Edgar Filing: AMERICAN AXLE & MANUFACTURING HOLDINGS INC

form10-q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2007

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer o Non-accelerated filer 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 x

As of October 25, 2007, the latest practicable date, the number of shares of the registrant's Common Stock, par value $0.01 per share, outstanding was 53,514,588 shares.

Internet Website Access to Reports

The website for American Axle & Manufacturing Holdings, Inc. is www.aam.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. 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.

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2007

TABLE OF CONTENTS

			Page Number

Cautionary Statements			1

Part I		FINANCIAL INFORMATION	2

	Item 1	Financial Statements	2
		Condensed Consolidated Statements of Operations	2
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Cash Flows	4
		Notes to Condensed Consolidated Financial Statements	5

	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	17

	Item 3	Quantitative and Qualitative Disclosures About Market Risk	22

	Item 4	Controls and Procedures	22

Part II		OTHER INFORMATION	23

	Item 1A	Risk Factors	23

	Item 2	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	23

	Item 6	Exhibits	23

		Signatures	24

		Exhibit Index	25

		Ex. 31.1 Certification - CEO - Rule 13a-14(a)
		Ex. 31.2 Certification - CFO - Rule 13a-14(a)
		Ex. 32 Section 906 Certifications

Table of Contents

CAUTIONARY STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q (Quarterly Report) are forward-looking in nature and relate to trends and events that may affect our future financial position and operating results. Such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The terms “will,” “expect,” “anticipate,” “intend,” “project” and similar words or expressions are intended to identify forward-looking statements. These statements speak only as of the date of this Quarterly Report. The statements are based on our current expectations, are inherently uncertain, are subject to risks and should be viewed with caution. Actual results and experience may differ materially from the forward-looking statements as a result of many factors, including, but not limited to:

·	reduced purchases of our products by General Motors Corporation (GM), Chrysler LLC (Chrysler) or other customers;

·	reduced demand for our customers’ products (particularly light trucks and SUVs produced by GM and Chrysler);

·	our ability and our suppliers’ ability to maintain satisfactory labor relations and avoid work stoppages;

·	our customers’ and their suppliers’ ability to maintain satisfactory labor relations and avoid work stoppages;

·	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;

·	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 attract new customers and programs for new products;

·	our ability to develop and produce new products that reflect market demand;

·	our ability to respond to changes in technology or increased competition;

·	adverse changes in laws, government regulations or market conditions including increases in fuel prices affecting our products or our customers’ products (including the Corporate Average Fuel Economy regulations);

·	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, R&D or other general corporate purposes, including our ability to comply with financial covenants;

·	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.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
	(in millions, except per share data)

Net sales	$	774.3		$	701.2		$	2,493.0		$	2,410.6

Cost of goods sold		693.6			763.2			2,214.4			2,319.2

Gross profit (loss)		80.7			(62.0)			278.6			91.4

Selling, general and administrative expenses		52.0			48.0			155.1			145.9

Operating income (loss)		28.7			(110.0	)		123.5			(54.5	)

Net interest expense		(11.5	)		(11.7	)		(40.8	)		(27.0	)

Other income (expense)
Debt refinancing and redemption costs		-			(0.3	)		(5.5	)		(2.7	)
Other, net		(1.2	)		10.1			0.1			11.4

Income (loss) before income taxes		16.0			(111.9	)		77.3			(72.8	)

Income tax expense (benefit)		2.9			(49.0	)		14.8			(38.9	)

Net income (loss)	$	13.1		$	(62.9	)	$	62.5		$	(33.9	)

Basic earnings (loss) per share	$	0.26		$	(1.25	)	$	1.23		$	(0.67	)

Diluted earnings (loss) per share	$	0.25		$	(1.25	)	$	1.19		$	(0.67	)

Dividends declared per share	$	0.15		$	0.15		$	0.45		$	0.45

See accompanying notes to condensed consolidated financial statements.

