form10-q.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 June 30, 2008
   
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 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 July 23, 2008, the latest practicable date, the number of shares of the registrant's Common Stock, par value $0.01 per share, outstanding was 54,373,873 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.


 
 
 
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2008
TABLE OF CONTENTS
 
       
Page Number
       
 
1
         
Part I
    
2
         
 
Item 1
  
2
     
2
     
3
     
4
     
5
         
 
Item 2
  
24
         
 
Item 3
  
32
         
 
Item 4
  
32
         
Part II
    
33
         
 
Item 1A
  
33
         
 
Item 4
  
33
         
 
Item 6
  
33
         
     
34
         
     
35
         
    Ex. 10.47 Amendment #6 dated May 3, 2008 to Letter Agreement dated February 26,2004 by and between GM and AAM, Inc.    
       
       
   
 
 
 
 
Table of Contents
FORWARD-LOOKING STATEMENTS

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:

·  
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);
·  
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 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’ 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 improve our U.S. labor cost structure;
·  
our ability to consummate and integrate acquisitions;
·  
supply shortages or price increases in raw materials, utilities or other operating supplies;
·  
our ability or 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 economic conditions or 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
 
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
    
Six months ended
  
   
June 30,
     June 30,  
     
 2008
      
2007
      
 2008
      
2007
  
   
(in millions, except per share data)
  
             
Net sales
   $ 490.5     $ 916.5     $ 1,078.1     $ 1,718.7  
                                 
Cost of goods sold    
1,018.4
       802.8       1,593.3       1,519.7  
                                 
Gross profit (loss)    
(527.9
 )      113.7       (515.2 )      199.0  
                                 
Selling, general and administrative expenses    
44.9
       54.2       94.3       103.1  
                                 
Operating income (loss)    
(572.8
 )      59.5       (609.5 )      95.9  
                                 
Net interest expense    
(13.5
 )      (15.3 )     (26.2 )     (29.3 )
                                 
Other income (expense), net
     1.1       (4.3 )      1.6       (4.2 )
                                 
Income (loss) before income taxes
     (585.2 )     39.9       (634.1 )     62.4  
                                 
Income tax expense
     59.1       5.3       37.2       12.1  
                                 
Net income (loss)
   $ (644.3 )   $ 34.6     $ (671.3 )   $ 50.3  
                                 
Basic earnings (loss) per share
   $ (12.49 )   $ 0.68     $ (13.01 )   $ 0.99  
                                 
Diluted earnings (loss) per share
   $ (12.49 )   $ 0.66     $ (13.01 )   $ 0.96  
                                 
Dividends declared per share
   $ 0.15     $ 0.15     $ 0.30     $ 0.30  
 
See accompanying notes to condensed consolidated financial statements.

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

   
June 30,
    
December 31,
  
   
2008
    
2007
  
   
(Unaudited)
        
   
(in millions)
  
Assets
            
Current assets
            
Cash and cash equivalents
   $ 196.1     $ 343.6  
Accounts receivable, net
     271.8       264.0  
AAM - GM Agreement receivable
     175.0       -  
Inventories, net
     238.7       242.8  
Prepaid expenses and other
     55.5       73.4  
Deferred income taxes
     15.0       19.5  
Total current assets
     952.1       943.3  
                 
Property, plant and equipment, net
     1,368.7       1,696.2  
Deferred income taxes
     4.4       78.7  
Goodwill
     147.8       147.8  
Other assets and deferred charges
     53.3       57.4  
Total assets
   $ 2,526.3     $ 2,923.4  
                 
Liabilities and Stockholders’ Equity
                
Current liabilities
                
Accounts payable
   $ 299.4     $ 313.8  
  Accrued compensation and benefits
     244.2       126.6  
Deferred revenue
     67.9       10.2  
Other accrued expenses
     60.4       61.0  
Total current liabilities
     671.9       511.6  
                 
Long-term debt
     869.2       858.1  
Deferred income taxes
     4.0       6.6  
Deferred revenue
     211.8       66.0  
Postretirement benefits and other long-term liabilities
     454.1       581.7  
Total liabilities
     2,211.0       2,024.0  
                 
Stockholders' equity
                
  Common stock, par value $0.01 per share
     0.6       0.6  
Paid-in capital
     423.7       416.3  
Retained earnings (accumulated deficit)
     (95.6 )     591.9  
  Treasury stock at cost, 5.1 million shares in 2008 and 2007
     (173.9 )     (173.8 )
  Accumulated other comprehensive income (loss), net of tax
                
       Defined benefit plans
     114.6       33.5  
       Foreign currency translation adjustments
     47.7       34.2  
       Unrecognized loss on derivatives
     (1.8 )     (3.3 )
Total stockholders' equity
     315.3       899.4  
Total liabilities and stockholders' equity
   $ 2,526.3     $ 2,923.4  


See accompanying notes to condensed consolidated financial statements

 
 
3
 
Table of Contents
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
Six months ended
  
   
June 30,
  
   
2008
    
2007
  
   
(in millions)
  
Operating activities
            
Net income (loss)
   $ (671.3 )   $ 50.3  
Adjustments to reconcile net income (loss) to net cash
                
provided by operating activities
                
       Depreciation and amortization
     112.6       113.4  
       Asset impairments
     294.8       -  
       Deferred income taxes
     29.2       4.1  
       Stock-based compensation
     5.5       12.0  
       Pensions and other postretirement benefits, net of contributions
     38.0       25.9  
       Loss (gain) on retirement of equipment
     (1.5 )     2.9  
       Debt refinancing and redemption costs
     -       5.5  
       Changes in operating assets and liabilities
                
