MANAGEMENT’S
DISCUSSION AND ANALYSIS
OVERVIEW
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 powertrain
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 powertrain products include axles,
chassis modules, driveshafts, power transfer units, transfer cases, chassis
and
steering components, driving heads, crankshafts, transmission parts and
metal-formed products.
We
are
the principal supplier of driveline components to General Motors Corporation
(GM) for its rear-wheel drive (RWD) light trucks and SUVs manufactured in North
America, supplying substantially all of GM’s rear axle and front four-wheel
drive/all-wheel drive (4WD/AWD) axle requirements for these vehicle platforms.
Sales to GM were approximately 78% of our total net sales in 2005, 80% in 2004
and 82% in 2003.
We
are
the sole-source supplier to GM for certain axles and other driveline products
for the life of each GM vehicle program covered by a Lifetime Program Contract
(LPC). Substantially all of our sales to GM are made pursuant to the LPCs.
The
LPCs have terms equal to the lives of the relevant vehicle programs or their
respective derivatives, which typically run 6 to 12 years, and require us to
remain competitive with respect to technology, design and quality. We have
been
successful in competing, and we will continue to compete for future GM business
upon the expiration of the LPCs.
We
are
also the principal supplier of driveline system products for the Chrysler
Group’s heavy-duty Dodge Ram full-size pickup trucks (Dodge Ram program) and its
derivatives. As part of this program, we supply a fully integrated
computer-controlled chassis system for the Dodge Ram Power Wagon. Sales to
DaimlerChrysler Corporation (DaimlerChrysler) were approximately 13% of our
total net sales in 2005, 11% in 2004 and 9% in 2003.
In
addition to GM and DaimlerChrysler, we supply driveline systems and other
related components to PACCAR Inc., Volvo Group, Ford Motor Company (Ford),
and
other original equipment manufacturers (OEMs) and Tier I supplier companies
such
as Magna International, Inc. and The Timken Company. Our net sales to customers
other than GM increased 3.6% to $754.4 million in 2005 as compared to $728.0
million in 2004 and $674.0 million in 2003. In the second quarter of 2005,
we
launched a program supporting independent rear drive axles (IRDAs) for South
Korean automaker Ssangyong Motor Corporation.
INDUSTRY
TRENDS AND COMPETITION
There
are
a number of key trends affecting the highly competitive automotive industry.
The
industry is global with an increased emphasis on new consumer markets,
geographically diverse production facilities and supplier consolidation. Pricing
pressures are significant, while domestic manufacturing costs, including labor
and certain raw materials, are escalating. As a result, OEMs and suppliers
are
developing strategies to reduce costs such as producing in low cost locations
and sourcing on a global basis. Product development and advanced technology
are
critical to attracting and retaining business. The driveline systems segment
of
the industry in which we compete reflects these trends, and we expect them
to
continue.
GLOBAL
AUTOMOTIVE PRODUCTION
Global
automotive production is increasing in Central and Eastern Europe, Asia
(particularly China, South Korea and India) and South America. The rate of
growth of automotive production in these regions is expected to be much greater
than the more traditional automotive production centers such as North America,
Western Europe and Japan. We have opened offices in India, China and South
Korea
and we have expanded our existing facility in Brazil to support these growing
markets. We expect our activity in these markets to increase significantly
over
the next several years. In 2006, we will begin construction of new manufacturing
facilities in China and Central/Eastern Europe.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
CHANGE
IN CONSUMER DEMAND AND PRODUCT MIX SHIFT
The
demand for SUV-type vehicles is shifting to smaller passenger cars and crossover
vehicles with smaller displacement engines and higher fuel economy. A
significant portion of our current revenue stream is tied to full-size and
mid-size SUV’s and as demand softens for these products, our current revenue
streams will be impacted. However, our R&D efforts have led to new business
awards for new products that support AWD and RWD passenger cars and crossover
vehicles positioning us well to compete as the product mix shifts. AAM’s new and
incremental business backlog now includes awards for new products supporting
seven passenger car and crossover vehicle programs that represent future annual
sales of over $600 million by 2012.
4WD/AWD
There
is
a continuing trend toward higher 4WD/AWD penetration in the market place. We
benefit from increased 4WD/AWD penetration because we are able to sell two
axles
on a 4WD/AWD vehicle versus one on a traditional light truck or SUV, which
also
increases our content-per-vehicle.
DECLINING
U.S. DOMESTIC MARKET SHARE
Competition
from offshore and transplant OEMs continues to intensify, and the U.S. market
share for GM and Ford has declined as their U.S. domestic vehicle production
levels decreased by 8% in 2005. Since approximately 78% of our 2005 revenue
is
derived from net sales to GM, this continuing trend is significant for us.
A
mitigating factor for us in this trend is our continuing effort to diversify
our
customer base as our sales to customers other than GM have increased to $754.4
million representing approximately 22% of net sales in 2005.
PRICE
PRESSURE
Year-over-year
price reductions are a common practice in the automotive industry. We sell
most
of our products under long-term contracts with prices scheduled at the time
the
contracts are established. Some of our contracts require us to reduce our prices
in subsequent years and most of our contracts allow us to adjust prices for
engineering changes. We do not believe that the price reductions we have
committed to our customers will have a material adverse impact on our future
operating results because we intend to offset such price reductions through
cost
reductions and other productivity initiatives.
SUPPLY
BASE CONSOLIDATION
The
OEMs
have continued to reduce their supply base, preferring stronger relationships
with a smaller number of suppliers capable of designing, engineering, testing,
validating and manufacturing systems and modules for their increasingly global
operations. The trend is to move away from regional suppliers and toward
suppliers that can serve global markets in a cost efficient manner. The
financial strength of a supplier is also an important factor in sourcing
decisions as the OEMs work to protect their continuity of supply. We believe
our
engineering capabilities and financial resources position us well in this
environment.
Supply
base consolidation is not limited to Tier I suppliers. The competitive pressures
of the automotive industry have forced the consolidation of our supply base
as
well. We have expanded our global purchasing activities in order to procure
materials cost-effectively while ensuring continuity of high quality supply.
STEEL
AND OTHER METALLIC MATERIAL PRICING
Worldwide
market conditions have resulted in higher steel and other metallic material
prices. We are focused on mitigating the impact of this trend through commercial
agreements with our customers, strategic sourcing arrangements with suppliers
and technology advancements that will allow us to use less metallic content
in
the manufacture of our products.
The
majority of our sales contracts with our largest customers provide price
adjustment provisions for metal market price fluctuations. Because we do not
have such provisions with all of our customers for all of the parts that we
sell, we are experiencing higher net costs for raw materials. Our cost increases
have come in the form of metal market adjustments, base price increases and
surcharges. We also have contracts with our steel suppliers that ensure
continuity of supply and our validation and testing capabilities enable us
to
strategically utilize steel sources on a global basis.
SHIFT
OF WARRANTY RESPONSIBILITIES
The
OEMs
are also shifting warranty responsibilities to their supply base. In our
eleven-year history, we have experienced negligible warranty charges from our
customers due to our contractual relationships and ongoing improvements in
the
areas of quality, reliability and durability with respect to the products that
we sell. Although we do not expect that our warranty obligations will have
a
material adverse impact on our future operating results, we will continue to
closely monitor potential future warranty costs.
FINANCIAL
DISTRESS OF U.S. DOMESTIC SUPPLY BASE
The
declining market share of the U.S. domestic OEMs has resulted in the
under-utilization of industry capacity which has significantly pressured the
U.S. domestic supply base. Steel and metallic material prices rose
significantly, and higher energy and fuel costs exacerbated the cost issue.
In
2005, several key automotive suppliers joined many other suppliers that have
filed for Chapter 11 bankruptcy protection since 2003. The declining market
share of U.S. domestic OEMs and its supply base caused by global competition
is
creating a major structural change in the U.S. domestic automotive industry
targeted at dramatically reducing cost.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
RESULTS
OF OPERATIONS
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NET SALES
Net
sales were $3,387.3 million in 2005 as compared to $3,599.6 million
in
2004 and $3,682.7 million in 2003. The decrease in 2005 net sales
of 5.9%
relative to 2004 compares to a decrease in North American (N.A.)
light
vehicle production of less than 1% and a decrease of nearly 9% in
GM light
truck production. The decrease in 2004 net sales of 2% relative to
2003
compares to a decrease in N.A. light vehicle production of less than
1%
and a decrease of nearly 5% in GM light truck production.
The
decreases in net sales resulting from lower GM light truck production
volumes, in both 2005 and 2004, were partially offset by metal
market
price adjustments. Our sales were also positively impacted by increased
production of the Dodge Ram heavy-duty pickup truck program that
we
support.
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Sales
in
2004 and 2003 benefited from the launch in the second half of 2003 of the GMC
Canyon and Chevrolet Colorado and increased production of GM’s full-size pickup
and SUV programs. Our sales activity in 2004 and 2003 also reflects the impact
of our successful launch in the second half of 2002 of new driveline system
products supporting the Dodge Ram program, the launch in the third quarter
of
2002 of GM’s HUMMER H2 and the 2002 introduction of the longer wheel-base
Chevrolet Trailblazer EXT and GMC Envoy XL. Sales in 2003 were partially offset
by decreased production of the Chevrolet Astro and GMC Safari van program.
Our
content-per-vehicle (as measured by the dollar value of our products supporting
GM’s N.A. light truck platforms and the Dodge Ram program) was $1,201 in 2005
up
from $1,173 in 2004 and 2003. The impact of metal market price adjustments,
favorable pricing due to technology improvements and mix shifts favoring 4WD/AWD
versions of light truck products were the primary drivers of content growth
for
the year. Our 4WD/AWD penetration rate has also increased in these periods
to
63.7% in 2005 as compared to 62.6% in 2004 and 61.8% in 2003. 4WD/AWD
penetration is equal to the total number of front axles we produce divided
by
the total number of rear axles we produce for the vehicle programs on which
we
sell product.
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GROSS
PROFIT
Gross
profit was $304.7 million in 2005 as compared to $474.5 million in
2004
and $540.3 million in 2003. Gross margin was 9.0% in 2005 as compared
to
13.2% in 2004 and 14.7% in 2003. Our gross profit in 2005 was adversely
impacted by lower GM light truck production volumes, increased
supplemental unemployment benefits to our hourly associates, higher
energy
and material costs, and increased launch costs, which include
non-capitalizable project expenses in addition to machine start-up
costs.
In
2004, we initiated a voluntary separation program whereby employees
could
receive lump-sum payments to voluntarily terminate their employment
with
AAM. We offered separation payments under this program to adjust
our
hourly workforce to meet current business conditions. The associated
labor
cost is normally recovered in approximately one year. The following
table
summarizes our activity under the program:
|
|
2005
|
2004
|
|||||||
|
(Dollars
in millions)
|
||||||||
|
Approximate
pre-tax charge
|
$
|
17.3
|
$
|
23.8
|
||||
|
Number
of associates
|
317
|
453
|
||||||
In
February 2004, our national collective bargaining agreement with the UAW
expired. As a result of not reaching an agreement before the expiration of
the
contract, we experienced a temporary work stoppage of less than two days at
six
of our North American manufacturing facilities. In 2004, our operating results
include costs and expenses of approximately $5.2 million related to overtime
and
other costs to recover lost production as a result of the work stoppage.
Lump-sum
ratification payments totaling $37.5 million (including applicable payroll
taxes) were made in the first half of 2004 in accordance with new collective
bargaining agreements with unions that represent our hourly associates at six
of
our locations in the U.S. These lump-sum payments relate to future service
of
our hourly associates. Through 2005, we expensed $21.2 million of these
payments, which represented amounts earned in relation to the agreements
including $7.1 million and $7.5 million paid in lieu of base wage increases
in
2005 and 2004, respectively. The remaining $16.3 million relates to amounts
which would be earned during the terms of the agreements and will be amortized
over the remaining lives of the agreements.
In
2003,
productivity gains were partially offset by a $9.3 million charge for an early
retirement program for our hourly associates and a $2.2 million third quarter
charge to adjust costs relating to our salaried workforce.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
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SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
SG&A (including research and development (R&D)) was $199.6 million
in 2005 as compared to $189.7 million in 2004 and $194.0 million
in 2003.
SG&A as a percentage of net sales was 5.9% in 2005 and 5.3% in 2004
and 2003. In addition to higher R&D spending, SG&A in 2005
reflects the cost of AAM’s first-ever restricted stock grants. SG&A in
2005 as compared to 2004 also reflects higher costs incurred to support
our strategic growth initiatives in other countries partially offset
by
lower profit sharing expense as a result of lower earnings. SG&A in
2004 as compared to 2003 includes higher R&D spending offset by lower
profit sharing expense due to lower earnings and changes to our incentive
compensation plans implemented in 2004.
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|
R&D In 2005, R&D spending in product, process and systems increased 7.3% to $73.6 million as compared to $68.6 million in 2004 and $60.7 million in 2003. The focus of this increasing investment is to develop innovative driveline and drivetrain systems and components for passenger cars, light trucks and SUVs in the global marketplace. Product development in this area includes power transfer units, transfer cases, driveline and transmission differentials, multipiece driveshafts, IRDAs and independent front drive axles (IFDAs). We also continue to focus on electronic integration in our existing products. The most recent examples of these initiatives are the electronic SmartBar™ stabilizer based roll-control system, TracRite® GTL electronic differentials and TracRite® EL electronic locking differentials all featured in the Dodge Ram Power Wagon. In addition, we continue to support the development of hybrid vehicle systems. Our efforts in these areas have resulted in the development of prototypes and various configurations of these driveline systems for several OEMs throughout the world. |
OPERATING
INCOME
Operating
income was $105.1 million in 2005 as compared to $284.8 million in 2004 and
$346.3 million in 2003. Operating margin was 3.1% in 2005, 7.9% in 2004 and
9.4%
in 2003. The decreases in operating income and operating margin in 2005 and
2004
were due to the factors discussed in Gross Profit and SG&A.
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NET INTEREST EXPENSE Net interest expense was $27.2 million in 2005, $25.5 million in 2004 and $46.8 million in 2003. Interest expense increased in 2005 due to higher average outstanding borrowings and higher interest rates in 2005 as compared to 2004. Interest expense decreased in 2004 as compared to 2003 due to the favorable impact of our debt refinancing activities in the first quarter of 2004. |
OTHER
INCOME (EXPENSE)
Following
are the components of Other Income (Expense) for 2005, 2004 and 2003:
Debt
refinancing and redemption costs
Debt
refinancing and redemption costs expensed in the first quarter of 2004 are
summarized as follows (dollars in millions):
|
Call
premium on 9.75% Notes
|
$
|
14.6
|
||
|
Write-off
of unamortized discount and debt issuance costs
|
||||
|
9.75%
Notes
|
5.7
|
|||
|
1997
Bank Credit
Facilities
|
3.2
|
|||
|
Debt
refinancing and
redemption costs
|
$
|
23.5
|
||
The
details of the debt refinancing and redemption costs are more fully explained
in
the section entitled “Liquidity and Capital Resources — Capitalization and Debt
Availability.”
Other,
net
This
activity is related principally to the net effect of foreign exchange gains
and
losses.