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2007			2006
	*(Unaudited)*
	(in millions)
Assets
Current assets
Cash and cash equivalents	$	362.1		$	13.5
Accounts receivable, net		320.5			327.6
Inventories, net		248.1			198.4
Prepaid expenses and other		79.0			69.2
Deferred income taxes		28.1			30.7
Total current assets		1,037.8			639.4

Property, plant and equipment, net		1,715.4			1,731.7
Deferred income taxes		49.8			35.7
Goodwill		147.8			147.8
Other assets and deferred charges		60.9			42.9
Total assets	$	3,011.7		$	2,597.5

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	396.4		$	316.4
Trade payable program liability		-			12.5
Accrued compensation and benefits		144.6			156.3
Other accrued expenses		62.6			56.1
Total current liabilities		603.6			541.3

Long-term debt		845.6			672.2
Deferred income taxes		6.3			6.8
Postretirement benefits and other long-term liabilities		683.8			563.5
Total liabilities		2,139.3			1,783.8

Stockholders' equity
Common stock, par value $0.01 per share		0.6			0.6
Paid-in capital		409.6			381.7
Retained earnings		616.8			590.0
Treasury stock at cost, 5.2 million shares in 2007 and 5.1 million shares in 2006		(173.7	)		(171.8	)
Accumulated other comprehensive income (loss), net of tax
Defined benefit plans		(10.4	)		(0.8	)
Foreign currency translation adjustments		31.7			15.5
Unrecognized loss on derivatives		(2.2	)		(1.5	)
Total stockholders' equity		872.4			813.7
Total liabilities and stockholders' equity	$	3,011.7		$	2,597.5

See accompanying notes to condensed consolidated financial statements.

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	September 30,
	2007			2006
	(in millions)
Operating activities
Net income (loss)	$	62.5		$	(33.9	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		171.0			153.2
Deferred income taxes		1.6			(78.7	)
Stock-based compensation		16.6			8.0
Pensions and other postretirement benefits, net of contributions		42.1			82.1
Loss on retirement of equipment		3.3			5.7
Debt refinancing and redemption costs		5.5			2.7
Changes in operating assets and liabilities
Accounts receivable		8.4			(22.8	)
Inventories		(48.0	)		(28.4	)
Accounts payable and accrued expenses		58.7			114.1
Other assets and liabilities		9.9			(40.3	)
Net cash provided by operating activities		331.6			161.7

Investing activities
Purchases of property, plant and equipment		(132.9	)		(243.5	)
Purchase buyouts of leased equipment		-			(19.5	)
Net cash used in investing activities		(132.9	)		(263.0	)

Financing activities
Net borrowings (repayments) under revolving credit facilities		(132.8	)		24.0
Proceeds from the issuance of long-term debt		553.1			260.9
Payment of Term Loan due 2010		(252.5	)		-
Payments of other long-term debt and capital lease obligations		(0.5	)		(147.4	)
Debt issuance costs		(7.5	)		(3.1	)
Employee stock option exercises		12.5			0.3
Tax benefit on stock option exercises		2.7			-
Purchase of treasury stock		(1.9	)		-
Dividends paid		(23.8	)		(23.3	)
Net cash provided by financing activities		149.3			111.4

Effect of exchange rate changes on cash		0.6			0.1

Net increase in cash and cash equivalents		348.6			10.2

Cash and cash equivalents at beginning of period		13.5			3.7

Cash and cash equivalents at end of period	$	362.1		$	13.9

Supplemental cash flow information
Interest paid	$	51.4		$	33.9
Income taxes paid, net of refunds	$	17.4		$	47.7

See accompanying notes to condensed consolidated financial statements.

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2007 (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 premier Tier I supplier to the automotive industry and a worldwide leader in the manufacture, engineering, design and validation of driveline and drivetrain systems and related components and chassis modules for light trucks, sport utility vehicles (SUVs), passenger cars and crossover 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.) (Indiana, Michigan, New York and Ohio), we have offices or facilities in Brazil, China, England, Germany, India, Japan, Luxembourg, Mexico, Poland, 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.

Trade Payable Program Liability In 2007, we terminated our supplier payment program. As of September 30, 2007, there was no outstanding balance under this program.

