AMERICAN AXLE & MANUFACTURING HOLDINGS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) COMPANY OVERVIEW
American Axle & Manufacturing Holdings, Inc. (Holdings) and its subsidiaries
(collectively, we, our, us or AAM) is a Tier I supplier to the automotive
industry. We manufacture, engineer, design and validate driveline and drivetrain
systems and related components and chassis modules for light trucks, sport
utility vehicles (SUVs), passenger cars, crossover vehicles and commercial
vehicles. Driveline and drivetrain systems include components that transfer
power from the transmission and deliver it to the drive wheels. Our driveline,
drivetrain and related products include axles, chassis modules, driveshafts,
power transfer units, transfer cases, chassis and steering components,
driveheads, transmission parts and metal-formed products. In addition to
locations in the United States (U.S.) (Michigan, Ohio, Indiana and
Pennsylvania), we also have offices or facilities in Brazil, China, Germany,
India, Japan, Luxembourg, Mexico, Poland, Scotland, South Korea, Sweden and
We are the principal supplier of driveline components to General Motors Company
(GM) for its rear-wheel drive (RWD) light trucks and SUVs manufactured in North
America, supplying substantially all of GM's rear axle and four-wheel drive and
all-wheel drive (4WD/AWD) axle requirements for these vehicle platforms. Sales
to GM were approximately 73% of our total net sales in 2012 and 2011, and 75% of
our total net sales in 2010.
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 5 to 7 years, and require us
to remain competitive with respect to technology, design and quality.
We are also the principal supplier of driveline system products for the Chrysler
Group LLC's (Chrysler) heavy-duty Ram full-size pickup trucks (Ram program) and
its derivatives. Sales to Chrysler were approximately 10% of our total net sales
in 2012, 8% in 2011 and 9% in 2010. In addition to GM and Chrysler, we supply
driveline systems and other related components to Volkswagen AG (Volkswagen),
Mack Trucks Inc. (Mack Truck), PACCAR Inc., Harley-Davidson Inc., Tata Motors,
Nissan Motor Co., Ltd. (Nissan), Ford Motor Company (Ford), Deere & Company,
Scania AB, Audi AG (Audi) and other original equipment manufacturers (OEMs) and
Tier I supplier companies such as Jatco Ltd. and Hino Motors Ltd. Our net sales
to customers other than GM increased to $792.6 million in 2012 as compared to
$710.0 million in 2011 and $563.0 million in 2010.
In 2012, we took further actions in order to improve the market cost
competitiveness of our labor cost structure and rationalize our operating
capacity. We closed both the Detroit Manufacturing Complex (DMC) and the
Cheektowaga Manufacturing Facility (CKMF) in February 2012, at the expiration of
our collective bargaining agreement with the International UAW. As a result of
these recent actions, along with others made over the past several years, we
have aligned our global capacity with projected market demand and improved our
regional cost competitiveness on a global basis. As a result of these plant
closures, we recorded net special charges including curtailment gains, asset
impairments, asset redeployment and other restructuring costs of $40.6 million.
As we look beyond 2012, we continue to focus on profitably growing sales,
significantly diversifying our customer, product and geographic sales mix and
strengthening our balance sheet.
There are a number of significant trends affecting the highly competitive
automotive industry. As general economic and industry specific conditions
continue to stabilize and improve, the global automotive industry continues to
experience intense competition, volatile fuel, steel, metallic and other
commodity prices and significant pricing pressures. At the same time, the
industry is focused on investing in future products that will incorporate the
latest technology, meet changing customer demands and comply with more stringent
In 2012, the U.S. Seasonally Adjusted Annual Rate of sales (SAAR) increased to
14.4 million units from 12.7 million in 2011. While the increase in production
levels represents a significant year-over-year improvement, these production
levels remain depressed in comparison to the 16.1 million U.S. SAAR experienced
in 2007. Factors such as the depressed U.S. housing market and continued high
unemployment rates may still hinder a full recovery of the domestic automotive
industry over the next few years. Additionally, continued turmoil in the
European credit markets and the debt crisis in the Euro-zone pose potential
constraints to market stability and global growth in the automotive industry.
However, as a result of the significant restructuring actions that were
implemented over the previous years, and the increasing age of vehicles
currently on the road, we expect that the U.S. domestic OEMs and their suppliers
will continue to capitalize on these increased volumes and provide improved
financial performance as the industry recovers.