             Accounts receivable
     (5.7 )     (70.9 )
             Inventories
     5.6       (23.5 )
             Accounts payable and accrued expenses
     95.1       104.1  
             Other assets and liabilities
     21.8       10.8  
Net cash provided by (used in) operating activities
     (75.9 )     234.6  
                 
Investing activities
                
Purchases of property, plant and equipment
     (66.9 )     (75.5 )
Proceeds from sale of equipment
     2.3       -  
Net cash used in investing activities
     (64.6 )     (75.5 )
                 
Financing activities
                
Net borrowings (repayments) under revolving credit facilities
     7.6       (127.6 )
Payments of long-term debt and capital lease obligations
     (6.9 )     (0.5 )
Proceeds from issuance of long-term debt
     7.2       550.0  
Debt issuance costs
     -       (7.5 )
Payment of Term Loan due 2010
     -       (252.5 )
Repurchase of treasury stock
     (0.1 )     -  
Employee stock option exercises
     0.7       9.2  
Tax benefit on stock option exercises
     0.2       2.1  
Dividends paid
     (16.2 )     (15.8 )
Net cash provided by (used in) financing activities
     (7.5 )     157.4  
                 
Effect of exchange rate changes on cash
     0.5       1.3  
                 
Net increase (decrease) in cash and cash equivalents
     (147.5 )     317.8  
                 
Cash and cash equivalents at beginning of period
     343.6       13.5  
                 
Cash and cash equivalents at end of period
   $ 196.1     $ 331.3  
                 
Supplemental cash flow information
                
     Interest paid
   $ 31.8     $ 26.0  
     Income taxes paid, net of refunds
   $ 2.1     $ 14.7        
See
See accompanying notes to condensed consolidated financial statements
4
 
Table of Contents
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(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 trucks, sport utility vehicles (SUVs), passenger cars and crossover utility 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, 2007 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, 2007.

Change in Accounting Principle  On January 1, 2008, we changed the method for costing our U.S. inventories from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.  As of December 31, 2007, the U.S. inventories for which the LIFO method of costing inventory was applied represented approximately 25% of total gross inventories.  This change enhances the matching of inventory costs with revenues and better reflects the current cost of inventory on our consolidated balance sheet.  Additionally, this change conforms all of our worldwide inventories to a consistent inventory costing method and provides better comparability to our industry peers, most of which use the FIFO method of costing for inventory.  In accordance with Statement of Financial Accounting Standards No. 154, “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 change in accounting for inventory costing to the Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007, the Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2008 and June 30, 2007, and the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and June 30, 2007.  We have condensed the comparative financial statements for financial statement line items that were not affected by the change in accounting principle.

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

Condensed Consolidated Statement of Operations
Three months ended June 30, 2007
(in millions)
                  
     As originally reported     
Adjustments to change from LIFO to FIFO
    
As adjusted and reported under FIFO
  
       
Net sales
   $ 916.5     $ -     $ 916.5  
Cost of goods sold
     803.4       (0.6 )     802.8  
Gross profit
     113.1       0.6       113.7  
Selling general and administrative expenses
     54.2       -       54.2  
Operating income
     58.9       0.6       59.5  
Other expense, net
     (19.6 )     -       (19.6 )
Income before income taxes
     39.3       0.6       39.9  
Income tax expense
     5.3       -       5.3  
Net income
  
$
 34.0    
$
 0.6    
$
 34.6  
Basic earnings per share
   $ 0.67     $ 0.01     $ 0.68  
Diluted earnings per share
   $ 0.64     $ 0.02     $ 0.66  
                         

Condensed Consolidated Statement of Operations
Six months ended June 30, 2007
(in millions)
                  
   
 As originally reported
      Adjustments to change from LIFO to FIFO     As adjusted and reported under FIFO  
       
Net sales
   $ 1,718.7     $ -     $ 1,718.7  
Cost of goods sold
     1,520.8       (1.1 )     1,519.7  
Gross profit
     197.9       1.1       199.0  
Selling general and administrative expenses
     103.1       -       103.1  
Operating income
     94.8       1.1       95.9  
Other expense, net
     (33.5 )     -       (33.5 )
Income before income taxes
     61.3       1.1       62.4  
Income tax expense
     11.9       0.2       12.1  
Net income
   $ 49.4     $ 0.9     $ 50.3  
Basic earnings per share
   $ 0.97     $ 0.02     $ 0.99  
Diluted earnings per share
   $ 0.94     $ 0.02     $ 0.96  
                         

 
6
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Condensed Consolidated Balance Sheet
December 31, 2007
(in millions)
                  
   
As originally reported
    
Adjustments to change from LIFO to FIFO
    
As adjusted and reported under FIFO
  
Assets
                  
Current assets
                  
     Inventories
   $ 229.0     $ 13.8     $ 242.8  
     Deferred income taxes
     24.6       (5.1 )     19.5  
     Other current assets
     681.0       -       681.0  
Total current assets
     934.6       8.7       943.3  
Other assets
     1,980.1       -       1,980.1  
Total assets
   $ 2,914.7     $ 8.7     $ 2,923.4  
                         