Income Tax Expense (Benefit) Income tax expense (benefit) was an expense of $2.9 million in the third quarter of 2007 and $14.8 million in the first nine months of 2007 as compared to a benefit of $49.0 million in the third quarter of 2006 and $38.9 million in the first nine months of 2006. Our effective income tax rate was 18.2% in the third quarter of 2007 and 19.1% in the first nine months of 2007 as compared to a benefit of 43.8% in the third quarter of 2006 and 53.4% in the first nine months of 2006. The change in our tax rate is primarily the result of recognizing income tax expense for current income in 2007 as compared to the recognition of the income tax benefit for losses in 2006. In addition, the tax rate in 2007 reflects an increase in income in jurisdictions which carry lower overall effective tax rates.

The balance sheet at December 31, 2006 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, 2006.

Effect of New Accounting Standards In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the criteria for recognition of income tax benefits in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” We adopted FIN 48 on January 1, 2007 and the impact of adoption was not material. As of the date of adoption, our unrecognized tax benefits attributable to uncertain tax positions were approximately $26 million. We remain subject to income tax examinations in the U.S. for years after 2003 and in Mexico for years after 2001.

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (SFAS 157). This statement clarifies the definition of fair value and establishes a fair value hierarchy. SFAS 157 is effective for us on January 1, 2008 and we are currently assessing the impact of this statement.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This statement permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for us on January 1, 2008 and we are currently assessing the impact of this statement.

2. RESTRUCTURING ACTIONS

In 2006, we took certain restructuring actions to realign and resize our production capacity and cost structure. As part of these actions, we incurred charges for one-time termination benefits. At December 31, 2006, our liability related to these benefits was $36.4 million.

In 2007, we incurred charges for one-time termination benefits related to ongoing restructuring actions. In addition, we continue to make payments related to the charges incurred in 2006. A summary of this activity for the nine months ended September 30, 2007 is shown below (in millions):

Accrual as of December 31, 2006	Charges	Cash Utilization	Non-Cash Accrual Adjustments	Accrual as of September 30, 2007
$36.4	$12.3	$(31.9)	$(2.5)	$14.3

In September 2007, we offered the Buffalo Separation Program (BSP) to all hourly associates represented by the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) at our Buffalo Gear, Axle & Linkage facility in Buffalo, New York. This voluntary separation program offered retirement or buyout incentives to approximately 650 eligible hourly associates. These associates have until November 15, 2007 to decide whether to participate. As of September 30, 2007, approximately 20 associates have elected early participation in this program and have waived the requisite consideration period. We recorded expense of $2.0 million for the estimated postemployment costs of these associates in the third quarter of 2007. We will record the remaining liability for the BSP when the final acceptance rates are known in the fourth quarter of 2007.

In 2007, approximately 90 associates represented by the International Association of Machinists (IAM) at our Tonawanda, New York and Detroit, Michigan facilities participated in a voluntary separation incentive program (VSIP) and elected to terminate employment with AAM. We recorded expense of $7.4 million for the estimated postemployment costs of this VSIP in 2007 and we paid $6.2 million of these costs as of September 30, 2007. Of the remaining one-time termination benefit charges recorded in the first nine months of 2007, $2.9 million related to service earned in the period for estimated future transition payments to certain salaried associates who will terminate employment on or around December 31, 2007.

We expect to make approximately $7 million in payments related to the remaining restructuring accrual in the fourth quarter of 2007. We will continue to make payments related to this accrual through 2010.

In addition to the one-time termination benefits, we have also incurred charges related to the redeployment of assets to support ongoing capacity utilization initiatives. For the three and nine months ended September 30, 2007, we have expensed $5.7 million and $7.2 million, respectively.

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. SUPPLEMENTAL UNEMPLOYMENT BENEFITS

In the third quarter of 2006, we recorded a $91.2 million charge to cost of sales relating to supplemental unemployment benefits (SUB) estimated to be payable to the UAW represented associates who are expected to be permanently idled through the end of the collective bargaining agreement that expires in February 2008. The collective bargaining agreement between AAM and the UAW contains a SUB provision, pursuant to which we are required to pay eligible idled workers certain benefits. As of December 31, 2006, the liability for SUB was $13.2 million.