INCOME
TAX EXPENSE
Income
tax expense was $24.0 million in 2005, $76.3 million in 2004 and $106.1 million
in 2003. Our effective income tax rate was 30.0% in 2005, 32.4% in 2004 and
35.0% in 2003. The decrease in our effective income tax rate in 2005 as compared
to 2004 was primarily due to the impact of federal income tax credits which
do
not vary proportionately with net income. These credits, when applied against
our lower pre-tax income in 2005, had a more significant impact on our effective
tax rate. The decrease in our effective income tax rate in 2004 as compared
to
2003 was primarily due to tax effects related to the recognition of R&D tax
credits, the Medicare Part D subsidy and lower foreign rates.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
NET
INCOME AND EARNINGS PER SHARE (EPS)
Net
income was $56.0 million in 2005 as compared to $159.5 million in 2004 and
$197.1 million in 2003. Diluted earnings were $1.10 per share in 2005 as
compared to $2.98 per share in 2004 and $3.70 per share in 2003. Net income
and
EPS were primarily impacted by the factors discussed in Gross Profit and
SG&A. Additionally, in 2004, net income and EPS include the impact of a
one-time first quarter charge related to debt refinancing and redemption costs
of $15.9 million, net of tax ($23.5 million before tax).
EARNINGS
BEFORE INTEREST EXPENSE, INCOME TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA)
EBITDA
was $293.0 million in 2005 as compared to $432.7 million in 2004 and $513.8
million in 2003. The decrease in EBITDA in 2005 and 2004 were primarily due
to
the factors discussed in Gross Profit and SG&A. In 2004, EBITDA includes the
impact of a one-time first quarter charge of $23.5 million related to debt
refinancing and redemption costs. For an explanation and reconciliation of
EBITDA, refer to the section entitled “Supplemental Financial Data.”
LIQUIDITY
AND CAPITAL RESOURCES
Our
primary liquidity needs are to fund capital expenditures, debt service
obligations, working capital investments and our quarterly cash dividend
program. We believe that operating cash flow and borrowings under our Revolving
Credit Facility will be sufficient to meet these needs in the foreseeable
future.
OPERATING
ACTIVITIES
Net
cash
provided by operating activities was $280.4 million in 2005 as compared to
$453.2 million in 2004 and $496.9 million in 2003. Significant factors impacting
our 2005 operating cash flow as compared to 2004 were:
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|
Lower
net income;
|
||
|
|
Lower
tax deferrals;
|
||
|
|
Higher
inventories;
|
||
|
|
Lower
lump-sum payments per union contracts; and
|
||
|
|
Lower
profit sharing payout.
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Deferred
taxes
The
impact on our operating cash flow as a result of deferring income taxes was
$(1.1) million in 2005, $46.3 million in 2004 and $20.4 million in 2003. Our
tax
deferrals were lower in 2005 as compared to 2004 due to reduced provisions
for
acclerated tax and bonus depreciation and the realization of federal tax credits
utilizable in future years.
Our
deferred tax asset valuation allowances were $31.2 million at year-end 2005,
$32.5 million at year-end 2004 and $34.9 million at year-end 2003. The majority
of our allowances relate to foreign net operating losses and capital allowance
carryforwards. Although these carryforwards do not expire, we considered prior
operating results and future plans, as well as the utilization period of other
temporary differences, in determining the amount of our valuation allowances.
Pension
and other postretirement benefits
We
contributed $34.7 million to our pension trusts in 2005 as compared to $35.7
million in 2004 and $42.1 million in 2003. This funding compares to our annual
pension expense of $41.3 million in 2005, $39.1 million in 2004 and $41.2
million in 2003. We expect our pension funding in 2006 to be in the range of
$30.0 million to $40.0 million.
Our
cash
outlay for other postretirement benefit obligations was $3.5 million in 2005,
$2.7 million in 2004 and $3.9 million in 2003. This compares to our annual
postretirement benefit expense of $70.1 million in 2005, $69.5 million in 2004
and $55.7 million in 2003. We expect our funding of other postretirement benefit
obligations in 2006 to be approximately $5.0 million.
Accounts
receivable
Accounts
receivable at year-end 2005 were $328.0 million as compared to $334.9 million
at
year-end 2004 and $339.2 million at year-end 2003. Accounts receivable were
impacted by reduced sales in the fourth quarter of 2005 as compared to the
fourth quarter of 2004.
Our
accounts receivable allowances were $3.1 million at year-end 2005, $2.5 million
at year-end 2004 and $2.8 million at year-end 2003.
Inventories
At
year-end 2005, inventories were $207.2 million as compared to $196.8 million
at
year-end 2004 and $171.8 million at year-end 2003. Spare parts inventories
increased in these periods as we implemented new product, process and systems
technology initiatives to support ongoing major program launches. In addition,
we managed preventive maintenance strategies to protect against costly
disruptions in operations due to machine downtime.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Our
inventory valuation allowances were $20.3 million at year-end 2005, $12.6
million at year-end 2004 and $14.8 million at year-end 2003. The change in
our
inventory valuation allowances in 2005 as compared to 2004 was primarily due
to
increased reserves for indirect inventories. We continuously monitor and adjust
our allowance as necessary to recognize as an asset only those quantities that
we can reasonably estimate will be used.
Accounts
payable and accrued expenses
The
change in our accounts payable and accrued expenses was a use of cash of $32.2
million in 2005 as compared to a source of cash of $18.9 million in 2004 and
$2.6 million in 2003. Accounts payable were lower at year-end 2005 as compared
to year-end 2004 due to lower inventory purchases and capital expenditures
in
the fourth quarter. Additionally, accrued compensation and benefits were lower
at year-end 2005 as compared to year-end 2004 primarily due to lower profit
sharing accruals.
Accrued
compensation and benefits were lower at year-end 2004 as compared to year-end
2003 primarily due to lower profit sharing accruals, which were more than offset
by increased accounts payable due to higher inventory purchases and capital
expenditures in the fourth quarter.
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INVESTING
ACTIVITIES
Capital
expenditures were $305.7 million in 2005, $240.2 million in 2004
and
$229.1 million in 2003. In addition to ongoing productivity improvements,
our largest capital projects in 2005 included investments for process
development equipment for the GMT 900 program (GM’s next generation
full-size truck and SUV platform which launched in December 2005)
and
expenditures to support the model year 2005 launch of the HUMMER
H3, the
Dodge Ram Mega Cab, GM’s new six speed transmission, and IFDAs for South
Korean automaker Ssangyong Motor Corporation. We also incurred capital
expenditures to support the further expansion of our Guanajuato Gear
&
Axle manufacturing facility in 2005.
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We
expect
our capital spending in 2006 to approximate $260.0 million supporting the 2006
and 2007 model year launch of the GMT 900 program and other major customer
programs. We expect to have expenditures in 2006 that will continue to support
our selective global expansion initiatives with new manufacturing facilities
in
China and Central/Eastern Europe and new equipment to enhance our testing and
validation capabilities at our European Headquarters in Bad Homburg, Germany.
Other major capital projects include the expansion of our Colfor
Manufacturing operations in Minerva, Ohio and expenditures to support
passenger car and crossover vehicle programs in our new and incremental business
backlog.
We
have
invested our capital with the objective of improving quality, productivity
and
long-term profitable growth. Our after-tax return on invested capital (ROIC)
was
5.2 % in 2005, 12.7% in 2004 and 16.1% in 2003. In 2005 and 2004, our ROIC
reflects the impact of lower production volumes, increased costs of steel and
other metallic material prices, voluntary separation programs and the effect
of
debt refinancing activities in the first quarter of 2004. For an explanation
and
reconciliation of ROIC, refer to the section entitled “Supplemental Financial
Data.”
NET
OPERATING CASH FLOW AND FREE CASH FLOW
Net
operating cash flow was a deficit of $25.3 million in 2005 as compared to a
surplus of $213.0 million and $267.8 million in 2004 and 2003, respectively.
Free cash flow was a deficit of $55.7 million in 2005 as compared to surpluses
of $190.0 million in 2004 and $267.8 million in 2003. For an explanation and
reconciliation of net operating cash flow and free cash flow, refer to the
section entitled “Supplemental Financial Data.”
FINANCING
ACTIVITIES
Net
cash
provided by financing activities was $14.8 million in 2005 as compared to a
use
of $211.3 million in 2004 and $262.6 million in 2003. Total debt outstanding
was
$489.2 million at year-end 2005, $448.0 million at year-end 2004 and $449.7
million at year-end 2003. Total debt outstanding increased by $41.2 million
at
year-end 2005 as compared to year-end 2004 primarily due to a decrease in
operating cash flow performance and increased capital expenditures to support
the launch of new business and our global expansion.
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CAPITALIZATION
AND DEBT AVAILABILITY
Our
total capitalization was $1.5 billion at year-end 2005 and $1.4 billion
at
year-end 2004. Our net debt to capital ratio was 32.8% at year-end
2005 as
compared to 31.2% at year-end 2004. For an explanation and reconciliation
of net debt to capital, refer to the section entitled “Supplemental
Financial Data.”
Our
senior unsecured revolving credit facility (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. Together with our
foreign
credit facilities and uncommitted lines of credit, the Revolving
Credit
Facility is our primary source of day-to-day liquidity.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS
The
Revolving Credit Facility is used for general corporate purposes, which included
the refinancing of the previously existing senior secured bank credit facilities
(1997 Bank Credit Facilities) in 2004. We had been amortizing fees and expenses
associated with the 1997 Bank Credit Facilities over the life of the agreement.
In January 2004, the unamortized balance of such fees and expenses of $3.2
million was expensed when we terminated our bank financing commitments under
the
1997 Bank Credit Facilities.
At
December 31, 2005, $575.0 million was available under the Revolving Credit
Facility, which reflected a reduction of $25.0 million for standby letters
of
credit issued against the facility. We also utilize foreign credit facilities
and uncommitted lines of credit to finance working capital needs. At December
31, 2005, $87.1 million was outstanding and $83.9 million was available under
such agreements.
In
February 2004, we issued $250.0 million of 5.25% Senior Notes due February
2014
(5.25% Notes) and $150.0 million of 2.00% Senior Convertible Notes due 2024
(2.00% Convertible Notes) in concurrent private offerings pursuant to Rule
144A
of the Securities Act of 1933. We received net proceeds from these offerings
of
approximately $394.0 million, after deducting discounts and commissions of
the
initial purchasers and other expenses. We used a portion of the net proceeds
to
repurchase $63.0 million, or 1.59 million shares, of our common stock in
privately negotiated transactions. The remainder of the net proceeds was used
to
redeem all $300.0 million of the outstanding 9.75% Senior Subordinated Notes
due
March 2009 (9.75% Notes) at a cost of $314.6 million on March 1, 2004, and
for
other general corporate purposes. In the first quarter of 2004, the $14.6
million call premium and an additional $5.7 million of unamortized discounts
and
debt issuance costs were expensed as a result of this redemption.
The
weighted-average interest rate of our total debt outstanding was 5.0%, 4.8%
and
5.9% during 2005, 2004 and 2003, respectively.
Credit
Ratings
Our
current credit ratings and (outlook) are BBB — (Negative), Ba2 (Negative) and
BBB — (Stable) with Standard & Poors Rating Services, Moody’s Investors
Services and Fitch Ratings, respectively.
Dividend
Program
In
April
2004, AAM’s Board of Directors declared our first quarterly cash dividend as a
public company of $0.15 per share. On an annualized basis, the dividend payout
equates to $0.60 per share. We paid $30.4 million and $23.0 million to
stockholders of record under the quarterly cash dividend program during 2005
and
2004, respectively.
Stock
Repurchase Program
During
2004, AAM’s Board of Directors approved a stock repurchase program under which
we may repurchase up to 5.5 million shares of common stock in the open market
or
in privately negotiated transactions from time to time through the first quarter
of 2006. Including the common stock we acquired in connection with our debt
refinancing activities in the first quarter of 2004, we have repurchased 5.0
million shares of our common stock for $171.0 million under this stock
repurchase program.
Off-Balance
Sheet Arrangements
Our
off-balance sheet financing relates principally to operating leases for certain
facilities and manufacturing machinery and equipment. These operating leases
are
fully disclosed in Note 2 to our consolidated financial statements. Pursuant
to
these operating leases, most of which were initiated prior to year-end 1999,
we
have the opportunity to purchase the underlying machinery and equipment at
specified buy-out dates. We exercised our purchase options for $3.0 million
of
such lease buy-outs in 2003. Remaining lease renewal or repurchase options
are
approximately $106.0 million in 2006, of which $29.9 million has been elected
for repurchase in April 2006. We have no off-balance sheet arrangements with
unconsolidated entities.
Contractual
Obligations
The
following table summarizes payments due on our contractual obligations as of
December 31, 2005:
|
Payments
due by period
|
||||||||||||||||||||||||||||||||||
|
|
Total
|
<1
yr
|
1-3
yrs
|
3-5
yrs
|
>5
yrs
|
|||||||||||||||||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||||||||||||||||||||
|
Long-term
debt
|
$
|
486.8
|
$
|
87.0
|
$
|
—
|
$
|
—
|
$
|
399.8
|
||||||||||||||||||||||||
|
Interest
obligations
(1)
|
263.3
|
16.1
|
32.3
|
32.3
|
182.6
|
|||||||||||||||||||||||||||||
|
Capital
lease obligations
|
2.4
|
0.3
|
0.7
|
0.8
|
0.6
|
|||||||||||||||||||||||||||||
|
Operating
leases
(2)
|
143.6
|
62.8
|
48.4
|
27.4
|
5.0
|
|||||||||||||||||||||||||||||
|
Purchase
obligations
(3)
|
163.1
|
146.8
|
16.3
|
—
|
—
|
|||||||||||||||||||||||||||||
|
Other
long-term liabilities
(4)
|
387.1
|
18.9
|
46.7
|
65.2
|
256.3
|
|||||||||||||||||||||||||||||
|
Total
contractual obligations
|
$
|
1,446.3
|
$
|
331.9
|
$
|
144.4
|
$
|
125.7
|
$
|
844.3
|
||||||||||||||||||||||||
|
(1)
|
Interest
obligations represent future interest payments on our public
debt.
|
|
|
(2)
|
Operating
leases include all lease payments through the end of the contractual
lease
terms, including elections for repurchase options, and exclude any
non-exercised purchase options on such leased
equipment.
|
|
|
(3)
|
Purchase
obligations represent our obligated purchase commitments for capital
expenditures.
|
|
|
(4)
|
Other
long-term liabilities represent our pension and other postretirement
obligations that were actuarially determined through
2015.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS
MARKET
RISK
Our
business and financial results are affected by fluctuations in world financial
markets, including interest rates and currency exchange rates. Our hedging
policy has been developed to manage these risks to an acceptable level based
on
management’s judgment of the appropriate trade-off between risk, opportunity and
cost. We do not hold financial instruments for trading or speculative purposes.
CURRENCY
EXCHANGE RISK
Because
most of our business is denominated in U.S. dollars, we do not currently have
significant exposures relating to currency exchange risk. From time to time,
we
use foreign currency forward contracts to reduce the effects of fluctuations
in
exchange rates, primarily relating to the Euro, Mexican Peso, Pound Sterling,
Brazilian Real and Canadian Dollar. At December 31, 2005, we had currency
forward contracts with a notional amount of $35.7 million outstanding. A 10%
change in any of these individual currencies would not have had a material
impact on our consolidated financial statements in 2005.
Future
business operations and opportunities, including the expansion of our business
outside North America, may further increase the risk that cash flows resulting
from these activities may be adversely affected by changes in currency exchange
rates. If and when appropriate, we intend to manage these risks by utilizing
local currency funding of these expansions and various types of foreign exchange
contracts.
INTEREST
RATE RISK
We
are
exposed to variable interest rates on certain credit facilities. From time
to
time, we use interest rate hedging to reduce the effects of fluctuations in
market interest rates. The pre-tax earnings and cash flow impact of a
one-percentage-point increase in interest rates (approximately 21.2% of our
weighted-average interest rate at December 31, 2005) on our long-term debt
outstanding at year-end 2005 would be approximately $0.9 million.