GLOBAL AUTOMOTIVE PRODUCTION The trend toward the globalization of automotive
production continues to intensify in regions such as Asia (particularly China,
India, South Korea and Thailand), Eastern Europe and South America. Automotive
production in these regions is expected to continue to grow while production in
the traditional automotive production centers such as North America, Western
Europe and Japan are continuing to improve from recent declines. We have
significantly increased our global installed capacity to support current
programs and future opportunities while reducing our installed capacity in the
U.S. We have expanded our facilities in Brazil, Mexico and Poland, constructed
new facilities in India, Mexico and Thailand and increased our investment in our
China joint venture. We also have offices in Brazil, China, Germany, India,
South Korea and Sweden to support these developing markets. We expect our
business activity in these markets to increase significantly over the next
several years. Approximately 40% of our new and incremental business backlog is
for end use markets outside the U.S. and approximately 65% has been sourced to
our manufacturing facilities outside the U.S.
STEEL AND OTHER METALLIC COMMODITIES Worldwide commodity market conditions have
resulted in volatile steel and other metallic material prices. As general
economic conditions have improved and production levels increased in 2012,
demand for these commodities has grown and prices have risen. We have taken
actions to mitigate the impact of this trend through commercial agreements with
our customers, strategic sourcing arrangements with suppliers and technology
advancements that result in using less metallic content or less expensive
metallic content in the manufacturing of our products. The majority of our sales
contracts with our largest customers provide price adjustment provisions for
metal market price fluctuations. We do not have metal market price provisions
with all of our customers for all of the parts that we sell. We also have agreed
to share in the risk of metal market price fluctuations in certain customer
contracts. As a result, we may experience higher net costs for raw materials.
These cost increases would come in the form of metal market adjustments and base
price increases. We currently have contracts with our steel suppliers that
ensure continuity of supply to our principal operating facilities in North
America. We also have validation and testing capabilities that enable us to
strategically qualify steel sources on a global basis.
PRICE PRESSURE Year-over-year price reductions are a common competitive practice
in the automotive industry. As OEMs continue to demand cost cutting initiatives,
we anticipate increased pressure to reduce the cost of our own operations. The
majority of our products are sold under long-term contracts with prices
scheduled at the time the contracts are established. Many 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 lessen the impact of
such price reductions through continued cost reductions, efficiency improvements
or other productivity initiatives.
INCREASE IN DEMAND FOR ALTERNATIVE ENERGY SOURCES AND ELECTRONIC INTEGRATION
With a shift towards aggressive, environmentally focused legislation in the
U.S., we have observed an increased demand for technologies designed to help
reduce emissions, increase fuel economy and minimize the environmental impact of
vehicles. In August 2012, the Obama Administration announced the new CAFE
standard for cars and light-duty trucks, raising the standard to the equivalent
of 54.5 miles per gallon, by 2025. As a result, OEMs and suppliers are competing
intensely to develop and market new and alternative technologies, such as
electric vehicles, hybrid vehicles, fuel cells, diesel engines and efficiency
improvements of driveline systems to improve fuel economy and emissions.
The electronic content of vehicles continues to expand, largely driven by
consumer demand for greater vehicle performance, functionality, and affordable
convenience options. This demand is a result of increased communication
abilities in vehicles as well as increasingly stringent regulatory standards for
energy efficiency, emissions reduction and increased safety. As these
electronics continue to become more reliable and affordable, we expect this
trend to continue. The increased use of electronics provides greater flexibility
in vehicles and enables the OEMs to better control vehicle stability, fuel
efficiency, and safety while improving the overall driving experience. Suppliers
with enhanced capability in electronic integration have greater sourcing
opportunities with OEMs and may be able to obtain more favorable pricing for
We are responding to the continuing change in vehicle mix in the North American
market as well as expected increases in CAFE regulations, with ongoing research
and development (R&D) efforts that focus on fuel economy, emission reduction and
environmental improvements. These efforts position us to compete as this product
mix shift continues and have led to new business awards for products that
support AWD and RWD passenger cars and crossover vehicles. We are continuing to
invest in the development of advanced products focused on fuel economy, mass
reductions, vehicle safety and performance leveraging electronics and
technology. We have increased our focus on alternative energy and electronics by
investing in product development that is consistent with the continued shift in
market demand. Approximately 60% of AAM's new and incremental business backlog
launching from 2013 to 2015, which is an estimated $1.25 billion, relates to
AAM's newest AWD systems for passenger cars and crossover vehicles. In 2010, we
entered into a joint venture with Saab in which the new company, e-AAM (now our
wholly-owned subsidiary), was created to engineer and develop electric and
hybrid driveline systems to be commercialized for passenger cars and crossover
vehicles. These systems are designed to improve fuel efficiency by up to 30%,
reduce CO2 emissions and provide AWD capability with the additional benefit of
improved vehicle stability when compared to traditional mechanical AWD systems.