Liabilities and Stockholders’ Equity
                        
Total liabilities
   $ 2,024.0     $ -     $ 2,024.0  
Stockholders’ equity
                        
     Retained earnings
     583.2       8.7       591.9  
     Other stockholders’ equity
     307.5       -       307.5  
Total stockholders’ equity
     890.7       8.7       899.4  
Total liabilities and stockholders’ equity
   $ 2,914.7     $ 8.7     $ 2,923.4  
 

 
Condensed Consolidated Statement of Cash Flows
Six months ended June 30, 2007
(in millions)
                  
   
As originally reported
    
Adjustments to change from LIFO to FIFO
    
As adjusted and reported under FIFO
  
Operating Activities
                  
Net income
   $ 49.4     $ 0.9     $ 50.3  
Adjustments to reconcile net income to net cash
   provided by operating activities
                        
     Deferred income taxes
     3.9       0.2       4.1  
     Changes in operating assets and liabilities
                        
           Inventories
     (22.4 )     (1.1 )     (23.5 )
           Other changes in operating assets and
               liabilities
     44.0       -       44.0  
     Other adjustments
     159.7       -       159.7  
Net cash provided by operating activities
     234.6       -       234.6  
                         
Investing Activities
                        
Net cash used in investing activities
     (75.5 )     -       (75.5 )
                         
Financing Activities
                        
Net cash provided by financing activities
     157.4       -       157.4  
                         
Effect of exchange rate changes on cash
     1.3       -       1.3  
                         
Net increase in cash and cash equivalents
   $ 317.8     $ -     $ 317.8  



7
Table of Contents
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Condensed Consolidated Statement of Operations
Three months ended June 30, 2008
(in millions)
                  
    As calculated using LIFO for U.S. inventories     Difference between LIFO and FIFO    
As reported using FIFO
  
       
Net sales
   $
490.5
     $
-
     $
490.5
  
Cost of goods sold
    
1,018.9
      
(0.5
)
    
1,018.4
  
Gross loss
    
(528.4
)
    
0.5
      
(527.9
)
Selling general and administrative expenses
    
44.9
      
-
      
44.9
  
Operating loss
    
(573.3
)
    
0.5
      
(572.8
)
Other expense, net
     (12.4
)
    
-
      
(12.4
)
Loss before income taxes
    
(585.7
)
    
0.5
      
(585.2
)
Income tax expense
    
64.2
      
5.1
      
59.1
  
Net loss
   $
(649.9
)
   $
5.6
     $
(644.3
)
Basic loss per share
   $
(12.60
)
   $
0.11
     $
(12.49
)
Diluted loss per share
   $
(12.60
)
   $
0.11
     $
(12.49
)
                         

Condensed Consolidated Statement of Operations
Six months ended June 30, 2008
(in millions)
                    
   
As calculated using LIFO for U.S. inventories
    
Difference between LIFO and FIFO
    
As reported using FIFO
    
               
Net sales
   $ 1,078.1     $ -     $ 1,078.1  
Cost of goods sold
     1,593.8       (0.5 )     1,593.3  
Gross loss
     (515.7 )     0.5       (515.2 )
Selling general and administrative expenses
     94.3       -       94.3  
Operating loss
     (610.0 )     0.5       (609.5 )
Other expense, net
     (24.6 )     -       (24.6 )
Loss before income taxes
     (634.6 )     0.5       (634.1 )
Income tax expense
     42.3       5.1       37.2  
Net loss
   $ (676.9 )   $ 5.6     $ (671.3 )
Basic loss per share
   $ (13.11 )   $ 0.10     $ (13.01 )
Diluted loss  per share
   $ (13.11 )   $ 0.10     $ (13.01 )

          The Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 as calculated using LIFO for U.S. inventories include an adjustment to income tax expense of $5.1 million for additional valuation allowances that would have been recorded against our U.S. deferred tax assets.  See Note 9 – Income Taxes for more detail on our valuation allowance.


 
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AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
Condensed Consolidated Balance Sheet
June 30, 2008
(in millions)
                  
   
As calculated using LIFO for U.S. inventories
    
Difference between LIFO and FIFO
    
As reported using FIFO
  
Assets
                  
Current Assets
                  
     Inventories
   $ 224.4     $ 14.3     $ 238.7  
     Other current assets
     713.4       -       713.4  
Total current assets
     937.8       14.3       952.1  
Other assets
     1,574.2       -       1,574.2  
Total assets
   $ 2,512.0     $ 14.3     $ 2,526.3  
                         
Liabilities and Stockholders’ Equity
                        
Total liabilities
   $ 2,211.0     $ -     $ 2,211.0  
Stockholders’ equity
                        
     Accumulated deficit
     (109.9 )     14.3       (95.6 )
     Other stockholders’ equity
     410.9       -       410.9  
Total stockholders’ equity
     301.0       14.3       315.3  
Total liabilities and stockholders’ equity
   $ 2,512.0     $ 14.3     $ 2,526.3  

Condensed Consolidated Statement of Cash Flows
Six months ended June 30, 2008
(in millions)
                  
   
As calculated using LIFO for U.S. inventories
    
Difference between LIFO and FIFO
    
As reported using FIFO
  
Operating Activities
                  
Net loss
   $ (676.9 )   $ 5.6     $ (671.3 )
Adjustments to reconcile net income to net cash
   provided by operating activities
                        