CYCLICALITY
AND SEASONALITY
Our
operations are cyclical because they are directly related to worldwide
automotive production, which is itself cyclical and dependent on general
economic conditions and other factors. Our business is also moderately seasonal
as our major OEM customers historically have a two-week shutdown of operations
in July and an approximate one-week shutdown in December. In addition, our
OEM
customers have historically incurred lower production rates in the third quarter
as model changes enter production. Accordingly, our third quarter and fourth
quarter results may reflect these trends.
LITIGATION
AND ENVIRONMENTAL MATTERS
We
are
involved in various legal proceedings incidental to our business. Although
the
outcome of these matters cannot be predicted with certainty, we do not believe
that any of these matters, individually or in the aggregate, will have a
material adverse effect on our financial condition, results of operations or
cash flows.
We
are
subject to various federal, state, local and foreign environmental and
occupational safety and health laws, regulations and ordinances, including
those
regulating air emissions, water discharge, waste management and environmental
cleanup. We will continue to closely monitor our environmental conditions to
ensure that we are in compliance with all laws, regulations and ordinances.
GM
has agreed to indemnify and hold us harmless against certain environmental
conditions existing prior to our asset purchase from GM on March 1, 1994. GM’s
indemnification obligations terminated on March 1, 2004 with respect to new
claims that may arise against GM. We have made, and will continue to make,
capital and other expenditures (including recurring administrative costs) to
comply with environmental requirements. Such expenditures were not significant
during 2005, nor do we expect such expenditures to be significant in 2006.
EFFECT
OF NEW ACCOUNTING STANDARDS
FASB
STATEMENT NO. 123 (REVISED 2004)
In
December 2004, the FASB issued Statement No. 123(R),
“
Share-Based
Payment
.”
FASB
Statement No. 123(R) replaces FASB Statement No. 123,
“
Accounting
for Stock-Based Compensation
”
and
supersedes APB Opinion No. 25,
“
Accounting
for Stock Issued to Employees
.”
The
revised statement requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements and measured on
the
fair value of the equity or liability instruments issued. Effective April 14,
2005, the Securities and Exchange Commission issued a new rule that amends
the
compliance dates for companies to implement the revised statement to the
beginning of their next fiscal year after June 15, 2005, which for AAM is
January 1, 2006. AAM currently estimates that its stock-based compensation
expense will increase by approximately $10.0 million in 2006.
On
December 31, 2005 we accelerated the vesting of certain “under water” stock
options in response to the required adoption of FASB Statement No. 123(R) on
January 1, 2006. As a result of the vesting acceleration, approximately 1.8
million shares became immediately exercisable in full to the extent that the
market price of the underlying stock exceeded the exercise price of the options.
The pro forma expense is reflected in our “Stock-Based Compensation” disclosure
included within Note 1 to our consolidated financial statements. The
acceleration was intended to eliminate future compensation expense with respect
to the “under water” stock options that we would otherwise recognize under our
adoption of FASB Statement No. 123(R).
MANAGEMENT’S
DISCUSSION AND ANALYSIS
CRITICAL
ACCOUNTING POLICIES
In
order
to prepare consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP), we are
required to make estimates and assumptions that affect the reported amounts
and
disclosures in our consolidated financial statements. These estimates are
subject to an inherent degree of uncertainty and actual results could differ
from our estimates.
Other
items in our consolidated financial statements require estimation. In our
judgment, they are not as critical as those disclosed herein. We have discussed
and reviewed our critical accounting policies disclosure with the Audit
Committee of our Board of Directors.
PENSION
AND OTHER POSTRETIREMENT BENEFITS
In
calculating our liabilities and expenses related to pension and other
postretirement benefits, key assumptions include the discount rate, expected
long-term rate of return on plan assets and rates of increase in compensation
and health care costs.
The
discount rates used in the valuation of our U.S. pension and other
postretirement benefit obligations were based on an actuarial review of a
hypothetical portfolio of long-term, high quality corporate bonds matched
against our expected payment stream. In 2005, the discount rates determined
on
that basis were 5.8% for the valuation of our pension and 5.9% for the valuation
of our other postretirement benefit obligations. The discount rate used in
the
valuation of our foreign pension obligation was based on a review of long-term
bonds, including published indices in the applicable market. In 2005, the
discount rate determined on that basis was 5.0%. The expected long-term rate
of
return on our plan assets was 8.0% in 2005. We developed this rate of return
assumption based on a review of long-term historical returns for the asset
classes represented within our portfolio. The asset allocation for our plans
was
developed in consideration of the demographics of the plan participants and
expected payment stream of the liability. Our investment policy allocates 65-70%
of the plans’ assets to equity securities, with the remainder invested in fixed
income securities and cash. The rates of increase in compensation and health
care costs are based on current market conditions, inflationary expectations
and
historical information.
All
of
our assumptions were developed in consultation with our actuarial service
providers. While we believe that we have selected reasonable assumptions for
the
valuation of our pension and other postretirement benefits obligations at
year-end 2005, actual trends could result in materially different valuations.
The
effect on our pension plans of a 0.5% decrease in both the discount rate and
expected return on assets is shown below as of September 30, 2005, our valuation
date.
|
|
|
|
||||||||||||||
|
|
|
|
Expected
|
|
||||||||||||
|
|
|
|
|
|
Discount
|
|
|
Return
on
|
|
|||||||
|
|
|
|
|
|
Rate
|
|
|
Assets
|
||||||||
|
|
(Dollars
in millions)
|
|||||||||||||||
|
Decline
in funded status
|
$
|
50.2
|
N/A
|
|||||||||||||
|
Reduction
in equity
|
$
|
52.4
|
N/A
|
|||||||||||||
|
Increase
in 2005 expense
|
$
|
6.7
|
$
|
1.7
|
||||||||||||
No
changes in benefit levels and no changes in the amortization of gains or losses
have been assumed.
A
9%
annual increase in the per-capita cost of covered health care benefits was
assumed for 2006. The rate was assumed to decrease gradually to 5% for 2012
and
remain at that level thereafter. A 0.5% decrease in the discount rate for our
other postretirement benefits would have increased total service and interest
cost by $8.8 million in 2005. A one-percentage-point increase in the assumed
health care trend rate would have increased total service and interest cost
in
2005 and the postretirement obligation at December 31, 2005 by $16.3 million
and
$107.3 million, respectively.
ACCOUNTS
RECEIVABLE ALLOWANCES
The
scope
of our relationships with certain customers, such as GM and DaimlerChrysler,
is
inherently complex and, from time to time, we identify differences in our
valuation of receivables due from these customers. Differences in the quantity
of parts processed as received by customers and the quantity of parts shipped
by
AAM is one major type of such difference. Price differences can arise when
we
and our customer agree on a price change but the customer’s pricing database
does not reflect the commercial agreement. In these instances, revenue is fixed
and determinable, but payment could fall outside our normal payment terms as
we
work through the process of resolving these differences.
All
of
our transactions with our customers occur within the parameters of a purchase
order which makes the price fixed and determinable. Because of the inherently
complex nature of our supply relationships with our customers, from time to
time
we encounter situations that were not contemplated in the purchase order. As
a
result, we sometimes enter into non-routine agreements outside the original
scope of the purchase order. These agreements may be temporary, are fixed and
determinable, and often have payment terms that are different than our normal
terms. We
MANAGEMENT’S
DISCUSSION AND ANALYSIS
recognize
the revenue or cost recovery from such arrangements in accordance with the
commercial agreement.
We
track
the aging of uncollected billings and adjust our accounts receivable allowances
on a quarterly basis as necessary based on our evaluation of the probability
of
collection. We recognize revenue or cost recoveries in accordance with our
understanding of a commercial agreement.
While
we
believe that we have made an appropriate valuation of our accounts receivable
due from GM, DaimlerChrysler and other customers for accounting purposes,
unforeseen changes in our ability to enforce commercial agreements or collect
aged receivables may result in actual collections that differ materially from
current estimates.
VALUATION
OF INDIRECT INVENTORIES
As
part
of our strategy to control our investment in working capital and manage the
risk
of excess and obsolete inventory, we generally do not maintain large balances
of
productive raw materials, work-in-process or finished goods inventories.
Instead, we utilize lean manufacturing techniques and coordinate our daily
production activities to meet our daily customer delivery requirements. The
ability to address plant maintenance issues on a real-time basis is a critical
element of our ability to pursue such an operational strategy. Our machinery
and
equipment may run for long periods of time without disruption and suddenly
fail
to operate as intended. In addition, certain repair parts required to address
such maintenance requirements may be difficult or cost prohibitive to source
on
a real-time basis.
To
facilitate our continuous preventive maintenance strategies and to protect
against costly disruptions in operations due to machine downtime, we carry
a
significant investment in inherently slow-moving machine repair parts and other
maintenance materials and supplies. At December 31, 2005, such indirect
inventories comprised approximately 39% of our total gross inventories. For
inventory valuation purposes, we evaluate our usage of such slow-moving
inventory on a quarterly basis by part number and adjust our inventory valuation
allowances as necessary to recognize as an asset only those quantities that
we
can reasonably estimate will be used. We have used the same approach in 2005
and
2004 to evaluate the adequacy of our indirect inventory valuation allowances.
While
we
believe that we have made an appropriate valuation of such inventories for
accounting purposes, unforeseen changes in inventory usage requirements,
manufacturing processes, maintenance and repair techniques, or inventory control
may result in actual usage of such inventories that differ materially from
current estimates.
ESTIMATED
USEFUL LIVES FOR DEPRECIATION
At
December 31, 2005, approximately 81% of our capitalized investment in property,
plant and equipment, or $2.3 billion, was related to productive machinery and
equipment used in support of our manufacturing operations. The selection of
appropriate useful life estimates for such machinery and equipment is a critical
element of our ability to properly match the cost of such assets with the
operating profits and cash flow generated by their use. We currently depreciate
productive machinery and equipment on the straight-line method using composite
useful life estimates up to 15 years.
While
we
believe that the useful life estimates currently being used for depreciation
purposes reasonably approximate the period of time we will use such assets
in
our operations, unforeseen changes in product design and technology standards
or
cost, quality and delivery requirements may result in actual useful lives that
differ materially from the current estimates.
VALUATION
OF DEFERRED TAX ASSETS AND OTHER TAX LIABILITIES
Because
we operate in many different geographic locations, including several foreign,
state and local tax jurisdictions, the evaluation of our ability to use all
recognized deferred tax assets is inherently complex. In assessing our ability
to realize such deferred tax assets, we review the scheduled reversal of
deferred tax liabilities, the projections of taxable income in future periods
and the effectiveness of various tax planning strategies in making our
assessment. Our consideration of these matters, including the determination
of
our other tax liabilities, requires significant management judgment.
While
we
believe we have made appropriate valuations of our deferred tax assets,
unforeseen changes in tax legislation, regulatory activities, audit results,
operating results, financing strategies, organization structure and other
related matters may result in material changes in our deferred tax asset
valuation allowances.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
FORWARD-LOOKING
INFORMATION
INFORMATION
Certain
statements in this MD&A and elsewhere in this Annual 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
Annual 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 GM, DaimlerChrysler or other
customers;
|
||
|
|
|
reduced
demand for our customers’ products (particularly light trucks and SUVs
produced by GM and DaimlerChrysler);
|
|
|
|
|
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;
|
|
|
|
|
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;
|
||
|
|
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;
|
|
|
|
|
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.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
SUPPLEMENTAL
FINANCIAL DATA
The
following supplemental financial data presented for the years ended December
31,
2005, 2004 and 2003 are reconciliations of non-GAAP financial measures, which
are intended to facilitate analysis of our business and operating performance.
This information is not and should not be viewed as a substitute for financial
measures determined under GAAP. Other companies may calculate these non-GAAP
financial measures differently.
Earnings
Before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA)
|
|
|
|
2005
|
|
2004
|
|
2003
|
|||||||||||||||
|
|
|
(Dollars
in millions)
|
||||||||||||||||||||
|
Net
income
|
$
|
56.0
|
$
|
159.5
|
$
|
197.1
|
||||||||||||||||
|
Interest
expense
|
27.9
|
25.8
|
47.5
|
|||||||||||||||||||
|
Income
taxes
|
24.0
|
76.3
|
106.1
|
|||||||||||||||||||
|
Depreciation
and amortization
|
185.1
|
171.1
|
163.1
|
|||||||||||||||||||
|
EBITDA
|
$
|
293.0
|
$
|
432.7
|
$
|
513.8
|
||||||||||||||||
We
believe EBITDA is a meaningful measure of performance as it is commonly utilized
by management and investors to analyze operating performance and entity
valuation. Our management, the investment community and the banking institutions
routinely use EBITDA, together with other measures, to measure our operating
performance relative to other Tier I automotive suppliers. EBITDA should not
be
construed as income from operations, net income or cash flow from operating
activities as determined under GAAP.
Net
Operating Cash Flow and Free Cash Flow
|
2005
|
|
2004
|
|
2003
|
|||||||||||||||
|
(Dollars
in millions)
|
|||||||||||||||||||
|
Net
cash flow provided by operating activities
|
$ |
|
280.4
|
$ |
|
453.2
|
$ |
|
496.9
|
||||||||||
|
Less:
Purchases of property, plant and equipment
|
305.7
|
240.2
|
229.1
|
||||||||||||||||
|
Net
operating cash flow
|
(25.3
|
)
|
213.0
|
267.8
|
|||||||||||||||
|
Less:
Dividends paid
|
(30.4
|
)
|
(23.0
|
)
|
—
|
||||||||||||||
|
Free
cash flow
|
$ |
|
(55.7
|
)
|
$ |
|
190.0
|
$ |
|
267.8
|
|||||||||
We
believe net operating cash flow and free cash flow are meaningful measures
as
they are commonly utilized by management and investors to assess our ability
to
generate cash flow from business operations to repay debt and return capital
to
our stockholders. Net operating cash flow is also a key metric used in our
calculation of incentive compensation.
After-Tax
Return on Invested Capital (ROIC)
|
|
2005
|
|
|
2004
|
|
|
2003
|
||||||||||||
|
|
(Dollars
in millions)
|
||||||||||||||||||
|
Net
income
|
$
|
56.0
|
$
|
159.5
|
$
|
197.1
|
|||||||||||||
|
Add:
After-tax net interest expense
(1)
|
19.0
|
17.2
|
30.4
|
||||||||||||||||
|
After-tax
return
|
75.0
|
176.7
|
227.5
|
||||||||||||||||
|
Net
debt
(2)
|
485.5
|
433.6
|
437.3
|
||||||||||||||||
|
Add:
Stockholders’ equity
|
994.8
|
955.5
|
954.7
|
||||||||||||||||
|
Invested
capital
|
|||||||||||||||||||
|
End of year
|
1,480.3
|
1,389.1
|
1,392.0
|
||||||||||||||||
|
Beginning of year
|
1,389.1
|
1,392.0
|
1,428.3
|
||||||||||||||||
|
Average
invested capital
(3)
|
1,434.7
|
1,390.6
|
1,410.2
|
||||||||||||||||
|
ROIC
(4)
|
5.2
|
%
|
12.7
|
%
|
16.1
|
%
|
|||||||||||||
|
(1)
|
After-tax
net interest expense is equal to tax effecting net interest expense
by the
applicable effective income tax rate as disclosed in Note 7 to the
consolidated financial statements.
|
|
|
(2)
|
Net
debt is equal to total debt less cash and cash equivalents as reconciled
in the net debt to capital table appearing on this
page.
|
|
|
(3)
|
Average
invested capital is equal to the average of beginning and ending
invested
capital.
|
|
|
(4)
|
ROIC
is equal to after-tax return divided by average invested
capital.
|
We
believe ROIC is a meaningful overall measure of business performance because
it
reflects our earnings performance relative to our investment level. ROIC is
also
a key metric used in our calculation of incentive compensation.
