.7  
Other inventory valuation reserves
    (33.2 )     (28.3 )
Inventories, net
  $ 88.0     $ 111.4  

8.
DEBT

 Debt consists of the following:
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(in millions)
 
             
Amended Revolving Credit Facility
  $ 342.5     $ 295.0  
7.875% Notes
    300.0       300.0  
5.25% Notes, net of discount
    249.8       249.8  
2.00% Convertible Notes
    0.4       0.4  
Amended Term Loan
    250.0       250.0  
Foreign credit facilities
    28.9       36.9  
Capital lease obligations
    7.5       7.8  
Total debt
    1,179.1       1,139.9  
     Less:  Current portion of long-term debt
    (36.3     -  
Long-term debt
  $ 1,142.8     $ 1,139.9  

 The Amended Revolving Credit Facility provides up to $476.9 million of revolving bank financing commitments through April 2010 and $369.4 million of such revolving bank financing commitments through December 2011.  The Amended Revolving Credit Facility bears interest at rates based on LIBOR or an alternate base rate, plus an applicable margin.  At September 30, 2009, we had $87.9 million available under the Amended Revolving Credit Facility.  This availability reflects a reduction of $46.5 million for standby letters of credit issued against the facility.

 On September 16, 2009, we entered into a credit agreement with GM, as lender, pursuant to which GM has agreed to provide us with a $100.0 million Second Lien Term Loan Facility.  See Note 2 – 2009 Settlement and Commercial Agreement, for more detail on the Second Lien Term Loan Facility.

 The Amended Revolving Credit Facility provides back-up liquidity for our other credit facilities.  We intend to use the availability of long-term financing under the Amended 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 classified $87.9 million of current maturities as long-term debt.

10

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries.  At September 30, 2009, $28.9 million was outstanding under these facilities and an additional $9.2 million was available.

 The weighted-average interest rate of our debt outstanding at September 30, 2009 was 8.7% and 7.0% as of December 31, 2008.

9.      INVESTMENT IN JOINT VENTURE
 
 In the first quarter of 2009, we formed a joint venture with Hefei Automobile Axle Co, Ltd., a subsidiary of Anhui Jianghuai Automobile Group Co, Ltd. (JV).  Each party owns 50 percent of the JV, and we will account for the JV using the equity method.  We recorded the initial investment in the JV of $10.2 million at cost, and adjusted the carrying amount of the investment to recognize our proportionate share of the earnings of the JV.  Our investment is classified as other assets and deferred charges on our Condensed Consolidated Balance Sheet.
 
10.    FAIR VALUE

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

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

 Financial instruments  The estimated fair value of our financial assets and liabilities that are recognized at fair value on a recurring basis, using available market information and other observable data, as of September 30, 2009, are as follows (in millions):

Balance Sheet Classification
 
Carrying Value
   
Fair Value
 
Input
Cash equivalents
  $ 44.9     $ 44.9  
Level 2
Short-term investments
    9.1       9.1  
Level 2
Accrued expenses and other current liabilities
                 
    Currency forward contracts
    1.6       1.6  
Level 2
 
         The carrying values of our cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates their fair values due to the short-term maturities of these instruments.  The carrying value of our borrowings under the foreign credit facilities approximates their fair value due to the frequent resetting of the interest rates.  We estimated the fair value of the amounts outstanding on our debt as of September 30, 2009, using available market information and other observable data, to be as follows (in millions):
 
       Carrying Value    
Fair Value
 
Input
Amended Revolving Credit Facility
   $    342.5     $ 301.4  
Level 2
Amended Term Loan
     250.0       230.0  
Level 2
7.875% Notes
     300.0       208.5  
Level 2
5.25% Notes
     249.8       173.6  
Level 2

  Long-lived assets  In the second quarter of 2009, as part of our impairment analysis, we were required to measure the fair value of certain long-lived assets.  In this analysis we utilized the income approach, which determines fair value through a discounted cash flow analysis based on the assumptions a market participant would use in pricing these assets.  Significant inputs used by management when determining the fair value of long-lived assets for impairment include general economic conditions, future expected production volumes, product pricing and cost estimates, working capital and capital investment requirements, discount rates and estimated liquidation values.