     Deferred income taxes
     34.3       (5.1 )     29.2  
     Changes in operating assets and liabilities
                        
           Inventories
     6.1       (0.5 )     5.6  
           Other changes in operating assets and
               liabilities
     111.2       -       111.2  
     Other adjustments
     449.4       -       449.4  
Net cash used in operating activities
     (75.9 )     -       (75.9 )
                         
Investing Activities
                        
Net cash used in investing activities
     (64.6 )     -       (64.6 )
                         
Financing Activities
                        
Net cash used in financing activities
     (7.5 )     -       (7.5 )
                         
Effect of exchange rate changes on cash
     0.5       -       0.5  
                         
Net decrease in cash and cash equivalents
   $ (147.5 )   $ -     $ (147.5 )

The application of this change in accounting increased retained earnings by $8.7 million as of January 1, 2007.

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AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       
        Effect of New Accounting Standards In September 2006, the FASB issued Statement No. 157 (SFAS 157), “Fair Value Measurements.”  This statement clarifies the definition of fair value and establishes a fair value hierarchy.  SFAS 157, as originally issued, was effective for us on January 1, 2008.  In February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, which defers the effective date of SFAS 157 for 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.  The effective date for us under this FSP is January 1, 2009.  As allowed by FSP FAS 157-2, we partially adopted SFAS 157 on January 1, 2008 and the impact of adoption was not significant.  We do not expect the impact of applying SFAS 157 to the remaining assets and liabilities on January 1, 2009 to be material.

SFAS 157 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.  SFAS 157 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.
 
On a recurring basis, we measure our derivatives at fair value, which was a net liability of $3.4 million as of June 30, 2008.  The fair value of these derivatives was determined using Level 2 inputs, as described above. 
       
        As allowed by FSP FAS 157-2, we did not apply SFAS 157 to fair value measurements of certain assets and liabilities included in property, plant and equipment, net, accrued compensation and benefits, other accrued expenses, and postretirement benefits and other long-term liabilities on our Condensed Consolidated Balance Sheets.

In February 2007, the FASB issued Statement No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities.”  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 was effective for us on January 1, 2008 and we did not elect to measure any additional assets or liabilities at fair value.

In December 2007, the FASB issued Statement No. 160 (SFAS 160), “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51.”   SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary.  SFAS 160 is effective for us on January 1, 2009.  We are currently assessing the impact of adopting this statement.
 
In December 2007, the FASB issued Statement No. 141 (Revised) (SFAS 141R),  “Business Combinations.” This statement replaces FASB Statement No. 141 and establishes principles and requirements for how the acquirer:

a. Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree
b. Recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase
c. Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
 
 SFAS 141R is effective for us prospectively for any acquisitions made on or after January 1, 2009.
 
         In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133.”  This statement 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.  SFAS 161 is effective for us prospectively on January 1, 2009.

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

2.  
LABOR RELATIONS

On February 25, 2008, the four-year master labor agreement between AAM and the International United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) covering approximately 3,650 associates at our original five facilities in Michigan and New York expired.  The International UAW called a strike at these facilities upon expiration of this agreement.  On May 23, 2008, UAW represented associates at these locations ratified new labor agreements with AAM.  The new labor agreements establish a new wage and benefit package for eligible current and newly hired UAW represented associates at these locations.

As part of these new agreements, we paid a lump-sum ratification bonus to each eligible associate at these locations in the second quarter of 2008.  We expensed and paid $19.1 million for these signing bonuses.

In addition, as part of the new labor agreements, we offered the Special Separation Program (SSP) to all UAW represented associates at our original U.S. locations.  This voluntary separation program offered a range of retirement or buyout incentives to eligible associates.   We also announced the closing of our Buffalo Gear, Axle & Linkage facility (Buffalo) and Tonawanda and Detroit forging facilities within the next six to twelve months.   The costs recorded in the second quarter of 2008 for the SSP and related plant closures are discussed in more detail in Note 3 – Restructuring Actions.
 
        The new labor agreements also have a significant impact on our pension and other postretirement employee benefit (OPEB) obligations, including the freezing, reducing or eliminating of current and future benefits for certain associates.  See Note 7 – Employee Benefit Plans for more detail on the impact of the new agreements on our pension and OPEB liabilities and expense.

An involuntary Buydown Program (BDP) will be applicable for associates that do not elect to participate in the SSP.  Under the BDP, we will make three annual lump-sum payments to associates in exchange for, among other things, a base wage decrease.  The total buydown payments are expected to average between $90,000 and $95,000 per associate and will not exceed $105,000 per associate.  The transition to a lower base wage and the first payment under the BDP will occur in the third quarter of 2008.

In the second quarter of 2008, we expensed $18.0 million relating to supplemental unemployment benefits (SUB) to be payable to current UAW represented associates during the new labor agreements that expire in February 2012.  The new labor agreements between AAM and the International UAW contain a SUB provision, pursuant to which we are required to pay eligible idled workers certain benefits.  Under the new agreement, our obligation for SUB payments is limited to $18.0 million.   Once this limit is reached, the SUB program will be terminated.  As of June 30, 2008, it was probable and estimable that we will pay the full amount during the contract period.  In the second quarter of 2008, we paid $2.1 million of this amount and our remaining liability was $15.9 million as of June 30, 2008.