Net
Debt to Capital
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|||||||||
|
|
|
|
(Dollars
in millions)
|
||||||||||||||||
|
Total
debt
|
$ |
|
489.2
|
$ |
|
448.0
|
|
449.7
|
|||||||||||
|
Less:
Cash and cash equivalents
|
3.7
|
14.4
|
12.4
|
||||||||||||||||
|
Net
debt
|
485.5
|
433.6
|
437.3
|
||||||||||||||||
|
Add:
Stockholders’ equity
|
994.8
|
955.5
|
954.7
|
||||||||||||||||
|
Invested
capital
|
1,480.3
|
1,389.1
|
1,392.0
|
||||||||||||||||
|
Net
debt to capital
(1)
|
32.8
|
%
|
31.2
|
%
|
31.4
|
%
|
|||||||||||||
|
(1)
|
Net
debt to capital is equal to net debt divided by invested
capital.
|
We
believe net debt to capital is a meaningful measure of financial condition
as it
is commonly utilized by management, investors and creditors to assess relative
capital structure risk.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We
are
responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to provide
reasonable assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial statements.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2005. In making this assessment, we used the
criteria established in
Internal
Control—Integrated Framework
issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Based
on
our assessment, we believe that as of December 31, 2005, our internal control
over financial reporting is effective based on those criteria.
Our
independent auditors have issued an audit report on our assessment of our
internal control over financial reporting. This report appears on page 29.
|
/s/
Richard E. Dauch
|
/s/
Michael K. Simonte
|
|
| Richard E. Dauch | Michael K. Simonte | |
|
Co-Founder,
Chairman of the Board &
|
Vice
President — Finance &
|
|
|
Chief
Executive Officer
|
Chief
Financial Officer
|
|
|
February
3, 2006
|
(also
in the capacity of Chief Accounting Officer)
|
|
|
February
3, 2006
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of American Axle & Manufacturing
Holdings, Inc.:
We
have
audited the accompanying consolidated balance sheets of American Axle &
Manufacturing Holdings, Inc. and its subsidiaries (the Company) as of December
31, 2005 and 2004, and the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of American Axle & Manufacturing Holdings,
Inc. and its subsidiaries as of December 31, 2005 and 2004, and the results
of
their operations and their cash flows for each of the three years in the period
ended December 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of American Axle &
Manufacturing Holdings, Inc. and its subsidiaries internal control over
financial reporting as of December 31, 2005, based on the criteria established
in
Internal
Control—Integrated Framework
issued
by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 3, 2006 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/
Deloitte & Touche LLP
Deloitte
& Touche LLP
Detroit, Michigan
Detroit, Michigan
February
3, 2006
MANAGEMENT’S
DISCUSSION AND ANALYSIS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders of American Axle & Manufacturing
Holdings, Inc.:
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting, that American Axle &
Manufacturing Holdings, Inc. and its subsidiaries (the Company) maintained
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in
Internal
Control — Integrated Framework
issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by
the
company’s Board of Directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2005, is fairly stated,
in
all material respects, based on criteria established in
Internal
Control — Integrated Framework
issued
by
the Committee of Sponsoring Organizations of the Treadway Commission. Also
in
our opinion, the Company maintained in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in
Internal
Control — Integrated Framework
issued
by
the Committee of Sponsoring Organizations of the Treadway Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of
and
for the year ended December 31, 2005 of the Company and our report dated
February 3, 2006 expressed an unqualified opinion on those financial statements.
/s/
Deloitte & Touche LLP
Deloitte
& Touche LLP
Detroit, Michigan
Detroit, Michigan
February
3, 2006
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
Consolidated
Statements of Income
Year
Ended December 31,
(In
millions, except per share data)
|
|
2005
|
|
2004
|
|
2003
|
||||||||||||||
|
Net
sales
|
$
|
3,387.3
|
$
|
3,599.6
|
$
|
3,682.7
|
|||||||||||||
|
Cost
of goods sold
|
3,082.6
|
3,125.1
|
3,142.4
|
||||||||||||||||
|
Gross
profit
|
304.7
|
474.5
|
540.3
|
||||||||||||||||
|
Selling,
general and administrative expenses
|
199.6
|
189.7
|
194.0
|
||||||||||||||||
|
Operating
income
|
105.1
|
284.8
|
346.3
|
||||||||||||||||
|
Net
interest expense
|
(27.2
|
)
|
(25.5
|
)
|
(46.8
|
)
|
|||||||||||||
|
Other
income (expense)
|
|||||||||||||||||||
|
Debt
refinancing and redemption
costs
|
—
|
(23.5
|
)
|
—
|
|||||||||||||||
|
Other,
net
|
2.1
|
—
|
3.7
|
||||||||||||||||
|
Income
before income taxes
|
80.0
|
235.8
|
303.2
|
||||||||||||||||
|
Income
taxes
|
24.0
|
76.3
|
106.1
|
||||||||||||||||
|
Net
income
|
$
|
56.0
|
$
|
159.5
|
$
|
197.1
|
|||||||||||||
|
Basic
earnings per share
|
$
|
1.12
|
$
|
3.09
|
$
|
3.84
|
|||||||||||||
|
Diluted
earnings per share
|
$
|
1.10
|
$
|
2.98
|
$
|
3.70
|
|||||||||||||
See
accompanying notes to consolidated financial statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
Consolidated
Balance Sheets
December
31,
(In
millions, except per share data)
|
|
|
|
2005
|
|
|
2004
|
|||||||
|
Assets
|
|||||||||||||
|
Current
assets
|
|||||||||||||
|
Cash and cash equivalents
|
$
|
3.7
|
$
|
14.4
|
|||||||||
|
Accounts receivable, net of allowances of $3.1 million in 2005 and
$2.5
million in 2004
|
328.0
|
334.9
|
|||||||||||
|
Inventories, net
|
207.2
|
196.8
|
|||||||||||
|
Prepaid expenses and other
|
45.5
|
39.1
|
|||||||||||
|
Deferred income taxes
|
17.0
|
7.4
|
|||||||||||
|
Total
current assets
|
601.4
|
592.6
|
|||||||||||
|
Property,
plant and equipment, net
|
1,836.0
|
1,713.0
|
|||||||||||
|
Deferred
income taxes
|
3.0
|
6.8
|
|||||||||||
|
Goodwill
|
147.8
|
147.8
|
|||||||||||
|
Other
assets and deferred charges
|
78.4
|
78.6
|
|||||||||||
|
Total
assets
|
$
|
2,666.6
|
$
|
2,538.8
|
|||||||||
|
Liabilities
and Stockholders’ Equity
|
|||||||||||||
|
Current
liabilities
|
|||||||||||||
|
Accounts payable
|
$
|
338.5
|
$
|
349.3
|
|||||||||
|
Trade payable program liability
|
42.6
|
49.3
|
|||||||||||
|
Accrued compensation and benefits
|
115.3
|
128.4
|
|||||||||||
|
Other accrued expenses
|
52.8
|
58.6
|
|||||||||||
|
Total
current liabilities
|
549.2
|
585.6
|
|||||||||||
|
Long-term
debt
|
489.2
|
448.0
|
|||||||||||
|
Deferred
income taxes
|
116.1
|
114.5
|
|||||||||||
|
Postretirement
benefits and other long-term liabilities
|
517.3
|
435.2
|
|||||||||||
|
Total
liabilities
|
$ |
1,671.8
|
$ |
1,583.3
|
|||||||||
|
Stockholders’
Equity
|
|||||||||||||
|
Series A junior participating preferred stock, par value $0.01 per
share;
0.1 million shares authorized; no shares outstanding in 2005 or
2004
|
—
|
—
|
|||||||||||
|
Preferred stock, par value $0.01 per share; 10.0 million shares
authorized; no shares outstanding in 2005 or 2004
|
—
|
—
|
|||||||||||
|
Common stock, par value $0.01 per share; 150.0 million shares authorized;
55.4 million and 54.8 million shares issued in 2005 and 2004,
respectively
|
0.5
|
0.5
|
|||||||||||
|
Series common stock, par value $0.01 per share; 40.0 million shares
authorized; no shares outstanding in 2005 or 2004
|
—
|
—
|
|||||||||||
|
Paid-in capital
|
385.6
|
357.6
|
|||||||||||
|
Retained earnings
|
843.5
|
817.9
|
|||||||||||
|
Treasury stock at cost, 5.1 million shares in both 2005 &
2004
|
(171.7
|
)
|
(171.7
|
)
|
|||||||||
|
Unearned compensation
|
(14.8
|
)
|
—
|
||||||||||
|
Accumulated other comprehensive loss, net of tax
|
|||||||||||||
|
Minimum pension liability adjustments
|
(52.6
|
)
|
(47.1
|
)
|
|||||||||
|
Foreign currency translation adjustments
|
3.9
|
(2.2
|
)
|
||||||||||
|
Unrecognized gain on derivatives
|
0.4
|
0.5
|
|||||||||||
|
Total
stockholders’ equity
|
994.8
|
955.5
|
|||||||||||
|
Total
liabilities and stockholders’ equity
|
$
|
2,666.6
|
$
|
2,538.8
|
|||||||||
See
accompanying notes to consolidated financial statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
Consolidated
Statements of Cash Flows
Year
Ended December 31,
(In
millions)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|||||||||||
|
Operating
activities
|
|||||||||||||||||||
|
Net
income
|
$
|
56.0
|
$
|
159.5
|
$
|
197.1
|
|||||||||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|||||||||||||||||||
|
Depreciation and amortization
|
185.1
|
171.1
|
163.1
|
||||||||||||||||
|
Deferred income taxes
|
(1.1
|
)
|
46.3
|
20.4
|
|||||||||||||||
|
Stock-based compensation
|
5.6
|
—
|
—
|
||||||||||||||||
|
Pensions and other postretirement benefits, net of
contributions
|
72.0
|
72.1
|
51.9
|
||||||||||||||||
|
Loss on retirement of equipment
|
7.0
|
9.2
|
3.5
|
||||||||||||||||
|
Debt refinancing and redemption costs
|
—
|
23.5
|
—
|
||||||||||||||||
|
Changes in operating assets and liabilities
|
|||||||||||||||||||
|
Accounts receivable
|
6.5
|
7.2
|
(2.1
|
)
|
|||||||||||||||
|
Inventories
|
(10.6
|
)
|
(23.7
|
)
|
4.1
|
||||||||||||||
|
Accounts payable and accrued expenses
|
(32.2
|
)
|
18.9
|
2.6
|
|||||||||||||||
|
Other assets and liabilities
|
(7.9
|
)
|
(30.9
|
)
|
56.3
|
||||||||||||||
|
Net
cash provided by operating activities
|
280.4
|
453.2
|
496.9
|
||||||||||||||||
|
Investing
activities
|
|||||||||||||||||||
|
Purchases
of property, plant and equipment
|
(305.7
|
)
|
(240.2
|
)
|
(229.1
|
)
|
|||||||||||||
|
Purchase
buyouts of leased equipment
|
—
|
—
|
(3.0
|
)
|
|||||||||||||||
|
Net
cash used in investing activities
|
(305.7
|
)
|
(240.2
|
)
|
(232.1
|
)
|
|||||||||||||
|
Financing
activities
|
|||||||||||||||||||
|
Net
borrowings (repayments) under revolving credit facilities
|
49.0
|
(81.9
|
)
|
87.5
|
|||||||||||||||
|
Proceeds
from issuance of long-term debt
|
—
|
399.7
|
—
|
||||||||||||||||
|
Redemption
of 9.75% Notes
|
—
|
(314.6
|
)
|
—
|
|||||||||||||||
|
Payments
of long-term debt and capital lease obligations
|
(8.4
|
)
|
(24.4
|
)
|
(375.2
|
)
|
|||||||||||||
|
Debt
issuance costs
|
—
|
(9.7
|
)
|
—
|
|||||||||||||||
|
Employee
stock option exercises
|
4.6
|
13.6
|
25.1
|
||||||||||||||||
|
Dividends
paid
|
(30.4
|
)
|
(23.0
|
)
|
—
|
||||||||||||||
|
Purchase
of treasury stock
|
—
|
(171.0
|
)
|
—
|
|||||||||||||||
|
Net
cash provided by (used in) financing activities
|
14.8
|
(211.3
|
)
|
(262.6
|
)
|
||||||||||||||
|
Effect
of exchange rate changes on cash
|
(0.2
|
)
|
0.3
|
0.8
|
|||||||||||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(10.7
|
)
|
2.0
|
3.0
|
|||||||||||||||
|
Cash
and cash equivalents at beginning of year
|
14.4
|
12.4
|
9.4
|
||||||||||||||||
|
Cash
and cash equivalents at end of year
|
$
|
3.7
|
$
|
14.4
|
$
|
12.4
|
|||||||||||||
|
Supplemental
cash flow information
|
|||||||||||||||||||
|
Interest
paid
|
$
|
31.3
|
$
|
33.6
|
$
|
50.1
|
|||||||||||||
|
Income
taxes paid, net of refunds
|
$
|
35.7
|
$
|
32.2
|
$
|
34.2
|
|||||||||||||
See
accompanying notes to consolidated financial statements.
AMERICAN
AXLE & MANUFACTURING HOLDINGS, INC.
Consolidated
Statements of Stockholders’ Equity
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
||||||||
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
||||||||||
|
|
|
Shares
|
|
Par
|
|
Paid-in
|
|
Retained
|
|
Treasury
|
|
Unearned
|
|
Comprehensive
|
|
Comprehensive
|
|
||||||||
|
|
|
Outstanding
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Stock
|
|
Compensation
|
|
Loss
|
|
Income
|
|||||||||
|
Balance
at January 1, 2003
|
49.7
|
$
|
0.5
|
$
|
279.0
|
$
|
484.3
|
$
|
(0.7
|
)
|
$ |
—
|
$
|
(59.5
|
)
|
||||||||||
|
Net
income
|
197.1
|
$
|
197.1
|
||||||||||||||||||||||
|
Unrecognized
gain on derivatives, net
|
1.0
|
1.