11

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
The following table summarizes impairments of long-lived assets measured at fair value on a nonrecurring basis subsequent to initial recognition (in millions):

 
 
 
Balance Sheet Classification
 
Fair Value Measurements using Level 3 Inputs
   
Asset Impairment Recorded in the Second Quarter of 2009
 
Property, plant and equipment, net
  $ 34.1     $ 72.6  
Other assets and deferred charges
    1.5       3.3  

We were also required to measure the fair value of obligations for leased assets that were permanently idled in the second quarter of 2009.  Using level 3 inputs, we determined the fair value of these obligations by calculating the present value of future lease payments, adjusted for the effects of any prepaid or deferred items recognized under the lease, using a credit adjusted risk-free rate.  We recorded $5.9 million of these obligations as accrued expenses and other current liabilities and $15.2 million of these obligations as postretirement benefits and other long-term liabilities on our Condensed Consolidated Balance Sheet as of June 30, 2009.

11.   DERIVATIVES

In March 2008, the FASB issued new accounting guidance that requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements.  We adopted this new guidance prospectively on January 1, 2009.

Our business and financial results are affected by fluctuations in world financial markets, including interest rates and currency exchange rates.  Our hedging policy has been developed to manage these risks to an acceptable level based on management’s judgment of the appropriate trade-off between risk, opportunity and cost.  We do not hold financial instruments for trading or speculative purposes.

Currency forward contracts  From time to time, we use foreign currency forward contracts to reduce the effects of fluctuations in exchange rates, primarily relating to the Mexican Peso.  As of September 30, 2009, we have forward contracts outstanding with a notional amount of $9.1 million that hedge our exposure to changes in foreign currency exchange rates for our payroll expenses.

Interest rate hedges  We are exposed to variable interest rates on certain credit facilities.  From time to time, we use interest rate hedging to reduce the effects of fluctuations in market interest rates.  As of September 30, 2009, no interest rate hedges were in place.  In 2008, we terminated our interest rate hedge with a notional amount of $200.0 million that converted variable rate financing based on 3-month LIBOR into fixed interest rates.  We continue to reclassify losses from this interest rate hedge into earnings.

The following table summarizes the reclassification of net derivative losses into net income (loss) from accumulated other comprehensive income (loss):

 
Location of Gain (Loss) Reclassified into Net Income (Loss)
 
Loss Reclassified During the Three Months Ended September 30, 2009
   
Loss Reclassified During the Nine Months Ended September 30, 2009
   
Loss Expected to be Reclassified During the Next 12 Months
 
     
(in millions)
 
Currency forward contracts
Cost of Goods Sold
  $ 1.6     $ 6.2     $ 1.3  
Interest rate hedges
Interest Expense
    0.7       2.1       1.4  

 
12

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

The components of net periodic benefit cost (credit) consist of the following:

   
Pension Benefits
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions)
 
                         
Service cost
  $ 1.1     $ 2.8     $ 3.8     $ 10.9  
Interest cost
    8.8       9.5       26.6       28.4  
Expected asset return
    (7.3 )     (9.7 )     (22.7 )     (30.1 )
Amortized loss
    0.2       0.1       0.8       0.6  
Amortized prior service cost
    -       -       -       0.8  
Curtailment
    0.6       (5.0 )     (1.2 )     1.0  
Special and contractual termination benefits
    -       26.3       2.5       53.4  
Net periodic benefit cost
  $ 3.4     $ 24.0     $ 9.8     $ 65.0  

   
Other Postretirement Benefits
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions)
 
                         
Service cost
  $ 0.5     $ 0.9     $ 1.9     $ 8.9  
Interest cost
    4.5       4.6       13.7       18.4  
Amortized gain
    (0.5 )             (1.7 )        
Amortized prior service credit
    (1.3 )     (2.8 )     (4.6 )     (5.2 )
Settlement
    -       -       -       (9.4 )
Curtailment
    (42.9 )     (34.9 )     (63.4 )     (51.0 )
Special and contractual termination benefits
    -       1.1       (0.7 )     10.9  
Net periodic benefit credit
  $ (39.7 )   $ (31.1 )   $ (54.8 )   $ (27.4 )
 
  We recorded a net gain of $42.3 million and $64.6 million for the curtailment of certain pension and other postretirement benefits in the three and nine months ended September 30, 2009, respectively.  These curtailments relate to UAW-represented associates who participated in attrition programs in 2008 but did not terminate employment with AAM until 2009, UAW-represented associates who terminated employment in 2009 by electing to accelerate their remaining buydown payments and a reduction in our salaried workforce.  These curtailment gains also resulted in a decrease of the postretirement and other long-term liabilities by $19.6 million and an increase in our accumulated other comprehensive loss of $45.0 million.
 