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

In 2008, we incurred restructuring charges related to the SSP, asset impairments, plant closure agreements and other ongoing restructuring actions.  In addition, we continue to make payments related to charges incurred in 2007 and 2006.

A summary of the restructuring related activity for the six months ended June 30, 2008 is shown below (in millions):

   
One-time
          
Indirect
          
Contract
    
    Redeployment
      
   
Termination
    
Asset
    
Inventory
    
Environmental
    
Related
    
of
      
   
Benefits
    
Impairments
    
    Obsolescence
    
Obligations
    
Costs
    
Assets
    
Total
    
Accrual as of December 31, 2007
   $ 20.3     $ -     $ -     $ 2.2     $ -     $ -     $ 22.5  
Charges
     129.4       294.8       30.4       0.8       9.7       5.3       470.4  
Cash utilization
     (12.2 )     -        -       (0.1 )     -       (5.3 )     (17.6 )
Non-cash utilization and accrual adjustments
     (0.2 )     (294.8 )     (30.4 )     -       (0.8 )     -       (326.2 )
Accrual as of June 30, 2008
   $ 137.3     $ -     $ -     $ 2.9     $ 8.9     $ -     $ 149.1  

 One-time Termination Benefits We offered the SSP to all UAW represented associates at the original U.S. locations in the second quarter of 2008.  Under this voluntary separation program, we offered retirement and buyout incentives to approximately 3,650 eligible hourly associates.  These associates have until July 25, 2008 to decide whether to participate in the SSP.   We recorded expense of $76.5 million for the estimated postemployment costs of those associates at the facilities operating under our plant closure agreements.  In addition, as of June 30, 2008, approximately 400 associates voluntarily elected early participation in this program.  We recorded expense of $39.6 million for the estimated postemployment costs of these associates.  
 
We will record the remaining liability for the SSP when the final acceptances are known in the third quarter of 2008.  We estimate the remaining liability to be between $115 million and $135 million, which includes special termination benefits that will be classified and disclosed as postretirement benefit obligations.

In addition, we recorded expense of $4.2 million for the estimated postemployment costs for associates represented by the International Association of Machinists (IAM) at our Tonawanda forging facility.
      
        In the second quarter of 2008, we approved a plan to reduce our salaried workforce by approximately 350 associates in the U.S.  As part of this plan, we offered a voluntary salaried retirement incentive program (SRIP) to eligible salaried associates in the U.S. Based on the approval of a salaried workforce reduction, the terms of our Layoff Severance Program (LSP), which provide postemployment benefits based on current salary and prior service level, and the preliminary acceptances of the SRIP, a liability for our salaried workforce reduction is probable and estimable as of June 30, 2008.  We recorded expense of $8.7 million for the acceptances of the SRIP and the estimated postemployment benefits related to the LSP for the three and six months ended June 30, 2008.

12
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
In the second quarter of 2008, we approved and communicated a plan to provide future transition payments to certain associates who will remain active through December 31, 2008.  We recorded expense of $0.4 million for the proportional amount of expense for service related to these future payments for the three and six months ended June 30, 2008.

Asset Impairments In the second quarter of 2008, we identified the following impairment indicators:

·  
a significant decline in current and projected market demand and future customer production schedules for the major North American light truck programs we currently support and
·  
changes in the extent to which assets at our original U.S. locations will be used as a result of management’s long-term plant loading decisions made subsequent to the new labor agreements with the International UAW.

We recorded asset impairment charges of $294.8 million in the second quarter of 2008 associated with the permanent idling of certain assets and an impairment analysis of certain assets that were “held for use” as of June 30, 2008.  Recoverability of each “held for use” asset group affected by these impairment indicators was determined by comparing the forecasted undiscounted cash flows of the operations to which the assets relate to their carrying amount.  When the carrying amount of an asset group exceeded the undiscounted cash flows and was therefore nonrecoverable, the assets in this group were  written down to their estimated fair value.  We estimated fair value based on a discounted cash flow analysis.  We also reduced the remaining useful lives of certain “held for use” assets as part of this analysis.
 
        Based on the impairment indicators described above, we also performed an impairment analysis on our goodwill as of June 30, 2008.  This analysis did not result in an impairment of goodwill.
 
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 machine repair parts classified as indirect inventory were determined to be in excess. We recorded a charge of $30.4 million related to the write down of the net book value of these assets to their estimated net realizable value at June 30, 2008.

Environmental Obligations  In the second quarter of 2008, as a result of the announced closure of our Tonawanda forging facility, the methods and timing of environmental liabilities related to this facility became reasonably estimable.  Based on management’s best estimate of the costs, methods and timing of the settlement of these obligations, we recorded a charge of $0.8 million.
 
        Contract Related Costs  Contract related costs recorded in the second quarter of 2008 of $9.7 million primarily include the fair value of obligations related to assets under operating leases that were idled in the second quarter of 2008 and long-term purchase commitments at certain facilities operating under our plant closure agreements.

Redeployment of Assets In the first six months of 2008, we incurred $5.3 million of charges related to the redeployment of assets to support capacity utilization initiatives.

We expect a majority of the remaining restructuring accrual to be paid in 2008 and the remainder to be paid through 2012.
 