0
|
|||||||||||||||||||||||
|
Foreign
currency translation, net
|
0.7
|
0.7
|
|||||||||||||||||||||||
|
Minimum
pension liability adjustment, net
|
(4.9
|
)
|
(4.9
|
)
|
|||||||||||||||||||||
|
Comprehensive
income
|
$
|
193.9
|
|||||||||||||||||||||||
|
Exercise
of stock options, including tax benefit
|
3.9
|
57.2
|
|||||||||||||||||||||||
|
Balance
at December 31 , 2003
|
53.6
|
0.5
|
336.2
|
681.4
|
(0.7
|
)
|
—
|
(62.7
|
)
|
||||||||||||||||
|
Net
income
|
159.5
|
$
|
159.5
|
||||||||||||||||||||||
|
Unrecognized
gain on derivatives, net
|
1.0
|
1.0
|
|||||||||||||||||||||||
|
Foreign
currency translation, net
|
3.9
|
3.9
|
|||||||||||||||||||||||
|
Minimum
pension liability adjustment, net
|
9.0
|
9.0
|
|||||||||||||||||||||||
|
Comprehensive
income
|
$
|
173.4
|
|||||||||||||||||||||||
|
Exercise
of stock options, including tax benefit
|
1.1
|
21.4
|
|||||||||||||||||||||||
|
Dividends
paid
|
(23.0
|
)
|
|||||||||||||||||||||||
|
Purchase
of treasury stock
|
(5.0
|
)
|
(171.0
|
)
|
|||||||||||||||||||||
|
Balance
at December 31, 2004
|
49.7
|
0.5
|
357.6
|
817.9
|
(171.7
|
)
|
—
|
(48.8
|
)
|
||||||||||||||||
|
Net
income
|
56.0
|
$
|
56.0
|
||||||||||||||||||||||
|
Unrecognized
loss on derivatives, net
|
(0.1
|
)
|
(0.1
|
)
|
|||||||||||||||||||||
|
Foreign
currency translation, net
|
6.1
|
6.1
|
|||||||||||||||||||||||
|
Minimum
pension liability, adjustment, net
|
(5.5
|
)
|
(5.5
|
)
|
|||||||||||||||||||||
|
Comprehensive
income
|
$
|
56.5
|
|||||||||||||||||||||||
|
Exercise
of stock options, including tax benefit
|
0.6
|
28.0
|
|||||||||||||||||||||||
|
Dividends
paid
|
(30.4
|
)
|
|||||||||||||||||||||||
|
Stock-based
compensation expense
|
5.6
|
||||||||||||||||||||||||
|
Restricted
stock awards
|
(20.4
|
)
|
|||||||||||||||||||||||
|
Balance
at December 31, 2005
|
50.3
|
$
|
0.5
|
$
|
385.6
|
$
|
843.5
|
$
|
(171.7
|
)
|
$
|
(14.8
|
)
|
$
|
(48.3
|
)
|
|||||||||
See
accompanying notes to consolidated financial statements.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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 powertrain
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 powertrain 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 and Ohio), we also have offices or facilities in Brazil,
China, England, Germany, India, Japan, Mexico, Scotland and South Korea.
PRINCIPLES
OF CONSOLIDATION
We
include the accounts of Holdings and its subsidiaries in our consolidated
financial statements. We eliminate the effects of all intercompany transactions,
balances and profits in our consolidation.
REVENUE
RECOGNITION
We
recognize revenue when products are shipped to our customers and title transfers
under standard commercial terms or when realizable in accordance with our
commercial agreements. If we are uncertain as to whether we will be successful
collecting a balance we determine in accordance with our understanding of a
commercial agreement, we do not recognize the revenue or cost recovery until
such time as the uncertainty is removed.
RESEARCH
AND DEVELOPMENT (R&D) COSTS
We
expense R&D as incurred. R&D spending was $73.6 million, $68.6 million
and $60.7 million in 2005, 2004 and 2003, respectively.
CASH
AND CASH EQUIVALENTS
Cash
and
cash equivalents include all of our cash balances and highly liquid investments
with a maturity of 90 days or less at the time of purchase.
ACCOUNTS
RECEIVABLE
The
majority of our accounts receivable are due from original equipment
manufacturers in the automotive industry. Credit is extended based on the
evaluation of our customers’ financial condition and is reviewed on an ongoing
basis. Trade accounts receivable are generally due on average within 50 days
from the date of shipment and are past due when payment is not received within
the stated terms. Amounts due from customers are stated net of allowances for
doubtful accounts. We determine our allowances by considering factors such
as,
length of time accounts are past due, our previous loss history, the customer’s
ability to pay its obligation to us, and the condition of the general economy
and the industry as a whole. We write-off accounts receivable when they become
uncollectible.
CUSTOMER
TOOLING
Reimbursable
costs incurred for customer tooling are classified as accounts receivable.
In
the event we estimate that the cost of such customer tooling is not deemed
collectible, a loss is recognized at such time.
INVENTORIES
We
state
our inventories at the lower of cost or market. The cost of our U.S. inventories
is determined principally using the last-in, first-out method (LIFO). The cost
of our foreign and indirect inventories is determined principally using the
first-in, first-out method (FIFO). We classify indirect inventories, which
include perishable tooling, repair parts and other materials consumed in the
manufacturing process but not incorporated into our finished products, as raw
materials. When we determine that our gross inventories exceed usage
requirements, or if inventories become obsolete or otherwise not saleable,
we
record a provision for such loss as a component of our inventory accounts.
This
policy predominantly affects our accounting for indirect inventories. At
December 31, 2005 and 2004, inventories were as follows:
|
|
|
|
|
2005
|
|
2004
|
|||||||
|
|
(Dollars
in millions)
|
||||||||||||
|
Raw
materials and work-in-progress
|
$
|
212.2
|
$
|
196.1
|
|||||||||
|
Finished
goods
|
29.9
|
27.6
|
|||||||||||
|
Gross
inventories
|
242.1
|
223.7
|
|||||||||||
|
LIFO
reserve
|
(14.6
|
)
|
(14.3
|
)
|
|||||||||
|
Other
inventory valuation reserves
|
(20.3
|
)
|
(12.6
|
)
|
|||||||||
|
Inventories,
net
|
$
|
207.2
|
$
|
196.8
|
|||||||||
PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment consists of the following:
|
Estimated
|
|
|
|
|
||||||||||||||||
|
|
useful
lives
|
2005
|
2004
|
|||||||||||||||||
|
|
(Years)
|
(Dollars
in millions)
|
||||||||||||||||||
|
Land
|
—
|
$ |
|
24.6
|
$ |
|
23.5
|
|||||||||||||
|
Land
improvements
|
10-15
|
19.6
|
18.7
|
|||||||||||||||||
|
Buildings
and building improvements
|
15-40
|
391.8
|
350.9
|
|||||||||||||||||
|
Machinery
and equipment
|
3-15
|
2,319.5
|
2,045.8
|
|||||||||||||||||
|
Construction
in progress
|
—
|
96.8
|
143.6
|
|||||||||||||||||
|
2,852.3
|
2,582.5
|
|||||||||||||||||||
|
Accumulated
depreciation and amortization
|
(1,016.3
|
)
|
(869.5
|
)
|
||||||||||||||||
|
Property,
plant and equipment, net
|
$ |
|
1,836.0
|
$ |
|
1,713.0
|
||||||||||||||
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
We
state
property, plant and equipment including tooling at cost. Construction in
progress includes costs incurred for the construction of buildings and building
improvements, and machinery and equipment in process. All expenditures for
repair and maintenance costs that do not extend the useful life of the related
asset are expensed in the period incurred.
We
record
depreciation and tooling amortization on the straight-line method over the
estimated useful lives of depreciable assets. Depreciation and tooling
amortization amounted to $158.3 million, $156.6 million and $159.8 million
in
2005, 2004 and 2003, respectively.
IMPAIRMENT
OF LONG-LIVED ASSETS
We
evaluate the carrying value of long-lived assets and long-lived assets to be
disposed for potential impairment on an ongoing basis in accordance with FASB
Statement No. 144,
“
Accounting
for the Impairment or Disposal of Long-Lived Assets
.”
We
consider projected future undiscounted cash flows, trends and other
circumstances in making such estimates and evaluations. If an impairment is
deemed to exist, the carrying amount of the asset is adjusted based on its
fair
value.
GOODWILL
We
record
goodwill when the purchase price of acquired businesses exceeds the value of
their identifiable net tangible and intangible assets acquired. With the
adoption of FASB Statement No. 142,
“
Goodwill
and Other Intangible Assets
,”
on
January 1, 2002, we no longer amortize goodwill. Instead, we periodically
evaluate goodwill for impairment. To meet our ongoing annual obligation, we
completed impairment tests as of December 31, 2005 and 2004 and concluded that
there was no impairment of our goodwill. Goodwill is our only significant
intangible asset.
Goodwill
was reduced $2.4 million in 2003 due to the utilization of a portion of our
foreign net operating loss carryforwards for which deferred tax asset valuation
allowances were established in our initial purchase accounting for the 1998
acquisition of Albion Automotive (Holdings) Limited.
TRADE
PAYABLE PROGRAM LIABILITY
We
offer
our suppliers access to an accelerated supplier payment program through which
they can elect for a designated finance company to advance payment on their
invoices due from us. We gain no advantage on the timing of such payments or
the
amounts due to be paid. The only difference between these obligations and other
trade payables is that we are obligated to pay the finance company on the due
date for such payment established in the terms and conditions of the purchase
order. Our agreement with the finance company calls for us to share in the
discount fees charged to the suppliers by the finance company for any advance
payments made through this program. The fees collected in association with
this
program were negligible for 2005, 2004, and 2003.
STOCK-BASED
COMPENSATION
As
permitted by FASB Statement No. 123,
“
Accounting
for Stock-Based Compensation
,”
we
account for our employee stock options in accordance with APB Opinion No. 25,
“
Accounting
for Stock Issued to Employees
,”
and
related interpretations. Although it is our practice to grant options with
no
intrinsic value, we measure compensation cost as the excess, if any, of the
market price of our common stock at the date of grant over the amount our
associates must pay to acquire the stock.
Had
we
determined compensation cost based upon the fair value of the options at the
grant date consistent with the alternative fair value method set forth in FASB
Statement No. 123, our net income and EPS would have been adjusted to the pro
forma amounts indicated as follows:
|
|
2005
|
|
2004
|
|
2003
|
||||||||||||||
|
(Dollars
in millions, except per share data)
|
|||||||||||||||||||
|
Net
income, as reported
|
$
|
56.0
|
$
|
159.5
|
$
|
197.1
|
|||||||||||||
|
Deduct:
Total employee stock option expense determined under the fair value
method, net of tax
|
(22.3
|
)
|
(16.4
|
)
|
(13.1
|
)
|
|||||||||||||
|
Pro
forma net income
|
$
|
33.7
|
$
|
143.1
|
$
|
184.0
|
|||||||||||||
|
Basic
EPS, as reported
|
$
|
1.12
|
$
|
3.09
|
$
|
3.84
|
|||||||||||||
|
Basic
EPS, pro forma
|
$
|
0.67
|
$
|
2.77
|
$
|
3.59
|
|||||||||||||
|
Diluted
EPS, as reported
|
$
|
1.10
|
$
|
2.98
|
$
|
3.70
|
|||||||||||||
|
Diluted
EPS, pro forma
|
$
|
0.67
|
$
|
2.69
|
$
|
3.50
|
|||||||||||||
We
estimated the fair value of our employee stock options on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
|
|
2005
|
|
2004
|
|
2003
|
||||||||||||||
|
Expected
volatility
|
|
41.64
|
% |
|
44.04
|
% |
|
47.55
|
% | ||||||||||
|
Risk-free
interest rate
|
4.36
|
%
|
3.70
|
%
|
3.50
|
%
|
|||||||||||||
|
Dividend
yield
|
|
2.25
|
%
|
|
None
|
|
None
|
||||||||||||
|
Expected
life of options
|
|
7
years
|
|
7
years
|
|
7
years
|
|||||||||||||
|
Weighted-average
grant-date fair value
|
$
|
10.50
|
$
|
19.83
|
$
|
12.69
|
|||||||||||||
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVES
We
account for derivatives under FASB Statement No. 133, “
Accounting
for Derivative Instruments and Hedging Activities
,
”
as
amended and interpreted. FASB Statement No. 133 requires us to recognize all
derivatives on the balance sheet at fair value. If a derivative qualifies under
FASB Statement No. 133 as a hedge, depending on the nature of the hedge, changes
in the fair value of the derivative are either offset against the change in
fair
value of the hedged assets, liabilities or firm commitments through earnings
or
recognized in other comprehensive income until the hedged item is recognized
in
earnings. The ineffective portion of a derivative’s change in fair value, and
changes in the fair value of derivatives that do not qualify as hedges, are
immediately recognized in earnings.
In
May
2003, the FASB issued Statement No. 149, “
Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities
.
”
FASB
Statement No. 149 amends and clarifies accounting for derivative instruments
and
hedging activities under FASB Statement No. 133. FASB Statement No. 149 is
effective for contracts entered into or modified and for hedging relationships
designated after June 30, 2003 with this guidance applied prospectively. The
adoption of this Statement did not have a significant impact on our results
of
operations or financial position at December 31, 2005 or 2004.
CURRENCY
TRANSLATION
We
translate the assets and liabilities of our foreign subsidiaries to U.S. dollars
at end-of-period exchange rates. We translate the income statement elements
of
our foreign subsidiaries to U.S. dollars at average-period exchange rates.
We
report the effect of translation for our foreign subsidiaries that use the
local
currency as their functional currency as a separate component of stockholders’
equity. Gains and losses resulting from the remeasurement of assets and
liabilities of our foreign subsidiary that uses the U.S. dollar as its
functional currency are reported in current period income. We also report any
gains and losses arising from transactions denominated in a currency other
than
our functional currency in current period income.
USE
OF ESTIMATES
In
order
to prepare consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America (GAAP), we are
required to make estimates and assumptions that affect the reported amounts
and
disclosures in our consolidated financial statements. Actual results could
differ from those estimates.
RECLASSIFICATIONS
We
have
reclassified certain 2004 amounts to conform to the presentation of our 2005
consolidated financial statements.
EFFECT
OF NEW ACCOUNTING STANDARDS
FASB
Statement No. 123 (revised 2004)
In
December 2004, the FASB issued Statement No. 123(R),
“
Share-Based
Payment
.”
FASB
Statement No. 123(R) replaces FASB Statement No. 123, “
Accounting
for Stock-Based Compensation
”
and
supersedes APB Opinion No. 25, “
Accounting
for Stock Issued to Employees.
”
The
revised statement requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements and measured on
the
fair value of the equity or liability instruments issued. Effective April 14,
2005, the Securities and Exchange Commission issued a new rule that amends
the
compliance dates for companies to implement the revised statement to the
beginning of their next fiscal year after June 15, 2005, which for AAM is
January 1, 2006. AAM currently estimates that its stock-based compensation
expense will increase by approximately $10.0 million in 2006.
On
December 31, 2005 we accelerated the vesting of certain “under water” stock
options in response to the required adoption of FASB Statement No. 123(R) on
January 1, 2006. As a result of the vesting acceleration, approximately 1.8
million shares became immediately exercisable in full to the extent that the
market price of the underlying stock exceeded the exercise price of the options.
The pro forma expense is reflected in our “Stock-Based Compensation” disclosure
included within Note 1. The acceleration was intended to eliminate future
compensation expense with respect to the “under water” stock options that we
would otherwise recognize under our adoption of FASB Statement No. 123(R).
2.
LONG-TERM DEBT AND LEASE OBLIGATIONS
Long
term
debt consists of the following:
|
|
2005
|
|
2004
|
||||||||||
|
|
(Dollars
in millions)
|
||||||||||||
|
5.25%
Notes, net of discount
|
$
|
249.7
|
$
|
249.7
|
|||||||||
|
2.00%
Convertible Notes
|
150.0
|
150.0
|
|||||||||||
|
Uncommitted
lines of credit
|
71.5
|
—
|
|||||||||||
|
Foreign
credit facilities and other
|
15.6
|
44.1
|
|||||||||||
|
Capital
lease obligations
|
2.4
|
4.2
|
|||||||||||
|
Long-term
debt
|
$
|
489.2
|
$
|
448.0
|
|||||||||
DEBT
REFINANCING AND REDEMPTION
In
2004,
we entered into our senior unsecured revolving credit facility. The revolving
credit facility, as amended, provides up to $600.0 million of revolving bank
financing commitments through April 2010, (Revolving Credit Facility). The
Revolving Credit Facility is used for general corporate purposes, which included
the refinancing of the previously existing senior secured bank credit facilities
(1997 Bank Credit Facilities). We had been amortizing fees and expenses
associated with the 1997 Bank Credit Facilities over the life of the agreement.