In the first nine months of 2007, we paid $8.1 million of SUB to workers deemed to be permanently idled and adjusted our accrual to reflect our current estimate of SUB costs to be paid to these workers through February 2008. At September 30, 2007, the accrual for SUB was $6.1 million.

4. 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, machine 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.

Inventories consist of the following:

	September 30,			December 31,
	2007			2006
	(in millions)

Raw materials and work-in-progress	$	244.7		$	220.6
Finished goods		58.9			26.3
Gross inventories		303.6			246.9
LIFO reserve		(15.4	)		(13.8	)
Other inventory valuation reserves		(40.1	)		(34.7	)
Inventories, net	$	248.1		$	198.4

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. LONG-TERM DEBT

Long-term debt consists of the following:

	September 30,		December 31,
	2007		2006
	(in millions)

Revolving Credit Facility	$	-	$	100.0
7.875% Notes		300.0		-
5.25% Notes, net of discount		249.8		249.8
2.00% Convertible Notes		2.7		2.7
Term Loan due 2010		-		250.0
Term Loan due 2012		250.0		-
Uncommitted lines of credit		-		33.5
Foreign credit facilities and other		40.8		33.7
Capital lease obligations		2.3		2.5
Long-term debt	$	845.6	$	672.2

The Revolving Credit Facility 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. At September 30, 2007, we had $570.2 million available under the Revolving Credit Facility. This availability reflects a reduction of $29.8 million for standby letters of credit issued against the facility.

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 $37.8 million of current maturities as long-term debt.

In the first quarter of 2007, we issued $300.0 million of 7.875% senior unsecured notes due 2017 (7.875% Notes). Net proceeds from these notes were used for general corporate purposes, including payment of amounts outstanding under our Revolving Credit Facility. We paid debt issuance costs of $5.2 million related to the 7.875% Notes.

The 2.00% Convertible Notes, as of the date of this filing, are convertible into cash at the option of the holder.

On June 14, 2007, we entered into a $250.0 million senior unsecured term loan that matures in June 2012 (Term Loan due 2012). Borrowings under the Term Loan due 2012 bear interest payable at rates based on LIBOR or an alternate base rate, plus an applicable margin. Proceeds from the Term Loan due 2012 were used for general corporate purposes, including the payment of amounts outstanding under the senior unsecured term loan scheduled to mature in April 2010 (Term Loan due 2010). We paid $2.3 million in debt issuance costs related to the Term Loan due 2012.

On June 28, 2007, we voluntarily prepaid amounts outstanding under our Term Loan due 2010. Upon repayment of the Term Loan due 2010, we expensed $3.0 million of unamortized debt issuance costs and $2.5 million of prepayment premiums. We had been amortizing the debt issuance costs over the expected life of the borrowing.

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

We have hedged a portion of our interest rate risk by entering into an interest rate swap with a notional amount of $200.0 million as of September 30, 2007. The notional amount reduces to $100.0 million in 2008 and expires in April 2010. The interest rate swap converts variable rate financing based on 3-month LIBOR into fixed U.S. dollar rates.

In the third quarter of 2007, we had access to $60.0 million of uncommitted bank lines of credit, all of which was available at September 30, 2007.

We utilize local credit facilities to finance the operations of certain foreign subsidiaries. At September 30, 2007, $40.8 million was outstanding under these facilities and an additional $115.6 million was available.

The weighted-average interest rate of our long-term debt outstanding at September 30, 2007 was 7.8% as compared to 8.0% at December 31, 2006.