We have also developed and commercialized a disconnecting AWD system, which
strengthens AAM's position as a leader in global driveline systems technology.
AAM's EcoTrac™ disconnecting AWD system is an industry-first technology that
seamlessly engages AWD functionality while improving fuel efficiency and
reducing CO2 emissions. The system will be featured on a passenger car and
crossover vehicle platform launching in 2013.
AAM also develops and manufactures high-efficiency axle systems which improve
axle efficiency and fuel economy by using proprietary technologies to optimize
product design and lubrication efficiency, while also significantly reducing
friction. In 2012, AAM launched a high efficiency axle on the Cadillac ATS
compact luxury sport sedan. Through the development of our EcoTrac™
disconnecting AWD system, our high efficiency axles and our e-AAM subsidiary, we
have significantly advanced our efforts to improve fuel efficiency and ride and
handling performance while reducing emissions.
RESULTS OF OPERATIONS
NET SALES Net sales increased by 13% to $2,930.9 million in 2012 as compared to
$2,585.0 million in 2011 and $2,283.0 million in 2010.
Our sales in 2012, as compared to 2011, reflect an increase of approximately
3.8% in production volumes for the major North American light truck and SUV
programs we currently support. These increases reflect the improvement in both
general economic conditions and market conditions in the automotive industry.
The increase in sales also reflects the favorable impact of new product
launches, many of which support passenger car platforms.
Our sales in 2011, as compared to 2010, reflect an increase of approximately
7.5% in production volumes for the North American light truck and SUV programs
we currently support for GM and Chrysler.
Our content-per-vehicle (as measured by the dollar value of our products
supporting our customers' North American light truck and SUV programs) was
$1,473 in 2012 as compared to $1,487 in 2011 and $1,441 in 2010. The change in
content-per-vehicle in 2012 as compared to 2011 is primarily due to a reduction
in deferred revenue recognition related to the 2008 AAM - GM Agreement. The
increase in 2011 as compared to 2010 is primarily due to mix shifts favoring the
next generation of heavy-duty trucks for GM and higher metal market pass
Our 4WD/AWD penetration rate was 64.4% in 2012 as compared to 63.0% in 2011 and
64.2% in 2010. We define 4WD/AWD penetration as the total number of front axles
we produce divided by the total number of rear axles we produce for the vehicle
programs we support.
GROSS PROFIT Gross profit was $399.7 million in 2012 as compared to $455.1
million in 2011 and $401.7 million in 2010. Gross margin was 13.6% in 2012 as
compared to 17.6% in both 2011 and 2010. The change in gross profit in 2012 as
compared to 2011 primarily reflects the impact of special charges related to the
closure of DMC and CKMF, as well as costs associated with increased levels of
global launch activity, which includes premium freight costs, lower capacity
utilization and labor inefficiencies. We estimate premium freight costs to be
approximately $24 million in 2012. In addition, gross profit was adversely
impacted by material cost inflation of approximately $32 million and higher
Gross profit in 2012 includes special charges of $28.7 million of expense
related to contractual termination benefits provided to certain eligible UAW
associates as a result of the DMC and CKMF plant closures and $32.5 million of
expense primarily related to asset impairments, asset redeployment and other
restructuring costs associated with the closure of DMC and CKMF. The impact on
gross profit as a result of these special charges was partially offset by a
$21.8 million other postretirement benefits (OPEB) curtailment gain recorded as
a result of the DMC and CKMF hourly associates who have terminated employment
from AAM as a result of our plant closures and a $5.2 million settlement gain
related to the termination of the UAW Legal Services Plan. Also included in
gross profit in 2012, is a gain of $2.2 million related to the sale of CKMF.