In January 2004, the unamortized balance of such fees and expenses of $3.2
million was expensed when we terminated our bank financing commitments under
the
1997 Bank Credit Facilities.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
In
February 2004, we issued $250.0 million of 5.25% Senior Notes due February
2014
(5.25% Notes) and $150.0 million of 2.00% Senior Convertible Notes due 2024
(2.00% Convertible Notes) in concurrent private offerings pursuant to Rule
144A
of the Securities Act of 1933. We received net proceeds from these offerings
of
approximately $394.0 million, after deducting discounts and commissions of
the
initial purchasers and other expenses. We used a portion of the net proceeds
to
repurchase $63.0 million, or 1.59 million shares, of our common stock in
privately negotiated transactions. The remainder of the net proceeds was used
to
redeem all $300.0 million of the outstanding 9.75% Senior Subordinated Notes
due
March 2009 (9.75% Notes) at a cost of $314.6 million on March 1, 2004, and
for
other general corporate purposes. In the first quarter of 2004, the $14.6
million call premium and an additional $5.7 million of unamortized discounts
and
debt issuance costs were expensed as a result of this redemption.
Debt
refinancing and redemption costs expensed in the first quarter of 2004 are
summarized as follows (dollars in millions):
|
Call
premium on 9.75% Notes
|
$
|
14.6
|
||
|
Write-off
of unamortized discount and debt issuance costs
9.75% Notes
|
5.7
|
|||
|
1997 Bank Credit Facilities
|
3.2
|
|||
|
Debt refinancing and redemption costs
|
$
|
23.5
|
||
REVOLVING
CREDIT FACILITY
Our
Revolving Credit Facility bears interest at rates based on LIBOR or an alternate
base rate, plus an applicable margin. At December 31, 2005, $575.0 million
was
available under the Revolving Credit Facility, which reflected a reduction
of
$25.0 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
such amounts as long-term debt.
5.25%
NOTES
The
5.25%
Notes are senior unsecured obligations of American Axle & Manufacturing,
Inc. (AAM, Inc.) and are fully and unconditionally guaranteed by Holdings.
Holdings has no significant assets other than its 100% ownership of AAM, Inc.
and no subsidiaries other than AAM, Inc.
2.00%
CONVERTIBLE NOTES
The
2.00%
Convertible Notes are senior unsecured obligations of Holdings and are fully
and
unconditionally guaranteed by AAM, Inc. At the option of the holder, under
certain conditions, these notes are convertible through 2024. The conversion
rate is subject to adjustment for certain events, including the payment of
dividends, change of control and other events specified in the indenture. In
October 2004, we gave notice of our irrevocable election to pay cash for the
accreted principal portion of the securities upon conversion.
LEASES
We
lease
certain facilities, machinery and equipment under capital leases expiring at
various dates. Approximately $9.4 million and $22.2 million of such gross asset
cost is included in property, plant and equipment at December 31, 2005 and
2004,
respectively. The weighted-average interest rate on these capital lease
obligations at December 31, 2005 was 7.1%.
We
also
lease certain facilities, machinery and equipment under operating leases
expiring at various dates. Pursuant to these operating leases, we have the
opportunity to purchase the underlying machinery and equipment at specified
buy-out dates. The existing lease renewal or repurchase options are
approximately $106.0 million in 2006, of which $29.9 million has been elected
for repurchase in April 2006. Future minimum payments under noncancelable
operating leases are as follows: $62.8 million in 2006; $24.7 million in 2007;
$23.7 million in 2008, $19.1 million in 2009, $8.3 million in 2010 and $5.0
million thereafter. Our total expense relating to operating leases was $32.2
million, $30.6 million and $33.3 million in 2005, 2004 and 2003, respectively.
UNCOMMITTED
LINES OF CREDIT
In
2005,
we had access to $110.0 million of uncommitted bank lines of credit. At December
31, 2005, $71.5 million was outstanding under such uncommitted bank credit
lines.
FOREIGN
CREDIT FACILITIES
We
utilize local currency credit facilities to finance the operations of certain
foreign subsidiaries. These credit facilities, guaranteed by Holdings and/or
AAM, Inc., expire at various dates through March 2006. At December 31, 2005,
$15.6 million was outstanding under these facilities and an additional $45.4
million was available. At December 31, 2004, $44.1 million was outstanding
and
an additional $14.8 million was available.
DEBT
COVENANTS
The
Revolving Credit Facility contains operating covenants which, among other
things, require us to comply with a leverage ratio and maintain a minimum level
of net worth. The Revolving Credit Facility also limits our ability to incur
certain types of liens and amounts of indebtedness or merge into another
company.
DEBT
MATURITIES
Aggregate
maturities of long-term debt are as follows (dollars in millions):
|
2006
|
$
|
87.3
|
||
|
2007
|
0.3
|
|||
|
2008
|
0.4
|
|||
|
2009
|
0.4
|
|||
|
2010
|
0.4
|
|||
|
Thereafter
|
400.4
|
|||
|
Total
|
$
|
489.2
|
||
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NET
INTEREST EXPENSE
The
following table summarizes supplemental information regarding the components
of
net interest expense as reported in our consolidated statements of income:
|
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
||||||
|
|
|
|
(Dollars
in millions)
|
||||||||||||||||
|
Gross
interest expense
|
$
|
33.6
|
$
|
31.6
|
$
|
53.5
|
|||||||||||||
|
Capitalized
interest
|
(5.7
|
)
|
(5.8
|
)
|
(6.0
|
)
|
|||||||||||||
|
Interest
income
|
(0.7
|
)
|
(0.3
|
)
|
(0.7
|
)
|
|||||||||||||
|
Net
interest expense
|
$
|
27.2
|
$
|
25.5
|
$
|
46.8
|
|||||||||||||
3.
DERIVATIVES AND RISK MANAGEMENT
DERIVATIVE
FINANCIAL INSTRUMENTS
In
the
normal course of business, we are exposed to market risk associated with changes
in foreign currency exchange rates and interest rates. To manage a portion
of
these inherent risks, we purchase certain types of derivative financial
instruments, from time to time, based on management’s judgment of the trade-off
between risk, opportunity and cost. We do not hold or issue derivative financial
instruments for trading or speculative purposes.
CURRENCY
FORWARD CONTRACTS
Because
most of our business is denominated in U.S. dollars, we do not currently have
significant exposures relating to currency exchange risk. From time to time,
we
use foreign currency forward contracts to reduce the effects of fluctuations
in
exchange rates, primarily relating to the Euro, Mexican Peso, Pound Sterling,
Brazilian Real and Canadian Dollar. We had currency forward contracts with
a
notional amount of $35.7 million and $21.0 million outstanding at December
31,
2005 and 2004, respectively.
INTEREST
RATE SWAPS
We
are
exposed to variable interest rates on certain credit facilities. From time
to
time, we use interest rate hedging to reduce the effects of fluctuations in
market interest rates. At December 31, 2005 and 2004, we did not hedge any
of
our interest rate risk through interest rate swaps. At December 31, 2003, we
hedged a portion of our interest rate risk by entering into interest rate swaps
with a notional amount of approximately $26.4 million. These interest rate
swaps, which were first established in 1999, converted variable financing based
on 3-month LIBOR rates into fixed U.S. dollar rates varying from 6.88% to 6.96%
and expired during 2004. Generally, we designate interest rate swaps as
effective cash flow hedges of the related debt and reflect the net cost of
such
agreements as an adjustment to interest expense over the lives of the debt
agreements. The ineffective portion of any such hedges is included in current
earnings to the extent hedges are in place. There were no hedges in place during
2005. The impact of hedge ineffectiveness was not significant during the year
ended December 31, 2004.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
carrying value of our cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates their fair values due to the
short-term maturities of these assets and liabilities. The carrying value of
our
borrowings under the Revolving Credit Facility, the uncommitted lines of credit
and foreign credit facilities approximates their fair value due to the frequent
resetting of the interest rates. We have estimated the fair value of the 5.25%
Notes and the 2.00% Convertible Notes, using available market information,
to be
approximately $195.0 million and
$110.1
million, respectively at December 31, 2005.
CONCENTRATIONS
OF CREDIT RISK
In
the
normal course of business, we provide credit to customers in the automotive
industry. We periodically evaluate the credit worthiness of our customers and
we
maintain reserves for potential credit losses, which, when realized, have been
within the range of our allowances for doubtful accounts. When appropriate,
we
also diversify the concentration of invested cash among different financial
institutions and we monitor the selection of counter parties to other financial
instruments to avoid unnecessary concentrations of credit risk.
Sales
to
General Motors Corporation (GM) were approximately 78%, 80% and 82% of our
total
net sales in 2005, 2004 and 2003, respectively. Accounts receivable due from
GM
were $233.3 million at year-end 2005 and $237.2 million at year-end 2004. Sales
to DaimlerChrysler Corporation (DaimlerChrysler) were approximately 13% of
our
total net sales in 2005, 11% in 2004 and 9% in 2003. Accounts receivable due
from DaimlerChrysler were $66.0 million at year-end 2005 and $51.7 million
at
year-end 2004. No other single customer accounted for more than 10% of our
consolidated net sales in any year presented.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
4.
STOCKHOLDER RIGHTS PLAN
In
September 2003, our Board of Directors adopted a Stockholder Rights Plan (the
Rights Plan) and declared a dividend of one preferred share purchase right
for
each outstanding share of common stock for stockholders of record on September
25, 2003. The Rights Plan provides a reasonable means of safeguarding the
interests of all stockholders against unsolicited takeover attempts at a price
not reflective of its fair value. The Rights Plan is designed to give the Board
of Directors sufficient time to evaluate and respond to an unsolicited takeover
attempt and to encourage anyone or group considering such action to negotiate
first with the Board of Directors.
5.
EMPLOYEE BENEFIT PLANS
PENSION
AND OTHER POSTRETIREMENT BENEFITS
We
sponsor various qualified and non-qualified defined benefit pension plans for
our eligible associates. We maintain hourly and salaried benefit plans that
provide postretirement medical, dental, vision and life benefits to our eligible
retirees and their dependents in the U.S. We also provide benefits under
collective bargaining agreements to a majority of our hourly associates.
Actuarial
valuations of our benefit plans were made as of September 30, 2005 and 2004.
The
principal weighted-average assumptions used in the valuation of our U.S. and
foreign plans appear in the following table. The U.S. discount rate was based
on
an actuarial review of a hypothetical portfolio of long-term, high quality
corporate bonds matched against our expected payment stream. The foreign
discount rate was based on a review of long-term bonds, including published
indices in the applicable market. The assumptions for expected return on plan
assets were based on a review of long-term historical returns for the asset
classes represented within our portfolio. The rates of increase in compensation
and health care costs were based on current market conditions, inflationary
expectations and historical information.
|
Pension
Benefits
|
|
|
Other
Postretirement Benefits
|
|||||||||||||||||||||||||||||||||
|
|
|
2005
|
|
2004
|
|
2003
|
|
|
2005
|
2004
|
2003
|
|||||||||||||||||||||||||
|
U.S.
|
Foreign
|
|
U.S.
|
Foreign
|
|
U.S.
|
Foreign
|
|||||||||||||||||||||||||||||
|
Discount
rate
|
5.80
|
%
|
|
|
5.00
|
%
|
|
|
6.20
|
%
|
|
|
5.75
|
%
|
|
|
6.25
|
%
|
|
|
5.50
|
%
|
|
|
5.90
|
%
|
|
|
6.35
|
%
|
|
|
6.25
|
%
|
||
|
Expected
return on plan assets
|
|
|
8.00
|
%
|
|
|
8.00
|
%
|
|
|
9.00
|
%
|
|
|
8.00
|
%
|
|
|
9.00
|
%
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Rate
of compensation increase
|
|
|
4.25
|
%
|
|
|
3.25
|
%
|
|
|
4.25
|
%
|
|
|
3.50
|
%
|
|
|
4.25
|
%
|
|
|
3.50
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
The
weighted-average asset allocations at September 30, 2005 and 2004, by asset
category appear in the following table. The asset allocation for our plans
was
developed in consideration of the demographics of the plan participants and
expected payment stream of the liability.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
accumulated benefit obligation for all defined benefit pension plans was $535.9
million and $461.0 million at September 30, 2005 and 2004, respectively. The
following table summarizes the changes in benefit obligations and plan assets
and reconciles the funded status of the benefit plans to the net benefit plan
asset (liability):
|
Pension
Benefits
|
Other
Postretirement Benefits
|
||||||||||||||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||||||||||||||
|
(Dollars
in millions)
|
(Dollars
in millions)
|
||||||||||||||||||||||||
|
Change
in benefit obligation
|
|||||||||||||||||||||||||
|
Benefit
obligation at beginning of year
|
$ |
|
486.3
|
$ |
|
416.5
|
$ |
|
418.6
|
$ |
|
397.5
|
|||||||||||||
|
Service
cost
|
32.7
|
32.6
|
38.1
|
39.0
|
|||||||||||||||||||||
|
Interest
cost
|
31.3
|
27.9
|
28.9
|
25.6
|
|||||||||||||||||||||
|
Plan
amendments
|
—
|
21.2
|
(9.7
|
)
|
(9.3
|
)
|
|||||||||||||||||||
|
Actuarial
loss (gain)
|
34.0
|
(5.6
|
)
|
32.4
|
(31.7
|
)
|
|||||||||||||||||||
|
Participant
contributions
|
1.7
|
1.7
|
—
|
—
|
|||||||||||||||||||||
|
Curtailment
|
(1.4
|
)
|
—
|
—
|
—
|
||||||||||||||||||||
|
Benefit
payments
|
(13.8
|
)
|
(14.5
|
)
|
—
|
(2.5
|
)
|
||||||||||||||||||
|
Currency
fluctuations
|
(9.2
|
)
|
6.5
|
(3.2
|
)
|
—
|
|||||||||||||||||||
|
Net
change
|
75.3
|
69.8
|
86.5
|
21.1
|
|||||||||||||||||||||
|
Benefit
obligation at end of year
|
561.6
|
486.3
|
505.1
|
418.6
|
|||||||||||||||||||||
|
Change
in plan assets
|
|||||||||||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
350.6
|
283.5
|
—
|
—
|
|||||||||||||||||||||
|
Actual
return on plan assets
|
47.0
|
35.6
|
—
|
—
|
|||||||||||||||||||||
|
Employer
contributions
|
33.2
|
40.2
|
3.3
|
2.5
|
|||||||||||||||||||||
|
Participant
contributions
|
1.7
|
1.7
|
—
|
—
|
|||||||||||||||||||||
|
Benefit
payments
|
(13.7
|
)
|
(14.5
|
)
|
(3.3
|
)
|
(2.5
|
)
|
|||||||||||||||||
|
Currency
fluctuations
|
(6.1
|
)
|
4.1
|
—
|
—
|
||||||||||||||||||||
|
Net
change
|
62.1
|
67.1
|
—
|
—
|
|||||||||||||||||||||
|
Fair
value of plan assets at end of year
|
412.7
|
350.6
|
—
|
—
|
|||||||||||||||||||||
|
Funded
status — U.S. plans at September 30
|
(120.7
|
)
|
(106.1
|
)
|
(505.1
|
)
|
(418.6
|
)
|
|||||||||||||||||
|
Funded
status — foreign plan at September 30
|
(28.3
|
)
|
(29.6
|
)
|
—
|
—
|
|||||||||||||||||||
|
Unrecognized
actuarial loss
|
117.3
|
108.3
|
129.7
|
99.4
|
|||||||||||||||||||||
|
Unrecognized
prior service cost
|
31.1
|
34.2
|
(19.8
|
)
|
(10.9
|
)
|
|||||||||||||||||||
|
Fourth
quarter contribution
|
5.5
|
4.0
|
0.8
|
0.6
|
|||||||||||||||||||||
|
Net
asset (liability) at December 31
|
$ |
|
4.9
|
$ |
|
10.8
|
$ |
|
(394.4
|
)
|
$ |
|
(329.5
|
)
|
|||||||||||
Amounts
recognized in our balance sheets are as follows:
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
components of net periodic benefit cost are as follows:
|
Pension
Benefits
|
|
Other
Postretirement Benefits
|
|
||||||||||||||||||||||||||||||||||
|
|
|
2005
|
|
2004
|
|
2003
|
|
2005
|
|
2004
|
|
2003
|
|
||||||||||||||||||||||||
|
|
|
(Dollars
in millions)
|
|
(Dollars
in millions)
|
|||||||||||||||||||||||||||||||||
|
Service
cost
|
$ |
|
32.7
|
$ |
|
32.6
|
$ |
|
28.1
|
$ |
|
38.1
|
$ |
|
39.0
|
$ |
|
32.6
|
|||||||||||||||||||
|
Interest
cost
|
31.3
|
27.9
|
23.6
|
28.9
|
25.6
|
20.7
|
|||||||||||||||||||||||||||||||
|
Expected
asset return
|
(30.3
|
)
|
(26.6
|
)
|
(23.6
|
)
|
N/A
|
N/A
|
N/A
|
||||||||||||||||||||||||||||
|
Amortized
loss
|
4.5
|
4.1
|
1.9
|
3.9
|
5.4
|
2.4
|
|||||||||||||||||||||||||||||||
|
Amortized
prior service cost
|
3.1
|
2.5
|
1.7
|
(0.8
|
)
|
(0.5
|
)
|
—
|
|||||||||||||||||||||||||||||
|
Special
termination benefits
|
—
|
—
|
9.3
|
—
|
—
|
—
|
|||||||||||||||||||||||||||||||
|
Other
|
—
|
(1.4
|
)
|
0.2
|
—
|
—
|
—
|
||||||||||||||||||||||||||||||
|
Net
periodic benefit cost
|
$ |
|
41.3
|
$ |
|
39.1
|
$ |
|
41.2
|
$ |
|
70.1
|
$ |
|
69.5
|
$ |
|
55.7
|
|||||||||||||||||||
For
measurement purposes, a 9% annual increase in the per-capita cost of covered
health care benefits was assumed for 2006. The rate was assumed to decrease
gradually to 5% for 2012 and remain at that level thereafter. Health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. A one-percentage-point increase in the assumed health care cost
trend rate would have increased total service and interest cost in 2005 and
the
postretirement obligation at December 31, 2005 by $16.3 million and $107.3
million, respectively. A one-percentage-point decrease in the assumed health
care cost trend rate would have decreased total service and interest cost in
2005 and the postretirement obligation at December 31, 2005 by $12.3 million
and
$82.1 million, respectively.