6. EMPLOYEE BENEFIT PLANS

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

	Pension Benefits
	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
	(in millions)

Service cost	$	5.4		$	8.4		$	16.1		$	25.2
Interest cost		8.6			8.4			25.9			25.1
Expected asset return		(9.5	)		(7.9	)		(28.5	)		(23.6	)
Amortized loss		0.4			1.4			1.1			4.0
Amortized prior service cost		0.6			0.7			1.8			2.3
Special termination benefits		0.3			-			0.7			-
Net periodic benefit cost	$	5.8		$	11.0		$	17.1		$	33.0

	Other Postretirement Benefits (OPEB)
	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
	(in millions)

Service cost	$	6.5		$	10.3		$	19.4		$	30.9
Interest cost		7.0			8.1			21.0			24.1
Amortized loss		-			1.4			-			4.2
Amortized prior service credit		(0.8	)		(0.4	)		(2.3	)		(1.1	)
Special termination benefits		0.4			-			0.4			-
Net periodic benefit cost	$	13.1		$	19.4		$	38.5		$	58.1

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

We adopted the measurement date provisions of FASB Statement No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans,” as of January 1, 2007, which requires companies to measure a plan’s assets and obligations that determine its funded status as of the end of the fiscal year. As a result of this adoption, we recorded a net transition adjustment of $12.0 million in the first quarter of 2007 to the opening retained earnings balance related to the net periodic benefit cost for the period between September 30, 2006 and January 1, 2007.

In the second quarter of 2007, we recorded an adjustment related to the completion of our valuation for pension and other postretirement benefit assets and obligations as of January 1, 2007. This adjustment resulted in an increase in postretirement benefits and other long-term liabilities of $15.7 million, a decrease in accumulated other comprehensive income of $10.2 million and an increase in deferred income taxes of $5.5 million.

In the first nine months of 2007, we recorded $1.1 million of expense for special termination benefits related to ongoing restructuring activities. In the third quarter of 2007, we offered the Buffalo Separation Program to all hourly associates represented by the UAW at our Buffalo Gear, Axle & Linkage facility in Buffalo, New York. Depending on the acceptance rate of this program, we expect to record special termination benefits and a curtailment of certain benefits under our U.S. hourly defined benefit pension and OPEB plans in the fourth quarter of 2007.

7. COMPREHENSIVE INCOME (LOSS)

Comprehensive income consists of the following:

	Three months ended						Nine months ended
	September 30,						September 30,
	2007			2006			2007			2006
	(in millions)

Net income (loss)	$	13.1		$	(62.9	)	$	62.5		$	(33.9	)
Defined benefit plans, net of tax		0.2			-			(9.6	)		-
Foreign currency translation adjustments, net of tax		5.8			2.2			16.2			8.2
Loss on derivatives, net of tax		(1.5	)		(1.2	)		(0.7	)		(2.4	)
Comprehensive income (loss)	$	17.6		$	(61.9	)	$	68.4		$	(28.1	)

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. 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,
	2007		2006			2007		2006
	(in millions, except per share data)

Numerator
Net income (loss)	$	13.1	$	(62.9	)	$	62.5	$	(33.9	)

Denominator
Basic shares outstanding -
Weighted-average shares outstanding		51.3		50.3			51.0		50.3

Effect of dilutive securities
Dilutive stock-based compensation		1.7		-			1.6		-

Diluted shares outstanding -
Adjusted weighted-average shares after assumed conversions		53.0		50.3			52.6		50.3

Basic EPS	$	0.26	$	(1.25	)	$	1.23	$	(0.67	)

Diluted EPS	$	0.25	$	(1.25	)	$	1.19	$	(0.67	)

Basic and diluted loss per share in the three and nine months ended September 30, 2006 are the same because the effect of potential dilutive securities would have been antidilutive. This effect would have been 1.0 million and 0.9 million shares for the three and nine months ended September 30, 2006, respectively.

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 1.9 million at September 30, 2007 and 4.7 million at September 30, 2006. The ranges of exercise prices related to the excluded exercisable stock options were $26.02 - $40.83 at September 30, 2007 and $18.40 - $40.83 at September 30, 2006.