The increase in gross profit in 2011 as compared to 2010 primarily reflects the
positive impact of an increase in sales and productivity gains, partially offset
by special charges and the impact of the implementation of certain provisions of
the 2009 Settlement and Commercial Agreement with GM. These provisions were
effective January 1, 2011 and, among other things, include expanded warranty
cost sharing and product price-downs.
Gross profit in 2011 includes special charges and other non-recurring operating
costs of $15.0 million, which includes $8.7 million of asset impairment charges
and indirect inventory obsolescence as a result of the announced closure of CKMF
and $6.3 million of other plant closure related costs. Gross profit in 2011 also
includes a $6.1 million gain related to the sale of equipment that we had
previously written down to its estimated fair value as a result of asset
Gross profit in 2010 includes the adverse impact of an arbitration ruling
related to the transfer of certain production from DMC to another AAM facility
for which we recorded a charge of $5.3 million for wages and benefits owed to
certain UAW represented associates at the DMC. Gross profit in 2010 also
includes net special charges of $1.1 million related to $8.7 million of asset
impairment and related charges at our Salem Manufacturing Facility, net of $7.6
million of adjustments to previously recorded estimates for Supplemental
Unemployment Benefits, idled leased assets and one-time termination benefit
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) SG&A (including R&D) was
$243.3 million in 2012 as compared to $231.7 million in 2011 and $197.6 million
in 2010. SG&A as a percentage of net sales was 8.3% in 2012, 9.0% in 2011 and
8.7% in 2010. The increase in SG&A in 2012 as compared to 2011 is primarily the
result of higher R&D spending and increases in our salaried workforce to support
worldwide growth, which is partially offset by lower incentive compensation
accruals and stock-based compensation expense. The increase in SG&A in 2011 as
compared to 2010 primarily reflects increased R&D spending, including costs
related to e-AAM, a joint venture that we formed with Saab Automobile AB (Saab)
in the fourth quarter of 2010 that is now a wholly-owned subsidiary.
In 2011, Saab filed for bankruptcy and entered into liquidation status. As a
result, in 2011, we recorded a $1.6 million impairment charge to SG&A to write
off the intangible asset associated with the long-term supply agreement with
Saab acquired as part of our joint venture formation in 2010.
SG&A in 2010 included a $3.3 million write down of administrative and
engineering facilities located in Detroit, Michigan.
R&D In 2012, R&D spending in product, process and systems was $123.4 million as
compared to $113.6 million in 2011 and $82.5 million in 2010. The focus of this
investment continues to be developing innovative driveline and drivetrain
systems and components for light trucks, SUVs, passenger cars, crossover
vehicles and commercial vehicles in the global marketplace. Product development
in this area includes power transfer units, transfer cases, driveline and
transmission differentials, multi-piece driveshafts, halfshafts, torque transfer
devices, and front and rear drive axles. We continue to focus on electronic
integration in our existing and future products to advance their performance. We
also continue to support the development of hybrid vehicle systems. Special
emphasis is also placed on the development of products and systems that provide
our customers with advancements in fuel efficiency and emissions reduction and
improved performance metrics such as noise vibration harshness (NVH) and power
OPERATING INCOME Operating income was $156.4 million in 2012 as compared to
$223.4 million in 2011 and $204.1 million in 2010. Operating margin was 5.3% in
2012 as compared to 8.6% in 2011 and 8.9% in 2010. The changes in operating
income and operating margin in 2012, 2011 and 2010 were due to the factors
discussed in Gross Profit and SG&A.
INTEREST EXPENSE Interest expense was $101.6 million in 2012, $83.9 million in
2011 and $89.0 million in 2010. The increase in interest expense in 2012
reflects higher average outstanding borrowings as compared to 2011. The decrease
in interest expense in 2011 as compared to 2010 relates primarily to higher
capitalized interest as a result of increased capital expenditures to support
our significant global program launches.
The weighted-average interest rate of our total debt outstanding was 7.8%, 8.0%
and 8.1% during 2012, 2011 and 2010, respectively.
INVESTMENT INCOME Investment income was $0.6 million in 2012, $1.2 million in
2011 and $3.8 million in 2010. Investment income includes interest and dividends
earned on cash and cash equivalents and short-term investments during the
period. Investment income includes a gain of $0.1 million and $2.3 million in
2011 and 2010, respectively, related to distributions of our short-term
investments from which distributions were previously suspended.