  We completed remeasurements of the assets and liabilities of certain of our pension and OPEB plans in conjunction with the curtailments.  These remeasurements resulted in an increase in postretirement and other long-term liabilities of $63.4 million, an increase in the GM postretirement cost sharing asset of $27.4 million and an increase in our accumulated other comprehensive loss of $36.0 million on our Condensed Consolidated Balance Sheet.  These net adjustments relate to changes in actuarial assumptions since the January 1, 2009 valuation of the assets and liabilities of our pension and OPEB plans.
 
          In addition, we increased postretirement benefits and other long-term liabilities and recorded expense of $1.8 million for special and contractual termination benefits in the nine months ended September 30, 2009.  This charge primarily relates to the voluntary salaried retirement incentive plan benefits to be paid under our pension plans, net of an adjustment resulting from the closing agreement we signed with the International Association of Machinists in the second quarter of 2009.  
 
  Our regulatory pension funding requirements in 2009 is approximately $15 million.  We expect our net cash outlay for other postretirement benefit obligations in 2009 to be approximately $15 million.

13

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

  We record a liability for estimated warranty obligations at the dates our product are sold.  These estimates are established using sales volumes and internal and external warranty data where there is no payment history and historical information about the average cost of warranty claims for customers with prior claims.  We adjust the liability as necessary.  The following table provides a reconciliation of changes in the product warranty liability as of September 30, 2009 (in millions):

Balance as of January 1, 2009
 
$
                        2.6
 
    Accruals
 
0.2
 
    Settlements
 
(0.3)
 
    Adjustment to prior period accruals
 
(0.4)
 
Currency translation adjustments
 
                           0.1
 
Balance as of September 30, 2009
 
$
            2.2
 

14.    INCOME TAXES

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

  Income tax expense was $5.5 million in the three months ended September 30, 2009 and $7.8 million in the nine months ended September 30, 2009 as compared to a benefit of $3.4 million in the three months ended September 30, 2008 and an expense of $33.8 million in the nine months ended September 30, 2008.  Our effective income tax rate was 22.0% in the three months ended September 30, 2009 and negative 2.7% in the nine months ended September 30, 2009 as compared to 0.8% in the three months ended September 30, 2008 and negative 3.1% in the nine months ended September 30, 2008.  Our income tax expense and effective tax rate for the three and nine months ended September 30, 2009 reflects the effect of recording a valuation allowance against income tax benefits on U.S. losses and increasing our contingent tax liabilities as a result of our quarterly analysis of uncertain tax positions.  The income tax expense and effective tax rate for the nine months ended September 30, 2008 includes the unfavorable tax adjustment related to the establishment of the full valuation allowance of $54.4 million against the net U.S. deferred tax assets.
 
          A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in millions):

Balance at January 1, 2009
  $ 45.8  
      Increase in prior year tax positions
    1.9  
      Decrease in prior year tax positions
    (0.1 )
      Increase in current year tax positions
    4.8  
Balance at September 30, 2009
  $ 52.4  

15.    STOCK-BASED COMPENSATION

  We recorded $0.2 million and $1.7 million of expense for the accelerated vesting of restricted stock, restricted stock units and stock options as a result of our salaried workforce reductions in the three and nine months ended September 30, 2009, respectively.

  On January 6, 2009, we granted approximately 1.3 million shares of restricted stock with a grant-date fair value of $2.81.  The unearned compensation will be expensed over the vesting period of three years.  We also granted approximately 0.2 million stock options under our 1999 Stock Incentive Plan.  These options will be expensed over the vesting period, which is three years.