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. SHARE-BASED COMPENSATION

On March 14, 2007, we granted approximately 0.3 million stock options to executive officers under our 1999 Stock Incentive Plan. These options will be expensed over the expected 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:

	2007			2006
Expected volatility		44.26	%		41.31	%
Risk -free interest rate		4.46	%		4.78	%
Dividend yield		2.30	%		3.70	%
Expected life of options		8 years			7 years
Weighted-average grant-date fair value	$	11.13		$	5.33

We also award performance accelerated restricted stock and restricted stock units (PARS and RSUs, respectively) under our 1999 Stock Incentive Plan. We granted approximately 0.8 million PARS and 0.1 million RSUs on March 14, 2007 with a grant-date fair value of $26.02. The PARS and RSUs vest over three to five years contingent upon the satisfaction of future financial performance targets specified by the awards. The unearned compensation associated with the PARS and RSUs is expensed over the expected vesting period of each grant.

10. LEGAL PROCEEDINGS

In the third quarter of 2006, we recognized a favorable outcome of $9.1 million, associated with the resolution of various legal proceedings and claims, net of costs incurred to resolve these matters. A benefit of $9.8 million resulting from this outcome was recorded to Other Income; other costs incurred to resolve these matters were recognized in cost of sales and selling, general and administrative expenses.

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. 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 the 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
2007
Net sales
External	$	-		$	511.4		$	262.9		$	-		$	774.3
Intercompany		-			16.4			23.3			(39.7	)		-
Total net sales		-			527.8			286.2			(39.7	)		774.3
Cost of goods sold		-			484.5			246.8			(37.7	)		693.6
Gross profit		-			43.3			39.4			(2.0	)		80.7
Selling, general and administrative expenses		-			50.0			4.0			(2.0	)		52.0
Operating income (loss)		-			(6.7	)		35.4			-			28.7
Net interest expense		-			(10.6	)		(0.9	)		-			(11.5	)
Other expense, net		-			-			(1.2	)		-			(1.2	)
Income (loss) before income taxes		-			(17.3	)		33.3			-			16.0
Income tax expense (benefit)		-			(0.6	)		3.5			-			2.9
Earnings from equity in subsidiaries		13.1			18.9			-			(32.0	)		-
Net income before royalties and dividends		13.1			2.2			29.8			(32.0	)		13.1
Royalties and dividends		-			10.9			(10.9	)		-			-
Net income after royalties and dividends	$	13.1		$	13.1		$	18.9		$	(32.0	)	$	13.1
2006
Net sales
External	$	-		$	477.9		$	223.3		$	-		$	701.2
Intercompany		-			6.6			18.8			(25.4	)		-
Total net sales		-			484.5			242.1			(25.4	)		701.2
Cost of goods sold		-			567.6			219.6			(24.0	)		763.2
Gross profit (loss)		-			(83.1	)		22.5			(1.4	)		(62.0	)
Selling, general and administrative expenses		-			46.0			3.4			(1.4	)		48.0
Operating income (loss)		-			(129.1	)		19.1			-			(110.0	)
Net interest expense		-			(8.4	)		(3.3	)		-			(11.7	)
Other income, net		-			9.1			0.7			-			9.8
Income (loss) before income taxes		-			(128.4	)		16.5			-			(111.9	)
Income tax benefit		-			(40.2	)		(8.8	)		-			(49.0	)
Earnings (loss) from equity in subsidiaries		(62.9	)		17.0			-			45.9			-
Net income (loss) before royalties and dividends		(62.9	)		(71.2	)		25.3			45.9			(62.9	)
Royalties and dividends		-			8.3			(8.3	)		-			-
Net income (loss) after royalties and dividends	$	(62.9	)	$	(62.9	)	$	17.0		$	45.9		$	(62.9	)