OTHER INCOME (EXPENSE) Following are the components of Other Income (Expense)
for 2012, 2011 and 2010:
Debt refinancing and redemption costs In 2012, we expensed $19.8 million of
unamortized debt issuance costs, discount and prepayment premiums related to our
Amended and Restated Revolving Credit Agreement, the purchase of $137.8 million
of our 5.25% Notes pursuant to a tender offer, the subsequent redemption of the
remaining $112.2 million of our 5.25% Notes and the voluntary redemption of
$42.5 million of our 9.25% Notes. In 2011, we expensed $3.1 million of
unamortized debt issuance costs, discount and prepayment premiums related to the
voluntary redemption of $42.5 million of our 9.25% Notes and the termination of
our Second Lien Term Loan with GM.
Other, net Other, net, which includes the net effect of foreign exchange gains
and losses and our proportionate share of earnings from equity in unconsolidated
subsidiaries, was expense of $4.1 million in 2012, income of $0.5 million in
2011 and expense of $0.1 million in 2010. The change in 2012, as compared to
2011, is primarily due to foreign exchange losses in our Brazil and Mexican
INCOME TAX EXPENSE (BENEFIT) Income tax expense (benefit) was a benefit of
$335.2 million in 2012 as compared to expense of $1.0 million in 2011 and
expense of $4.3 million in 2010. Our effective income tax rate was negative
1,064.2% in 2012 as compared to 0.7% in 2011 and 3.6% in 2010.
The following is a reconciliation of our provision for income taxes to the
expected amounts using statutory rates:
2012 2011 2010
Federal statutory 35.0 % 35.0 % 35.0 %
Foreign income taxes (85.0 ) (34.6 ) (42.9 )
State and local 3.5 (1.2 ) 1.6
Valuation allowance (985.0 ) (30.7 ) (39.3 )
U.S. tax on unremitted foreign earnings (29.5 ) 26.3 49.6
Other (3.2 ) 5.9 (0.4 )
Effective income tax rate (1,064.2 )% 0.7 % 3.6 %
During 2012, our business returned to a position of cumulative profitability on
a pre-tax basis, considering our operating results for the current year (2012)
and the previous two years (2011 and 2010). We concluded that this record of
cumulative profitability in recent years, in addition to the restructuring of
our U.S. operations and our long range forecast showing continued profitability,
has provided sufficient positive evidence that our net U.S. federal tax benefits
more likely than not will be realized. Accordingly, in the fourth quarter of
2012, we released the valuation allowance against our net federal deferred tax
assets for entities in the U.S., resulting in a $337.5 million benefit in our
2012 provision for income taxes. Our income tax benefit and effective tax rate
in 2012 reflect the impact of this valuation allowance reversal.
Our income tax expense and effective tax rate for 2012 also reflect a net tax
expense of $1.3 million related to the amendment of state income tax returns as
a result of the settlement of federal income tax audits for the tax years 2004
As of December 31, 2012, we have retained a valuation allowance of approximately
$166.1 million related to net deferred tax assets in several foreign
jurisdictions and U.S. state and local jurisdictions. See "Critical Accounting
Estimates - Valuation of Deferred Tax Assets and Other Tax Liabilities" below
for more detail on the impact of this reversal.
For each reporting period until the valuation allowance was released, we
experienced low effective tax rates as we continued to record net tax expense
only for those locations in which we did not have a valuation allowance in
place. As a result of reversing our valuation allowance against our net federal
deferred tax assets in the U.S. in 2012, we expect to experience higher
effective tax rates going forward.
Our income tax expense and effective tax rate in 2011 reflect the effect of
recognizing a net operating loss (NOL) benefit against our taxable income in the
U.S. Our income tax expense for 2011 also reflects net tax benefits of $4.5
million relating to the favorable resolution of income tax audits in the U.S.
and the impacts of tax law changes in Brazil and the state of Michigan. Our low
effective tax rate was primarily the result of our valuation allowance against
deferred tax assets as of December 31, 2011.