The
expected future pension and postretirement benefits to be paid for each of
the
next five years and in the aggregate for the succeeding five years thereafter
are as follows: $18.9 million in 2006; $21.5 million in 2007; $25.2 million
in
2008; $30.4 million in 2009; $34.8 million in 2010 and $256.3 million
thereafter. These amounts were estimated using the same assumptions to measure
our 2005 year-end pension and postretirement benefit obligation and include
an
estimate of future employee service.
MEDICARE
PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT OF
2003
During
2003, the Medicare Prescription Drug, Improvement and Modernization Act of
2003
was signed into law. This Act introduces a prescription drug benefit under
Medicare (Medicare Part D) as well as a federal subsidy to sponsors of
postretirement health care benefit plans that provide a benefit that is at
least
actuarially equivalent to Medicare Part D. The effect of the subsidy reduced
our
other postretirement benefit obligation by $28.1 million in 2004, which was
treated as an actuarial gain and is being amortized over the future service
lives of active employees. Our net periodic other postretirement benefit cost
was reduced by $6.0 million and $4.7 million in 2005 and 2004, respectively,
as
a result of the subsidy.
CONTRIBUTIONS
We
expect
our pension funding in 2006 to be in the range of $30.0 million to $40.0 million
and our cash outlay for other postretirement benefit obligations to be
approximately $5.0 million in 2006.
ACCELERATED
ATTRITION PROGRAM
In
accordance with FASB Statement No. 88,
“
Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and
for Termination Benefits
,”
we
recorded a $9.3 million charge in 2003 for hourly associates who were eligible
to participate in an early retirement program. Each hourly associate who elected
to participate received a one-time lump sum payment.
SEVERANCE
OBLIGATIONS AND OTHER POSTEMPLOYMENT BENEFITS
Pursuant
to FASB Statement No. 112,
“
Employers’
Accounting for Postemployment Benefits
,”
we
recorded a $3.4 million charge during the third quarter of 2003 to adjust costs
relating to our salaried workforce.
VOLUNTARY
SAVINGS PLANS
Most
of
our U.S. associates are eligible to participate in voluntary savings plans.
Our
maximum match under these plans is 50% of salaried associates’ contributions up
to 6% of their eligible salary. Matching contributions amounted to $2.6 million
in 2005 and $3.6 million in 2004 and 2003. Under these plans, our common stock
became an investment option for our participants during 2002.
DEFERRED
COMPENSATION PLAN
Certain
U.S. associates are eligible to participate in a non-qualified deferred
compensation plan. Payments of $0.8 million and $0.6 million have been made
in
2005 and 2004, respectively to eligible associates that have elected
distributions. At December 31, 2005 and 2004, our deferred compensation
liability was $13.8 million and $12.7 million, respectively. We recognized
$0.9
million, $1.0 million and $1.3 million of expense related to this deferred
compensation plan in 2005, 2004 and 2003, respectively.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
6.
STOCK OPTIONS
At
December 31, 2005, we have stock options outstanding under three stock
compensation plans approved by our stockholders. Under two of these plans,
a
total of 19.1 million options have been authorized for issuance to our
directors, officers and certain other associates in the form of options, stock
appreciation rights or other awards that are based on the value of our common
stock. We have granted a total of 13.8 million options under these stock
compensation plans through December 31, 2005, which become vested based upon
duration of employment. The vesting of some of these options awarded pursuant
to
one of the plans was accelerated due to the satisfaction of certain annual
or
cumulative performance criteria. At December 31, 2005, 6.9 million of these
options have been exercised.
At
December 31, 2004, there were 0.2 million options held by several of our
officers which were granted in 1997 as a replacement for an incentive
compensation plan established in 1994. These options were immediately vested
and
were exercisable at a weighted-average exercise price per share of approximately
$0.12. All remaining options granted under this plan were exercised during
2005.
The
following table summarizes activity relating to our stock options:
|
|
|
|
|
Weighted-Average
|
|
||||||||
|
|
|
|
Number
of
|
|
|
Exercise
Price
|
|
||||||
|
|
|
|
Shares
|
|
|
Per
Share
|
|||||||
|
|
(In
millions, except per share data)
|
||||||||||||
|
Outstanding
at January 1, 2003
|
8.9
|
$
|
10.61
|
||||||||||
|
Options
granted
|
2.0
|
23.74
|
|||||||||||
|
Options
exercised
|
(3.9
|
)
|
6.55
|
||||||||||
|
Options
lapsed or canceled
|
—
|
20.56
|
|||||||||||
|
Outstanding
at December 31, 2003
|
7.0
|
$
|
16.43
|
||||||||||
|
Options
granted
|
1.7
|
38.35
|
|||||||||||
|
Options
exercised
|
(1.1
|
)
|
12.17
|
||||||||||
|
Options
lapsed or canceled
|
(0.3
|
)
|
28.07
|
||||||||||
|
Outstanding
at December 31, 2004
|
7.3
|
$
|
21.82
|
||||||||||
|
Options
granted
|
0.3
|
26.24
|
|||||||||||
|
Options
exercised
|
(0.6
|
)
|
7.70
|
||||||||||
|
Options
lapsed or canceled
|
(0.2
|
)
|
29.22
|
||||||||||
|
Outstanding
at December 31, 2005
|
6.8
|
$
|
23.00
|
||||||||||
Options
outstanding at December 31, 2005 have a weighted-average remaining contractual
life of approximately 6 years. The following is a summary of the range of
exercise prices for stock options that are outstanding and exercisable at
December 31, 2005:
|
|
|
|
|
Weighted-Average
|
|
Number
of
|
|
Weighted-Average
|
|
||||||||||||||||
|
|
|
Outstanding
|
|
Exercise
Price
|
|
Stock
Options
|
|
Exercise
Price
|
|
||||||||||||||||
|
|
|
Stock
Options
|
|
Per
Share
|
|
Exercisable
|
|
Per
Share
|
|
||||||||||||||||
|
|
|
(In
millions, except per share data)
|
|
(In
millions, except per share data)
|
|||||||||||||||||||||
|
Range
of exercise prices
|
|||||||||||||||||||||||||
|
$4.26
|
0.6
|
$ |
4.26
|
0.6
|
$ |
4.26
|
|||||||||||||||||||
|
$8.85
|
0.7
|
8.85
|
0.7
|
8.85
|
|||||||||||||||||||||
|
$
9.15 - $13.13
|
0.1
|
12.17
|
0.1
|
12.17
|
|||||||||||||||||||||
|
$15.00
- $24.13
|
2.2
|
21.09
|
2.2
|
21.10
|
|||||||||||||||||||||
|
$24.15
- $28.45
|
1.7
|
24.66
|
1.7
|
24.66
|
|||||||||||||||||||||
|
$32.13
- $40.83
|
1.5
|
38.50
|
1.5
|
38.50
|
|||||||||||||||||||||
|
6.8
|
$ |
|
23.00
|
6.8
|
$ |
|
22.99
|
||||||||||||||||||
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
7.
INCOME TAXES
Income
before income taxes for U.S. and non-U.S. operations was as follows:
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
2005
|
|
2004
|
|
2003
|
|
||||||||||||
|
|
|
(Dollars
in millions)
|
|||||||||||||||||
|
U.S.
income
|
$ |
|
20.2
|
$ |
|
155.3
|
$ |
|
253.9
|
||||||||||
|
U.S.
foreign source income
|
33.0
|
31.7
|
31.5
|
||||||||||||||||
|
Non-U.S.
income
|
26.8
|
48.8
|
17.8
|
||||||||||||||||
|
Total
income before income taxes
|
$ |
|
80.0
|
$ |
|
235.8
|
$ |
|
303.2
|
||||||||||
The
following is a summary of the components of our provisions for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
2005
|
|
2004
|
|
2003
|
|
||||||||||||
|
|
|
(Dollars
in millions)
|
|||||||||||||||||
|
Current
|
|||||||||||||||||||
|
Federal
|
$ |
|
5.9
|
$ |
|
18.3
|
$ |
|
76.2
|
||||||||||
|
Other
state and local
|
4.5
|
4.0
|
6.8
|
||||||||||||||||
|
Foreign
|
14.7
|
7.7
|
2.7
|
||||||||||||||||
|
Total
current
|
25.1
|
30.0
|
85.7
|
||||||||||||||||
|
Deferred
|
|||||||||||||||||||
|
Federal
|
(1.3
|
)
|
36.8
|
20.0
|
|||||||||||||||
|
Other
state and local
|
(1.6
|
)
|
0.5
|
(2.9
|
)
|
||||||||||||||
|
Foreign
|
1.8
|
9.0
|
3.3
|
||||||||||||||||
|
Total
deferred
|
(1.1
|
)
|
46.3
|
20.4
|
|||||||||||||||
|
Total
income taxes
|
$ |
|
24.0
|
$ |
|
76.3
|
$ |
|
106.1
|
||||||||||
The
following is a reconciliation of our provision for income taxes to the expected
amounts using statutory rates:
|
2005
|
|
2004
|
|
2003
|
|||||||||||||||
|
Federal
statutory
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
|||||||||||||
|
Foreign
income taxes
|
(1.9
|
)
|
(0.5
|
)
|
(0.1
|
)
|
|||||||||||||
|
State
and local
|
1.8
|
1.2
|
0.8
|
||||||||||||||||
|
Federal
tax credits
|
(5.3
|
)
|
(1.7
|
)
|
(1.0
|
)
|
|||||||||||||
|
Other
|
0.4
|
(1.6
|
)
|
0.3
|
|||||||||||||||
|
Effective
income tax rate
|
30.0
|
%
|
32.4
|
%
|
35.0
|
%
|
|||||||||||||
The
following is a summary of the significant components of our deferred tax assets
and liabilities:
|
|
2005
|
2004
|
|||||||||||
|
(Dollars
in millions)
|
|||||||||||||
|
Current
deferred tax assets
|
|||||||||||||
|
Employee
benefits
|
$
|
|
11.4
|
$
|
|
10.9
|
|||||||
|
Prepaid
taxes and other
|
9.9
|
—
|
|||||||||||
|
Total
current deferred tax assets
|
21.3
|
10.9
|
|||||||||||
|
Current
deferred tax liabilities
|
|||||||||||||
|
Inventory
and other
|
(4.3
|
(3.5
|
)
|
||||||||||
|
Current
deferred tax asset, net
|
$
|
|
17.0
|
$
|
|
7.4
|
|||||||
|
|
2005
|
|
2004
|
|||||||||||
|
|
(Dollars
in millions)
|
|||||||||||||
|
Noncurrent
deferred tax assets
|
||||||||||||||
|
Employee
benefits
|
$ |
|
159.8
|
$ |
|
127.5
|
||||||||
|
NOL
carryforwards
|
20.8
|
19.7
|
||||||||||||
|
Tax
credit carryforwards
|
2.4
|
1.7
|
||||||||||||
|
Capital
allowance carryforwards
|
13.7
|
15.0
|
||||||||||||
|
Prepaid
taxes
|
2.8
|
12.1
|
||||||||||||
|
Goodwill
|
—
|
0.4
|
||||||||||||
|
Other
|
1.3
|
1.3
|
||||||||||||
|
Valuation
allowances
|
(31.2
|
)
|
(32.5
|
)
|
||||||||||
|
Noncurrent
deferred tax assets, net
|
169.6
|
145.2
|
||||||||||||
|
Noncurrent
deferred tax liabilities
|
||||||||||||||
|
Fixed
assets and other
|
(282.7
|
)
|
(252.9
|
)
|
||||||||||
|
Noncurrent
deferred tax liability, net
|
$ |
|
(113.1
|
)
|
$ |
|
(107.7
|
)
|
||||||
Noncurrent
deferred tax assets and liabilities recognized in our balance sheets are as
follows:
|
|
2005
|
|
|
|
2004
|
|
|||||||
|
|
|
|
(Dollars
in millions)
|
||||||||||
|
U.S.
federal deferred tax liability, net
|
$ |
|
(116.1
|
)
|
$ |
|
(114.5
|
)
|
|||||
|
Other
foreign deferred tax asset, net
|
3.0
|
6.8
|
|||||||||||
|
Noncurrent
deferred tax liability, net
|
$ |
|
(113.1
|
)
|
$ |
|
(107.7
|
)
|
|||||
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
The
deferred income tax assets and liabilities summarized on the preceding page
reflect the impact of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the basis of such
assets and liabilities as measured by tax laws. At year-end 2005 and 2004,
our
net noncurrent foreign deferred tax asset was primarily attributable to timing
differences related to our minimum pension liability for our foreign operations.
Also at year-end 2005 and 2004, our net noncurrent U.S. Federal deferred tax
liability was principally attributable to the impact of accelerated tax
depreciation. The impact of this accelerated tax depreciation was offset in
both
2005 and 2004 primarily by timing differences related to postretirement benefits
and alternative minimum tax credit carryforwards that do not expire.