  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:

   
2009
   
2008
 
Expected volatility
    64.32 %     46.10 %
Risk-free interest rate
    2.07 %     3.78 %
Dividend yield
    2.85 %     6.20 %
Expected life of options
 
8 years
   
8 years
 
Weighted-average grant-date fair value
  $ 1.40     $ 2.67  

14

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

 Comprehensive loss consists of the following:

   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions)
 
                         
Net income (loss)
  $ 19.6     $ (441.1 )   $ (301.8 )   $ (1,112.4 )
Defined benefit plans, net of tax
    (70.7 )     6.2       (86.1 )     87.3  
Foreign currency translation adjustments, net of tax
    11.8       (20.3 )     34.3       (6.8 )
Change in derivatives, net of tax
    1.9       (0.8 )     8.7       0.6  
Comprehensive loss
  $ (37.4 )   $ (456.0 )   $ (344.9 )   $ (1,031.3 )
      Net loss attributable to noncontrolling interests
    -       0.2       0.1       0.2  
      Foreign currency translation adjustments related to noncontrolling interests     -       -       (0.3     -  
Comprehensive loss attributable to AAM
  $ (37.4 )   $ (455.8 )   $ (345.1 )   $ (1,031.1 )
 
17.   EARNINGS (LOSS) PER SHARE (EPS)

The following table sets forth the computation of our basic and diluted EPS:
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
   
(in millions, except per share data)
 
Numerator
                       
Net income (loss) attributable to AAM
  $ 19.6     $ (440.9 )   $ (301.7 )   $ (1,112.2 )
                                 
Denominator
                               
Basic shares outstanding -
                               
  Weighted-average shares outstanding
    55.4       51.6       51.8       51.6  
                                 
Effect of dilutive securities
                               
  Dilutive stock-based compensation
    -       -       -       -  
  Dilutive warrants
    0.4       -       -       -  
                                 
Diluted shares outstanding -
                               
  Adjusted weighted-average shares after assumed conversions
    55.8       51.6       51.8       51.6  
                                 
Basic EPS
  $ 0.35     $ (8.54 )   $ (5.83 )   $ (21.55 )
                                 
Diluted EPS
  $ 0.35     $ (8.54 )   $ (5.83 )   $ (21.55 )

 Basic and diluted loss per share are the same for the nine months ended September 30, 2009 because the effect of 0.1 million potentially dilutive warrants would have been antidilutive.  Basic and diluted loss per share are the same for the three and nine months ended September 30, 2008 because the effect of 0.5 million and 1.2 million potentially dilutive stock-based compensation shares would have been antidilutive.  

 In January 2009, we adopted new accounting guidance which notes that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and shall be included in the computation of EPS pursuant to the two-class method.  Adoption of this new guidance increased basic and diluted shares outstanding by 3.5 million shares and 2.2 million shares, respectively, for the three months ended September 30, 2009.  However, basic and diluted shares outstanding did not increase for the nine months ended September 30, 2009 as we were in a loss position and the participating securities do not participate in losses.
 
 Certain exercisable stock options were excluded in the computations of diluted EPS because the exercise price of these options was greater than the average period market prices.  The number of stock options outstanding, which were not included in the calculation of diluted EPS, was 5.8 million at September 30, 2009 and 5.2 million at September 30, 2008.  The ranges of exercise prices related to the excluded exercisable stock options were $2.81 - $40.83 at September 30, 2009 and $15.00 - $40.83 at September 30, 2008.
 
18.   SUBSEQUENT EVENT

         On October 30, 2009, we entered into an Amended and Restated Rights Agreement between AAM and Computershare Trust Company, N.A., as rights agent (the Rights Agreement), in order to preserve the long-term value and availability of our net operating loss carryforwards and related tax benefits.
        
         The Rights Agreement, as amended, reduces the beneficial ownership threshold at which a person or group becomes an “Acquiring Person” under the Rights Agreement from 15% of our then-outstanding shares of common stock to 4.99% of our then-outstanding shares of common stock.  The Rights Agreement also, among other things, expands the scope of the definition of “Acquiring Person” to include persons or groups that would be considered “5-percent shareholders” under Section 382 of the Internal Revenue Code of 1986, as amended, and the related treasury regulations promulgated thereunder.  Additionally, the Rights Agreement exempts stockholders who currently beneficially own 5% or more of our outstanding shares of common stock so long as their ownership continuously equals or exceeds 5% and provided that they do not acquire an additional 0.5% or more of our outstanding shares of common stock.
 