Our income tax expense and effective tax rate for 2010 reflect the effect of
recognizing an NOL benefit against our taxable income in the U.S. In conjunction
with the filing of our 2009 federal tax return, under provisions contained in
the American Recovery and Reinvestment Act of 2009, we recorded a tax benefit of
$1.4 million in 2010 attributable to the monetization of alternative minimum tax
and research and development credits. We received this tax refund during the
fourth quarter of 2010.
NET LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS Net loss attributable to
noncontrolling interests was $1.0 million in 2012, $5.7 million in 2011 and $0.9
million in 2010. The decrease in 2012 as compared to 2011 is attributable to the
acquisition of the noncontrolling interest in e-AAM in the first quarter of
2012. There is no longer an allocation of net loss attributable to
noncontrolling interests related to this entity. The increase in 2011 as
compared to 2010 primarily reflects the portion of the net expenses of e-AAM
that relates to noncontrolling interests, which included an impairment charge of
$0.5 million in 2011 related to the write off of the Saab intangible asset.
NET INCOME ATTRIBUTABLE TO AAM AND EARNINGS PER SHARE (EPS) Net income
attributable to AAM was $367.7 million in 2012 as compared to $142.8 million in
2011 and $115.4 million in 2010. Diluted earnings per share was $4.87 in 2012 as
compared to $1.89 per share in 2011 and $1.55 per share in 2010. Net Income and
EPS were primarily impacted by the factors discussed in Gross Profit, SG&A,
Interest Expense, Debt Refinancing and Redemption Costs and Income Tax Expense
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, debt service
obligations and our working capital requirements. We believe that operating cash
flow, available cash and cash equivalent balances and available committed
borrowing capacity under our Amended Revolving Credit Facility will be
sufficient to meet these needs.
OPERATING ACTIVITIES Net cash used in operating activities was $175.5 million in
2012 as compared to net cash used in operating activities of $56.3 million in
2011 and net cash provided by operating activities of $240.3 million in 2010.
Pension and OPEB We contributed $225.4 million to our pension trusts in 2012,
which included our regulatory funding requirements of $35.0 million. This
compares to $52.0 million in 2011, which included $26.0 million of contributions
that were in excess of our minimum statutory funding requirements for the 2011
calendar year, and $44.0 million in 2010. This funding compares to our annual
pension expense, including special and contractual termination benefits,
curtailments and settlements of $24.6 million in 2012, $14.5 million in 2011 and
$12.6 million in 2010. Due to our significant pension contributions made in
2012, we do not expect to make any cash payments in 2013 to satisfy our
regulatory funding requirements.
On September 27, 2012, AAM and the Pension Benefit Guaranty Corporation entered
into an agreement regarding any liability that may have arisen under the
Employee Retirement Income Security Act of 1974 in connection with the closures
of DMC and CKMF. As part of this agreement, in the third quarter of 2012, we
contributed $114.7 million in excess of our statutory minimum to our U.S. hourly
pension plan, which is included in the contributions described above.
Our cash outlay for OPEB, net of GM cost sharing, was $11.5 million in both 2012
and 2011 and $10.4 million in 2010. This compares to our annual postretirement
cost, including special and contractual termination benefits, curtailments and
settlements, of expense of $3.3 million in 2012, $15.2 million in 2011 and $12.6
million in 2010. We expect our cash outlay for other postretirement benefit
obligations in 2013, net of GM cost sharing, to be approximately $15 million.
GM Payment Terms As a result of a change in the administration of GM supplier
payment terms from pay on shipment to pay on receipt, our operating cash flow
was negatively impacted by approximately $33.1 million in 2012.
In conjunction with the 2009 Settlement and Commercial Agreement with GM, we
agreed to expedited payment terms of "net 10 days" from GM (as compared to
previously existing terms of approximately 45 days) in exchange for a 1% early
payment discount. We estimated that the accelerated payment terms favorably
impacted cash flow from operations by approximately $23 million in 2010. In
2011, we elected to terminate the expedited payment terms and transition to GM
standard weekly payment terms of approximately 50 days. As a result of the
termination of these expedited payment terms in 2011, our operating cash flow
was negatively impacted by approximately $190 million in 2011.