Our
deferred tax asset valuation allowances at December 31, 2005 and 2004 are
principally related to foreign net operating losses and capital allowance
carryforwards. Although these carryforwards do not expire, we considered prior
operating results and future plans, as well as the utilization period of other
temporary differences, in determining the amount of our valuation allowances.
In
2005 and 2004, we utilized a portion of such foreign tax benefits.
Payments
for federal, state, local and foreign income taxes were $36.0 million, $33.3
million and $44.9 million in 2005, 2004 and 2003, respectively.
8.
EARNINGS PER SHARE (EPS)
The
following table sets forth the computation of our basic and diluted EPS:
|
|
|
|
2005
|
|
|
|
2004
|
|
|
|
2003
|
|
|||||||
|
|
|
(In
millions, except per share data)
|
|||||||||||||||||
|
Numerator
|
|||||||||||||||||||
|
Net
income
|
$
|
56.0
|
$
|
159.5
|
$
|
197.1
|
|||||||||||||
|
Denominators
|
|||||||||||||||||||
|
Basic
shares outstanding — Weighted-average shares outstanding
|
50.1
|
51.6
|
51.3
|
||||||||||||||||
|
Effect
of dilutive securities Dilutive stock-based compensation
|
1.0
|
1.9
|
2.0
|
||||||||||||||||
|
Diluted
shares outstanding — Adjusted weighted-average shares after assumed
conversions
|
51.1
|
53.5
|
53.3
|
||||||||||||||||
|
Basic
EPS
|
$
|
1.12
|
$
|
3.09
|
$
|
3.84
|
|||||||||||||
|
Diluted
EPS
|
$
|
1.10
|
$
|
2.98
|
$
|
3.70
|
|||||||||||||
Certain
exercisable stock options were excluded in the computations of diluted EPS
because the exercise price of these options was greater than the average annual
market prices. The number of stock options outstanding, which was not included
in the calculation of diluted EPS, was 4.7 million at year-end 2005, 1.6 million
at year-end 2004 and less than 0.1 million at year-end 2003. The ranges of
exercise prices related to the excluded exercisable stock options were
$23.73-$40.83 at year-end 2005, $34.88 - $40.83 at year-end 2004 and $34.15
-
$34.88 at year-end 2003.
9.
LABOR RELATIONS
In
2004,
we initiated a voluntary separation program whereby employees could receive
lump-sum payments to voluntarily terminate their employment with AAM. We offered
separation payments under this program to adjust our hourly workforce to meet
current business conditions. The associated labor cost is normally recovered
in
approximately one year. The following table summarizes our activity under the
program:
|
2005
|
2004
|
|||||||
|
(Dollars
in millions)
|
||||||||
|
Approximate
pre-tax charge
|
$
|
17.3
|
$
|
23.8
|
||||
|
Number
of associates
|
317
|
453
|
||||||
In
February 2004, our national collective bargaining agreement with the UAW
expired. As a result of not reaching an agreement before the expiration of
the
contract, we experienced a temporary work stoppage of less than two days
at six
of our North American manufacturing facilities. In 2004, our operating results
include costs and expenses of approximately $5.2 million related to overtime
and
other costs to recover lost production as a result of the work stoppage.
Lump-sum
ratification payments totaling $37.5 million (including applicable payroll
taxes) were made in the first half of 2004 in accordance with new collective
bargaining agreements with unions that represent our hourly associates at six
of
our locations in the U.S. These lump-sum payments relate to the future service
of our hourly associates. Through 2005, we expensed $21.2 million of these
payments, which represented amounts earned in relation to the agreements
including $7.1 million and $7.5 million paid in lieu of base wage increases
in
2005 and 2004, respectively. The remaining $16.3 million relates to amounts
which would be earned during the terms of the agreements and will be amortized
over the remaining lives of the agreements.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
10.
COMMITMENTS AND CONTINGENCIES
Obligated
purchase commitments for capital expenditures were approximately $163.1 million
at December 31, 2005 and
$155.6
million at December 31, 2004.
We
are
involved in various legal proceedings incidental to our business. Although
the
outcome of these matters cannot be predicted with certainty, we do not believe
that any of these matters, individually or in the aggregate, will have a
material adverse effect on our financial condition, results of operations or
cash flows.
We
are
subject to various federal, state, local and foreign environmental and
occupational safety and health laws, regulations and ordinances, including
those
regulating air emissions, water discharge, waste management and environmental
cleanup. We will continue to closely monitor our environmental conditions to
ensure that we are in compliance with all laws, regulations and ordinances.
GM
has agreed to indemnify and hold us harmless against certain environmental
conditions existing prior to our purchase of the assets from GM on March 1,
1994. GM’s indemnification obligations terminated on March 1, 2004 with respect
to any new claims that we may have against GM. We have made, and will continue
to make, capital and other expenditures (including recurring administrative
costs) to comply with environmental requirements. Such expenditures were not
significant during 2005, and we do not expect such expenditures to be
significant in 2006.
11.
SEGMENT AND GEOGRAPHIC INFORMATION
We
operate in one reportable segment: the manufacture, engineering, design and
validation of driveline systems and related powertrain components and chassis
modules for light trucks, SUVs, passenger cars and crossover vehicles. Financial
information relating to our operations by geographic area is presented in the
following table. Net sales are attributed to countries based upon location
of
customer. Long-lived assets exclude deferred income taxes.
|
2005
|
|
2004
|
2003
|
||||||||||||||||
|
|
(Dollars
in millions)
|
||||||||||||||||||
|
Net
sales
|
|||||||||||||||||||
|
United
States
|
$ |
|
2,323.6
|
$ |
|
2,472.5
|
$ |
|
2,600.0
|
||||||||||
|
Canada
|
316.8
|
328.1
|
325.2
|
||||||||||||||||
|
Mexico
and South America
|
614.6
|
667.6
|
642.2
|
||||||||||||||||
|
Europe
and other
|
132.3
|
131.4
|
115.3
|
||||||||||||||||
|
Total
net sales
|
$ |
|
3,387.3
|
$ |
|
3,599.6
|
$ |
|
3,682.7
|
||||||||||
|
Long-lived
assets
|
|||||||||||||||||||
|
United
States
|
$ |
|
1,603.0
|
$ |
|
1,499.3
|
$ |
|
1,411.6
|
||||||||||
|
Other
|
459.2
|
440.1
|
416.5
|
||||||||||||||||
|
Total
long-lived assets
|
$ |
|
2,062.2
|
$ |
|
1,939.4
|
$ |
|
1,828.1
|
||||||||||
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
12.
UNAUDITED QUARTERLY FINANCIAL AND MARKET DATA
|
March
31
|
|
June
30
|
|
September
30
|
|
December
31
|
|
Full
Year
|
|
||||||||||||||||||||||
|
|
|
(Dollars
in millions, except per share data)
|
|||||||||||||||||||||||||||||
|
2005
|
|||||||||||||||||||||||||||||||
|
Net
sales
|
$ |
|
818.9
|
$ |
|
867.7
|
$ |
|
848.1
|
$ |
|
852.6
|
$ |
|
3,387.3
|
||||||||||||||||
|
Gross
profit
|
72.3
|
85.4
|
83.3
|
63.7
|
304.7
|
||||||||||||||||||||||||||
|
Net
income
|
13.3
|
18.9
|
19.3
|
4.5
|
56.0
|
||||||||||||||||||||||||||
|
Basic
EPS
|
$ |
|
0.27
|
$ |
|
0.38
|
$ |
|
0.38
|
$ |
|
0.09
|
$ |
|
1.12
|
||||||||||||||||
|
Diluted
EPS
(1)
|
$ |
|
0.26
|
$ |
|
0.37
|
$ |
|
0.38
|
$ |
|
0.09
|
$ |
|
1.10
|
||||||||||||||||
|
Market
price
(2)
|
|||||||||||||||||||||||||||||||
|
High
|
$ |
|
29.88
|
$ |
|
25.27
|
$ |
|
28.61
|
$ |
|
23.08
|
$ |
|
29.88
|
||||||||||||||||
|
Low
|
$ |
|
24.11
|
$ |
|
18.76
|
$ |
|
22.01
|
$ |
|
17.87
|
$ |
|
17.87
|
||||||||||||||||
|
2004
|
|||||||||||||||||||||||||||||||
|
Net
sales
|
$ |
|
952.8
|
$ |
|
929.6
|
$ |
|
841.6
|
$ |
|
875.6
|
$ |
|
3,599.6
|
||||||||||||||||
|
Gross
profit
|
136.4
|
133.4
|
107.9
|
96.8
|
474.5
|
||||||||||||||||||||||||||
|
Net
income
|
36.5
|
55.3
|
36.4
|
31.3
|
159.5
|
||||||||||||||||||||||||||
|
Basic
EPS
|
$ |
|
0.69
|
$ |
|
1.06
|
$ |
|
0.71
|
$ |
|
0.63
|
$ |
|
3.09
|
||||||||||||||||
|
Diluted
EPS
(1)
|
$ |
|
0.66
|
$ |
|
1.02
|
$ |
|
0.68
|
$ |
|
0.61
|
$ |
|
2.98
|
||||||||||||||||
|
Market
price
(2)
|
|||||||||||||||||||||||||||||||
|
High
|
$ |
|
41.98
|
$ |
|
39.86
|
$ |
|
35.66
|
$ |
|
30.84
|
$ |
|
41.98
|
||||||||||||||||
|
Low
|
$ |
|
34.10
|
$ |
|
33.30
|
$ |
|
27.84
|
$ |
|
26.87
|
$ |
|
26.87
|
||||||||||||||||
|
(1)
|
Full
year diluted EPS will not necessarily agree to the sum of the four
quarters because each quarter is a separate
calculation.
|
|
|
(2)
|
Prices
are the quarterly high and low closing sales prices for our common
stock
as reported by the New York Stock Exchange (NYSE). We had approximately
466 stockholders of record as of February 20,
2006.
|
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Five
Year Financial Summary
Year
Ended December 31,
(In millions, except per share data)
(In millions, except per share data)
|
2005
|
|
2004
|
|
|
2003
|
|
2002
|
|
|
2001
|
|
|||||||||||||||||||||||
|
Statement
of income data
|
||||||||||||||||||||||||||||||||||
|
Net
sales
|
$ |
|
3,387.3
|
$ |
|
3,599.6
|
$ |
|
3,682.7
|
$ |
|
3,480.2
|
$ |
|
3,107.2
|
|||||||||||||||||||
|
Gross
profit
|
304.7
|
474.5
|
540.3
|
491.7
|
409.7
|
|||||||||||||||||||||||||||||
|
Selling,
general and administrative expenses
|
199.6
|
189.7
|
194.0
|
180.5
|
164.4
|
|||||||||||||||||||||||||||||
|
Operating
income
|
105.1
|
284.8
|
346.3
|
311.2
|
241.3
|
|||||||||||||||||||||||||||||
|
Net
interest expense
|
(27.2
|
)
|
(25.5
|
)
|
(46.8
|
)
|
(50.6
|
)
|
(59.4
|
)
|
||||||||||||||||||||||||
|
Net
income
|
56.0
|
159.5
|
(a)
|
197.1
|
176.1
|
(b) |
|
|
114.9
|
|||||||||||||||||||||||||
|
Diluted
earnings per share
|
$ |
|
1.10
|
$ |
|
2.98
|
$ |
|
3.70
|
$ |
|
3.38
|
$ |
|
2.36
|
|||||||||||||||||||
|
Diluted
shares outstanding
|
51.1
|
53.5
|
53.3
|
52.1
|
48.7
|
|||||||||||||||||||||||||||||
|
Balance
sheet data
|
||||||||||||||||||||||||||||||||||
|
Cash
and cash equivalents
|
$ |
|
3.7
|
$ |
|
14.4
|
$ |
|
12.4
|
$ |
|
9.4
|
$ |
|
12.3
|
|||||||||||||||||||
|
Total
assets
|
2,666.6
|
2,538.8
|
2,398.7
|
2,335.7
|
2,160.9
|
|||||||||||||||||||||||||||||
|
Total
long-term debt
|
489.2
|
448.0
|
449.7
|
734.1
|
878.2
|
|||||||||||||||||||||||||||||
|
Dividends
paid
|
(30.4
|
)
|
(23.0
|
)
|
—
|
—
|
—
|
|||||||||||||||||||||||||||
|
Stockholders’
equity
|
994.8
|
955.5
|
954.7
|
703.6
|
534.7
|
|||||||||||||||||||||||||||||
|
Dividends
declared per share
|
$ |
|
0.60
|
$ |
|
0.45
|
$ |
|
—
|
$ |
|
—
|
$ |
|
—
|
|||||||||||||||||||
|
Statement
of cash flows data
|
||||||||||||||||||||||||||||||||||
|
Cash
provided by operating activities
|
$ |
|
280.4
|
$ |
|
453.2
|
$ |
|
496.9
|
$ |
|
384.2
|
$ |
|
232.8
|
|||||||||||||||||||
|
Cash
used in investing activities
|
(305.7
|
)
|
(240.2
|
)
|
(232.1
|
)
|
(252.9
|
)
|
(375.5
|
)
|
||||||||||||||||||||||||
|
Cash
(used in) provided by financing activities
|
14.8
|
(211.3
|
)
|
(262.6
|
)
|
(133.2
|
)
|
120.2
|
||||||||||||||||||||||||||
|
Other
data
|
||||||||||||||||||||||||||||||||||
|
EBITDA(c)
|
$ |
|
293.0
|
$ |
|
432.7
|
$ |
|
513.8
|
$ |
|
470.6
|
$ |
|
367.8
|
|||||||||||||||||||
|
Depreciation
and amortization
|
185.1
|
171.1
|
163.1
|
145.8
|
126.6
|
|||||||||||||||||||||||||||||
|
Capital
expenditures
|
305.7
|
240.2
|
229.1
|
207.7
|
375.5
|
|||||||||||||||||||||||||||||
|
Buyouts
of sale-leasebacks
|
—
|
—
|
3.0
|
45.2
|
—
|
|||||||||||||||||||||||||||||
|
(a)
|
Includes
a one-time charge of $15.9 million, net of tax related to debt refinancing
and redemption costs in the first quarter of 2004.
|
|
|
(b)
|
Includes
a $5.5 million gain, net of tax and other related costs, due to an
insurance settlement related to a fire that occurred at our forge
operations in Detroit, Michigan.
|
|
|
(c)
|
We
believe that earnings before interest expense, income taxes, depreciation
and amortization (EBITDA) is a meaningful measure of performance
as it is
commonly utilized by management and investors to analyze operating
performance and entity valuation. Our management, the investment
community
and the banking institutions routinely use EBITDA, together with
other
measures, to measure our operating performance relative to other
Tier I
automotive suppliers. EBITDA should not be construed as income from
operations, net income or cash flow from operating activities as
determined under accounting principles generally accepted in the
United
States of America. Other companies may calculate EBITDA
differently.
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|||||||||||||||||||||
|
Net
income
|
$
|
|
56.0
|
$ |
|
159.5
|
$ |
|
197.1
|
$ |
|
176.1
|
$ |
|
114.9
|
||||||||||||||||
|
Interest
expense
|
27.9
|
25.8
|
47.5
|
51.0
|
60.3
|
||||||||||||||||||||||||||
|
Income
taxes
|
24.0
|
76.3
|
106.1
|
97.7
|
66.0
|
||||||||||||||||||||||||||
|
Depreciation
and amortization
|
185.1
|
171.1
|
163.1
|
145.8
|
126.6
|
||||||||||||||||||||||||||
|
EBITDA
|
$ |
|
293.0
|
$ |
|
432.7
|
$ |
|
513.8
|
$
|
|
470.6
|
$
|
|
367.8
|
||||||||||||||||