13
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
4.  
INVENTORIES

We state our inventories at the lower of cost or market.  In the first quarter of 2008, we changed the method of accounting for our U.S. inventories from the LIFO method to the FIFO method as discussed in Note 1 – Organization and Basis of Presentation.  The cost of worldwide inventories is determined using the FIFO method.  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:

   
June 30,
    
December 31,
  
   
2008
    
2007
  
   
(in millions)
  
             
Raw materials and work-in-progress
   $ 248.5     $ 230.5  
Finished goods
     62.6       52.6  
Gross inventories
     311.1       283.1  
Other inventory valuation reserves
     (72.4 )     (40.3 )
Inventories, net
   $ 238.7     $ 242.8  

5.  
LONG-TERM DEBT

Long-term debt consists of the following:

   
June 30,
    
December 31,
  
   
2008
    
2007
  
   
(in millions)
  
             
Revolving Credit Facility
   $ -     $ -  
7.875% Notes
     300.0       300.0  
5.25% Notes, net of discount
     249.8       249.8  
2.00% Convertible Notes
     2.7       2.7  
Term Loan due 2012
     250.0       250.0  
Foreign credit facilities
     58.2       46.7  
Capital lease obligations
     8.5       8.9  
Long-term debt
   $ 869.2     $ 858.1  
                 

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 June 30, 2008, we had $572.3 million available under the Revolving Credit Facility.  This availability reflects a reduction of $27.7 million for standby letters of credit issued against the facility.

The Revolving Credit Facility provides back-up liquidity for our foreign credit facilities.  We intend to use the availability of long-term financing under the Revolving Credit Facility to refinance any current maturities related to such debt agreements that are not otherwise refinanced on a long-term basis in their respective markets.  Accordingly, we have classified $46.9 million of such amounts as long-term debt.

We utilize local currency credit facilities to finance the operations of certain foreign subsidiaries.  At June 30, 2008, $58.2 million was outstanding under these facilities and an additional $105.4 million was available.
 
The weighted-average interest rate of our long-term debt outstanding at June 30, 2008 was 7.6% and 7.8% as of December 31, 2007.

14
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
6.  
DEFERRED REVENUE

In the second quarter of 2008, we entered into an agreement with GM in connection with the resolution of the strike called by the International UAW (AAM – GM Agreement).  Pursuant to this agreement, GM will provide us with $175.0 million of cash payments through April 2009.  As of June 30, 2008, we have recorded a receivable for $175.0 million, which is disclosed as AAM – GM Agreement receivable on our Condensed Consolidated Balance Sheet.

The AAM – GM agreement also amended the Asset Purchase Agreement, dated February 18, 1994, between GM and AAM.  The amendment provides that we shall have no liability to GM for postretirement healthcare and life insurance coverage provided to UAW represented transition associates with earned credited service from AAM who retire under plans administered by GM.  As of June 30, 2008, the value of this liability was estimated at $38.7 million.  See Footnote 7 – Employee Benefits Plans for more detail on the settlement of this liability.

As of June 30, 2008, we recorded deferred revenue of $209.0 million related to the AAM – GM Agreement, $57.7 million of which is classified as current and $151.3 million of which is recorded as noncurrent on our Condensed Consolidated Balance Sheet.  We will amortize this deferred revenue into income over future periods.   We recorded revenue of $4.7 million for the three month and six months ended June 30, 2008 related to this agreement.

7.  
EMPLOYEE BENEFIT PLANS
 
        The components of net periodic benefit cost consist of the following:

   
Pension Benefits
  
   
Three months ended
    
Six months ended
  
   
June 30,
    
June 30,
  
   
2008
    
2007
    
2008
    
2007
  
   
(in millions)
  
                         
Service cost
   $ 3.9     $ 4.6     $ 8.1     $ 10.7  
Interest cost
     9.5       8.7       18.9       17.3  
Expected asset return
     (10.2 )     (9.5 )     (20.4 )     (19.0 )
Amortized loss
     0.3       0.3       0.5       0.7  
Amortized prior service cost
     0.3       0.6       0.8       1.2  
Curtailment
     6.0       -       6.0       -  
Special and contractual termination benefits
     27.1       0.2       27.1       0.4  
Net periodic benefit cost
   $ 36.9     $ 4.9     $ 41.0     $ 11.3  
             
 
 
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AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
   
Other Postretirement Benefits
  
   
Three months ended
    
Six months ended
  
   
June 30,
    
June 30,
  
   
2008
    
2007
    
2008
    
2007
  
   
(in millions)
  
                         
Service cost
   $ 3.5     $ 6.5     $ 8.0     $ 12.9  
Interest cost
     6.4       7.2       13.8       14.0  
Amortized loss
     -       -       -       -  
Amortized prior service credit
     (1.6 )     (0.7 )     (2.4 )     (1.5 )
Settlement
     (9.4 )     -       (9.4 )     -  
Curtailment
     (16.1 )     -       (16.1 )     -  
Special and contractual termination benefits
     9.8       -       9.8       -  
Net periodic benefit cost (credit)
   $ (7.4 )   $ 13.0     $ 3.7     $ 25.4  

In the second quarter of 2008, we completed multiple valuations of the assets and liabilities of our U.S. hourly pension and other postretirement benefit (OPEB) plans.  This was required due to plan amendments, attrition programs and plant closure agreements which resulted from the new labor agreements ratified with UAW represented associates at our original U.S. locations on May 23, 2008.  We recorded an adjustment associated with the completion of these valuations in the second quarter of 2008.  The components of this adjustment are discussed below.
 