Table of Contents

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
2007
Net sales
External	$	-		$	1,686.0		$	807.0		$	-		$	2,493.0
Intercompany		-			42.0			76.1			(118.1	)		-
Total net sales		-			1,728.0			883.1			(118.1	)		2,493.0
Cost of goods sold		-			1,563.6			763.6			(112.8	)		2,214.4
Gross profit		-			164.4			119.5			(5.3	)		278.6
Selling, general and administrative expenses		-			149.1			11.3			(5.3	)		155.1
Operating income		-			15.3			108.2			-			123.5
Net interest expense		-			(37.1	)		(3.7	)		-			(40.8	)
Other expense, net		-			(5.4	)		-			-			(5.4	)
Income (loss) before income taxes		-			(27.2	)		104.5			-			77.3
Income tax expense		-			7.3			7.5			-			14.8
Earnings from equity in subsidiaries		62.5			63.7			-			(126.2	)		-
Net income before royalties and dividends		62.5			29.2			97.0			(126.2	)		62.5
Royalties and dividends		-			33.3			(33.3	)		-			-
Net income after royalties and dividends	$	62.5		$	62.5		$	63.7		$	(126.2	)	$	62.5
2006
Net sales
External	$	-		$	1,657.4		$	753.2		$	-		$	2,410.6
Intercompany		-			28.6			64.2			(92.8	)		-
Total net sales		-			1,686.0			817.4			(92.8	)		2,410.6
Cost of goods sold		-			1,683.2			724.8			(88.8	)		2,319.2
Gross profit		-			2.8			92.6			(4.0	)		91.4
Selling, general and administrative expenses		-			140.9			9.0			(4.0	)		145.9
Operating income (loss)		-			(138.1	)		83.6			-			(54.5	)
Net interest expense		-			(13.0	)		(14.0	)		-			(27.0	)
Other income, net		-			6.5			2.2			-			8.7
Income (loss) before income taxes		-			(144.6	)		71.8			-			(72.8	)
Income tax expense (benefit)		-			(42.8	)		3.9			-			(38.9	)
Earnings (loss) from equity in subsidiaries		(33.9	)		38.6			-			(4.7	)		-
Net income (loss) before royalties and dividends		(33.9	)		(63.2	)		67.9			(4.7	)		(33.9	)
Royalties and dividends		-			29.3			(29.3	)		-			-
Net income (loss) after royalties and dividends	$	(33.9	)	$	(33.9	)	$	38.6		$	(4.7	)	$	(33.9	)

Table of Contents

AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Condensed Consolidating Balance Sheets

(in millions)

	Holdings		AAM Inc.			All Others		Elims			Consolidated
September 30, 2007
Assets
Current assets
Cash and cash equivalents	$	-	$	313.3		$	48.8	$	-		$	362.1
Accounts receivable, net		-		186.6			133.9		-			320.5
Inventories, net		-		124.1			124.0		-			248.1
Other current assets		-		61.4			45.7		-			107.1
Total current assets		-		685.4			352.4		-			1,037.8
Property, plant and equipment, net		-		999.1			716.3		-			1,715.4
Goodwill		-		-			147.8		-			147.8
Other assets and deferred charges		-		28.4			82.3		-			110.7
Investment in subsidiaries		1,160.5		746.1			-		(1,906.6	)		-
Total assets	$	1,160.5	$	2,459.0		$	1,298.8	$	(1,906.6	)	$	3,011.7
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	-	$	224.2		$	172.2	$	-		$	396.4
Other accrued expenses		-		161.1			46.1		-			207.2
Total current liabilities		-		385.3			218.3		-			603.6
Intercompany payable (receivable)		285.4		(509.0	)		223.6		-			-
Long-term debt		2.7		799.8			43.1		-			845.6
Other long-term liabilities		-		622.4			67.7		-			690.1
Total liabilities		288.1		1,298.5			552.7		-			2,139.3
Stockholders’ equity		872.4		1,160.5			746.1		(1,906.6	)		872.4
Total liabilities and stockholders’ equity	$	1,160.5	$	2,459.0		$	1,298.8	$	(1,906.6	)	$	3,011.7

December 31, 2006
Assets
Current assets
Cash and cash equivalents	$	-	$	0.5		$	13.0	$	-		$	13.5
Accounts receivable, net		-		181.0			146.6		-			327.6
Inventories, net		-		110.4			88.0		-			198.4
Other current assets		-		62.9			37.0		-			99.9
Total current assets