         The Rights Agreement will automatically expire on September 15, 2013.  In addition, beginning in 2011, our board of directors will review the Rights Agreement annually in the first fiscal quarter to determine whether any of its provisions are, or the Rights Agreement itself is, no longer in the best interests of AAM, its stockholders and any other relevant constituencies.
 
         We have evaluated and disclosed subsequent events through October 30, 2009, our filing date, as necessary.
 
15

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

Holdings has no significant assets other than its 100% ownership in AAM, Inc. and no direct subsidiaries other than AAM, Inc.  Holdings fully and unconditionally guarantees the 5.25% Notes and 7.875% Notes, which are senior unsecured obligations of AAM, Inc.  The 2.00% Convertible Notes are senior unsecured obligations of Holdings and are fully and unconditionally guaranteed by AAM, Inc.

The following Condensed Consolidating Financial Statements are included in lieu of providing separate financial statements for Holdings and AAM, Inc. These Condensed Consolidating Financial Statements are prepared under the equity method of accounting whereby the investments in subsidiaries are recorded at cost and adjusted for the parent’s share of the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other equity changes.

Condensed Consolidating Statements of Operations
                         
Three months ended, September 30,
(in millions)
                             
   
Holdings
   
AAM Inc.
   
All Others
   
Elims
   
Consolidated
 
2009
                             
Net sales
                             
    External
  $ -     $ 116.3     $ 293.3     $ -     $ 409.6  
    Intercompany
    -       5.6       29.7       (35.3 )     -  
Total net sales
    -       121.9       323.0       (35.3 )     409.6  
Cost of goods sold
    -       85.4       271.0       (35.3 )     321.1  
Gross profit
    -       36.5       52.0       -       88.5  
Selling, general and administrative expenses
    -       41.2       2.8       -       44.0  
Operating income (loss)
    -       (4.7 )     49.2       -       44.5  
Non-operating income (expense), net
    -       (21.0 )     1.6       -       (19.4 )
Income (loss) before income taxes
    -       (25.7 )     50.8       -       25.1  
Income tax expense (benefit)
    -       (0.3 )     5.8       -       5.5  
Earnings from equity in subsidiaries
    19.6       31.4       -       (51.0 )     -  
Net income before royalties and dividends
    19.6       6.0       45.0       (51.0 )     19.6  
Royalties and dividends
    -       13.6       (13.6 )     -       -  
Net income after royalties and dividends
    19.6       19.6       31.4       (51.0 )     19.6  
    Add: Net loss attributable to noncontrolling interests
    -       -       -       -       -  
Net income attributable to AAM
  $ 19.6     $ 19.6     $ 31.4     $ (51.0 )   $ 19.6  
 
2008
                                       
Net sales
                                       
    External
  $ -     $ 278.7     $ 249.4     $ -     $ 528.1  
    Intercompany
    -       9.8       16.8       (26.6 )     -  
Total net sales
    -       288.5       266.2       (26.6 )     528.1  
Cost of goods sold
    -       612.2       320.9       (26.6 )     906.5  
Gross loss
    -       (323.7 )     (54.7 )     -       (378.4 )
Selling, general and administrative expenses
    -       41.6       1.4       -       43.0  
Operating loss
    -       (365.3 )     (56.1 )     -       (421.4 )
Non-operating expense, net
    -       (17.7 )     (5.4 )     -       (23.1 )
Loss before income taxes
    -       (383.0 )     (61.5 )     -       (444.5 )
Income tax expense (benefit)
    -       (4.3 )     0.9       -       (3.4 )
Loss from equity in subsidiaries
    (440.9 )     (71.9 )     -       512.8       -  
Net loss before royalties and dividends
    (440.9 )     (450.6 )     (62.4 )     512.8       (441.1 )
Royalties and dividends
    -       9.7       (9.7 )     -       -  
Net loss after royalties and dividends
    (440.9 )     (440.9 )     (72.1 )     512.8       (441.1 )
    Add: Net loss attributable to noncontrolling interests
    -       -       0.2       -       0.2  
Net loss attributable to AAM
  $ (440.9 )   $ (440.9 )   $ (71.9 )   $ 512.8     $ (440.9 )
 
16

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Condensed Consolidating Statements of Operations
                         
Nine months ended, September 30,
(in millions)
                             
   
Holdings
   
AAM Inc.
   
All Others
   
Elims
   
Consolidated