Cash paid for special charges In 2012, we made cash payments of $37.9 million
for special charges primarily related to asset redeployment, capital
expenditures and other costs associated with the closure of DMC and CKMF in the
first quarter of 2012. We paid $34.6 million in 2011 related to asset
redeployment and other costs associated with our announced closures of DMC and
CKMF and leased assets that were permanently idled prior to 2011. In 2010, we
paid $46.9 million related to our ongoing restructuring actions. These cash
payments primarily related to hourly and salaried workforce reductions initiated
prior to 2010. We expect to make payments of $0.5 million in 2013 related to
our remaining restructuring accrual as of December 31, 2012.
In 2011, we paid $18.6 million for purchase buyouts of leased equipment, of
which $13.4 million is included in the investing section of our Consolidated
Statement of Cash Flows.
Incentive compensation payments We paid approximately $37.0 million in 2012,
approximately $31.0 million in 2011 and approximately $5.0 million in 2010
related to incentive compensation as a result of our increased profitability and
statutory requirements in certain jurisdictions.
Sales and production volumes Cash provided by operating activities was favorably
impacted by higher profits related to an increase in sales and production
activity in 2011 and 2010.
Accounts receivable Accounts receivable at year-end 2012 were $463.4 million as
compared to $333.3 million at year-end 2011 and $146.6 million at year-end 2010.
The increase in our year-end 2012 accounts receivable balance was primarily due
to increased sales in November and December 2012 as compared to November and
December of 2011, as well as the change in administration of GM payment terms.
The increase in our year-end 2011 accounts receivable balance primarily reflects
the termination of expedited payment terms with GM and the transition to
standard weekly payment terms of approximately 50 days, effective June 30, 2011.
Inventories At year-end 2012, inventories were $224.3 million as compared to
$177.2 million at year-end 2011 and $130.3 million at year-end 2010. The
increase in inventory in 2012, as compared to 2011, was primarily related to the
impact of global sourcing and plant loading initiatives, new program launches
and increased production in existing programs during 2012. The increase in
inventory in 2011, as compared to 2010, primarily reflects increased inventory
levels related to new program launches, higher production in existing programs,
bank builds related to our pending DMC and CKMF plant closures and the ramp-up
of production at our Rayong Manufacturing facility in Thailand.
Accounts payable At year-end 2012, accounts payable were $396.1 million as
compared to $337.1 million at year-end 2011 and $283.6 million at year-end 2010.
The increase in accounts payable at year-end 2012, as compared to year-end 2011,
primarily reflects an increase in sales and production levels and higher capital
expenditures. The increase in accounts payable at year-end 2011 compared to
year-end 2010 primarily reflects higher production levels, higher capital
expenditures and the ramp up of activity at some of our foreign locations.
Interest paid Interest paid in 2012 was $88.9 million as compared to $73.1
million in 2011 and $61.6 million in 2010. The increase in interest paid in
2012, as compared to 2011, and 2011, as compared to 2010, relates primarily to
higher average outstanding borrowings during the year. The amount of accrued
interest included in other accrued expenses on our Consolidated Balance Sheet
was $35.1 million and $32.0 million as of December 31, 2012 and 2011,
Refundable income taxes In 2010, we collected a $48.8 million refund as a result
of a special carryback election which enabled us to carryback our 2008 NOL to
INVESTING ACTIVITIES Capital expenditures were $207.6 million in 2012, $163.1
million in 2011 and $108.3 million in 2010. In 2012 and 2011, our capital
spending primarily supported our significant global program launches within our
new and incremental business backlog.
We expect our capital spending, net of proceeds from the sale-leaseback of
equipment and the sale of property, plant and equipment in 2013 to be
approximately 7% of sales, which includes support for our significant global
program launches in 2013 and 2014 within our new and incremental business
In the fourth quarter of 2012, we entered into a sale-leaseback transaction for
equipment recently purchased. We received proceeds of $12.1 million in 2012
related to this transaction.
In 2009, we formed a JV with Hefei Automobile Axle Co, Ltd., (HAAC), a
subsidiary of the JAC Group (Anhui Jianghuai Automobile Group Co, Ltd). In 2011,
we expanded our existing JV with HAAC to include HAAC's light commercial axle
business. We made an initial investment of $10.2 million in 2009 related to the
formation of this JV and an additional investment of $16.5 million in 2011
related to the expansion of this JV. Each party continues to own 50 percent of
the JV, which we account for under the equity method of accounting.