Certain changes in the new labor agreements reduced the postretirement benefit obligation attributed to employee services already rendered.  These changes are classified as negative plan amendments and reduced postretirement and other long-term liabilities by approximately $93.2 million.  In addition, we reduced postretirement and other long-term liabilities by $8.0 million for changes in actuarial assumptions since the U.S. hourly pension and OPEB plan valuation on January 1, 2008.  These adjustments were recorded to accumulated other comprehensive income (AOCI) and will be amortized over future periods.

We also reduced postretirement and other long-term liabilities and recorded a net gain to cost of sales of $10.1 million for the curtailment of certain pension and OPEB.  This resulted primarily from the reduction in the expected future OPEB related to early acceptances of the SSP as well as the estimated pension curtailment losses related to those associates who will terminate employment at the facilities operating under our plant closure agreements.  In addition, we reduced postretirement and other long-term liabilities and recorded an estimated curtailment gain to AOCI of $23.4 million related to the expected curtailment of OPEB for those associates at the facilities operating under our plant closure agreements who have not yet terminated employment.  This gain will be recognized in cost of sales as these associates terminate employment throughout the remaining operation of these facilities.

In addition, we increased postretirement and other long-term liabilities and recorded expense of $36.9 million for special and contractual termination benefits. This charge includes $34.6 million related to the SSP, which is made up of benefits to be paid under our pension plans, contractual pension and OPEB to be provided to certain eligible associates at the facilities operating under our plant closure agreements and future postretirement benefits to be provided to certain eligible associates who have accepted the SSP as of June 30, 2008.  This charge also includes $1.9 million of contractual pension and OPEB benefits related to certain eligible IAM associates at our Detroit forging facilities and $0.4 million of SRIP benefits to be paid under our pension plans.

16
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
        As part of the AAM – GM agreement, we will no longer have a liability to GM for postretirement healthcare and life insurance coverage provided to UAW represented transition associates with earned credited service from AAM who retire under the plans administered by GM.  We recorded a reduction of our OPEB liability of $38.7 million to reflect the settlement of this portion of the liability.  We will record this transaction as deferred revenue and amortize it over future periods.  See Note 6 – Deferred Revenue for more detail on this agreement with GM.  The forgiveness of this obligation has been accounted for as a settlement.  Accordingly, the related amount of unamortized gain previously recorded to AOCI has been recorded as a credit of $9.4 million to cost of sales.
      
        In the first quarter of 2008, we recorded an adjustment related to the completion of our valuation for pension and OPEB assets and obligations as of January 1, 2008.  This adjustment resulted in a decrease in postretirement benefits and other long-term liabilities of $11.8 million, an increase in AOCI of $7.4 million and a decrease in deferred income taxes of $4.4 million.

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 to the opening retained earnings balance related to the net periodic benefit cost for the period between September 30, 2006 and January 1, 2007.

Our regulatory pension funding requirements in 2008 are less than $5 million.  We expect our cash outlay for OPEB obligations in 2008 to be between $5 million and $10 million.

8.    PRODUCT WARRANTIES

The following table provides a reconciliation of changes in product warranty liabilities as of June 30, 2008 (in millions):

Beginning balance as of January 1, 2008
  
$
              6.8
  
Accruals
    
     0.3
  
Settlements
    
     (0.3
 ) 
Adjustment to prior period accruals
    
     (0.4
 ) 
Ending balance as of June 30, 2008
  
$
 6.4
  

9.    
INCOME TAXES

 We estimate whether recoverability of our deferred tax assets is “more likely than not” based on forecasts of taxable income in the related tax jurisdictions.  In this estimate, we use historical results, projected future operating results based upon approved business plans, eligible carry forward periods, tax planning opportunities and other relevant considerations.  We review the likelihood that we will be able to realize the benefit of our deferred tax assets on a quarterly basis or whenever events indicate that a review is required.

In the second quarter of 2008, several events occurred that led us to significantly revise the near-term projected future operating results of our U.S. operations.  These events include:

·  
a significant decline in current and projected market demand and future customer production schedules for the major North American light truck programs we currently support;
·  
management’s long-term plant loading decisions made subsequent to the new labor agreements with the International UAW; and
·  
the impact of significant charges resulting from our restructuring actions in the second quarter of 2008.
 
17
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
We reviewed the likelihood that we would be able to realize the benefit of our U.S. deferred tax assets as of June 30, 2008, based on the revised near-term projected future operating results of our U.S. operations.  We concluded that it is no longer “more likely than not” that we will realize our net deferred assets in the U.S. and recorded a charge to income tax expense in the second quarter of 2008 of $54.4 million to establish a full valuation allowance against these assets.  We recorded an additional valuation allowance in the second quarter of 2008 of $213.5 million by not recognizing a tax benefit on losses incurred in the three months ended June 30, 2008.
 
        If, in the future, we generate taxable income in the U.S. on a sustained basis, our current estimate of the recoverability of our deferred tax assets could change and result in the future reversal of some or all of the valuation allowance.
 
Income tax expense was $59.1 million in the second quarter of 2008 as compared to $5.3 million in the second quarter of 2007.  Our effective income tax rate was negative 10.1% in the second quarter of 2008 as compared to 13.3% in the second quarter of 2007.  Income tax expense was $37.2 million in the first six months of 2008 as compared to $12.1 million in the first six months of 2007.  Our effective income tax rate was negative 5.9% in the first six months of 2008 as compared to 19.4% in the first six months of 2007.  The effective tax rate in the second quarter and first six months of 2008 include the unfavorable tax adjustment related to the establishment of the full valuation allowance against the net U.S. deferred tax assets and reflects the impact of not recording an income tax benefit for current tax losses in the U.S.

 
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in millions):
 
Balance at January 1, 2008
 $ 
         33.0
    
Increase in prior year tax positions
  
7.1
    
Decrease in prior year tax positions
  
(6.2
 )   
Increase in current year tax positions
  
1.7
    
Settlement
  
(1.2
 )   
Balance at June 30, 2008
 $ 
       34.4
    


10.   STOCK-BASED COMPENSATION

On June 25, 2008, we granted approximately 0.3 million stock options under our 1999 Stock Incentive Plan.  These options will be expensed over the vesting period, which is approximately 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:

   
2008
    
2007
  
Expected volatility
     46.10 %     44.26 %
Risk-free interest rate
     3.78 %     4.46 %
Dividend yield
     6.20 %     2.30 %
Expected life of options
  
8 years
    
8 years
  
Weighted-average grant-date fair value
   $ 2.67     $ 11.13  

  On June 25, 2008, we granted 0.2 million shares of restricted stock with a grant-date fair value of $10.08.  The unearned compensation related to this grant will be expensed over the vesting period of approximately three years.

On March 14, 2008, we granted 0.7 million shares of restricted stock with a grant-date fair value of $21.37.  The unearned compensation related to this grant will be expensed over the vesting period of three years.

In the first quarter of 2008, we made cash payments of $2.0 million related to vested restricted stock units.
 
18
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
11.  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of the following:

   
Three months ended
    
Six months ended
  
   
June 30,
    
June 30,
  
   
2008
    
2007
    
2008
    
2007
  
   
(in millions)
  
                         
Net income (loss)
   $ (644.3 )   $ 34.6     $ (671.3 )   $ 50.3  
Defined benefit plans, net of tax
     73.7       (10.1 )     81.1       (9.8 )
Foreign currency translation adjustments,  net of tax
     9.9       6.7       13.4       10.4  
Gain on derivatives, net of tax
     2.9       1.4       1.5       0.8  
Comprehensive income (loss)
   $ (557.8 )   $ 32.6     $ (575.3 )   $ 51.7  


12.   EARNINGS (LOSS) PER SHARE (EPS)

The following table sets forth the computation of our basic and diluted EPS:
 
   
Three months ended
    
Six months ended
  
   
June 30,
    
June 30,
  
   
2008
    
2007
    
2008
    
2007
  
   
(in millions, except per share data)
  
Numerator
                        
Net income(loss)
   $ (644.3 )   $ 34.6     $ (671.3 )   $ 50.3  
                                 
Denominator
                                
Basic shares outstanding -
                                
  Weighted-average shares outstanding
     51.6       50.9       51.6       50.8  
                                 
Effect of dilutive securities
                                
  Dilutive stock-based compensation
     -       1.9       -       1.7  
                                 
Diluted shares outstanding -
                                
  Adjusted weighted-average shares after assumed conversions
     51.6       52.8       51.6       52.5  
                                 
Basic EPS
   $ (12.49 )   $ 0.68     $ (13.01 )   $ 0.99  
                                 
Diluted EPS
   $ (12.49 )   $ 0.66     $ (13.01 )   $ 0.96  

Basic and diluted loss per share for the three and six months ended June 30, 2008 are the same because the effect of 1.6 million potentially dilutive shares would have been antidilutive.

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 4.4 million at June 30, 2008 and 1.4 million at June 30, 2007.  The ranges of exercise prices related to the excluded exercisable stock options were $19.54 - $40.83 at June 30, 2008 and $32.13 - $40.83 at June 30, 2007.
 
19
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
13.   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, June 30,
(in millions)
   
Holdings
    
AAM Inc.
    
All Others
    
Elims
    
Consolidated
  
2008
                              
Net sales
                              
   External
   $ -     $ 133.7     $ 356.8     $ -     $ 490.5  
   Intercompany
     -       10.0       15.3       (25.3 )     -  
Total net sales
     -       143.7       372.1       (25.3 )     490.5  
Cost of goods sold
     -       708.1       335.6       (25.3 )     1,018.4  
Gross profit (loss)
     -       (564.4 )     36.5       -       (527.9 )
Selling, general and administrative expenses
     -       44.2       0.7       -       44.9  
Operating income (loss)
     -       (608.6 )     35.8       -       (572.8 )
Net interest expense
     -       (12.8 )     (0.7 )     -       (13.5 )
Other income, net
     -       -       1.1       -       1.1  
Income (loss) before income taxes
     -       (621.4 )     36.2       -       (585.2 )
Income tax expense
     -       57.2       1.9       -       59.1  
Earnings (loss) from equity in subsidiaries
     (644.3 )     17.8       -       626.5       -  
Net income (loss) before royalties and dividends
     (644.3 )     (660.8 )     34.3       626.5       (644.3 )
Royalties and dividends
     -       16.5       (16.5 )     -       -  
Net income (loss) after royalties and dividends
   $ (644.3 )   $ (644.3 )   $ 17.8     $ 626.5     $ (644.3 )
 
2007