In 2008, certain money-market and other similar funds that we invested in
temporarily suspended redemptions. We received $6.4 million of redemptions in
2010 from these funds.
FINANCING ACTIVITIES Net cash provided by financing activities was $253.5
million in 2012 as compared to net cash provided by financing activities of
$167.2 million in 2011 and net cash used in financing activities of $66.4
million in 2010. Total debt outstanding was $1,454.1 million at year-end 2012,
$1,180.2 million at year-end 2011 and $1,010.0 million at year-end 2010. Total
debt outstanding increased by $273.9 million at year-end 2012 as compared to
year-end 2011, primarily as a result of the issuance of $550.0 million of 6.625%
senior unsecured notes in the third quarter of 2012, which was partially offset
by using the proceeds to purchase and redeem $250.0 million of our 5.25% Notes
and redeem $42.5 million of our 9.25% Notes. The increase in total debt
outstanding at year-end 2011 as compared to year-end 2010 was primarily due to
the issuance of $200.0 million of 7.75% senior unsecured notes in 2011, which
was partially offset by using cash flow from operations to redeem $42.5 million
of our 9.25% Notes.
Amended Revolving Credit Facility On August 31, 2012, we amended and restated
the Credit Agreement dated as of January 9, 2004 (as amended and restated, the
"Amended and Restated Revolving Credit Agreement" and the facility thereunder,
the "Amended Revolving Credit Facility"). As of December 31, 2012, the Amended
Revolving Credit Facility provided up to $72.8 million of revolving bank
financing commitments through June 2013 and $365.0 million of revolving bank
financing commitments through June 30, 2016. At December 31, 2012, $414.6
million was available under the Amended Revolving Credit Facility, which
reflected a reduction of $23.2 million for standby letters of credit issued
against the facility.
The Amended and Restated Revolving Credit Agreement, among other things,
increased the aggregate commitments by approximately $116.0 million and
increased the commitments maturing on June 30, 2016 (the class D facility) to
$365.0 million. The class D facility includes loans held by lenders that agreed
to extend and/or increase their respective commitments and new lenders to the
facility. The Amended and Restated Revolving Credit Agreement also includes a
class C loan facility of approximately $72.8 million, which matures on June 30,
2013. We expensed $0.3 million for the write-off of a proportionate amount of
unamortized debt issuance costs related to the class C facility. We had been
amortizing the debt issuance costs over the expected life of the borrowing. We
paid debt issuance costs of $1.7 million, $5.9 million and $1.6 million
associated with the amendments and restatements of our Revolving Credit Facility
in 2012, 2011 and 2010, respectively.
Borrowings under the Amended Revolving Credit Facility bear interest at rates
based on adjusted LIBOR or an alternate base rate, plus an applicable margin.
The applicable margin for the class C and class D facilities remains unchanged.
Under the Amended Revolving Credit Facility, certain negative covenants were
revised to provide increased flexibility. In the event AAM achieves investment
grade corporate credit ratings from S&P and Moody's, AAM may elect to release
all of the collateral from the liens granted pursuant to the Collateral
Agreement, subject to notice requirements and other conditions.
The Amended Revolving Credit Facility is secured on a first priority basis by
all or substantially all of the assets of AAM and each guarantor under the
Collateral Agreement dated as of November 7, 2008, as amended and restated as of
December 18, 2009 and as further amended on June 30, 2011, among AAM and its
domestic subsidiaries and JPMorgan Chase Bank, N.A., as collateral agent for the
lenders under the Amended and Restated Revolving Credit Agreement and the
secured noteholders under the Indenture dated as of December 18, 2009, among
AAM, as issuer, the guarantors and U.S. Bank National Association, as trustee.
The Amended Revolving Credit Facility provides back-up liquidity for our foreign
credit facilities. We intend to use the availability of long-term financing
under the Amended Revolving Credit Facility to refinance any current maturities
related to such debt agreements that are not otherwise refinanced on a long-term
basis in their local markets.
9.25% Notes In 2009, we issued $425.0 million of 9.25% senior secured notes due
2017 (9.25% Notes). The notes were issued at a discount of $5.5 million. Net
proceeds from these notes were used for the repayment of certain indebtedness.
In 2010, we paid debt issuance costs of $0.3 million related to the 9.25% Notes.
In 2012 and 2011, we elected to exercise an option to redeem 10% of the original
amount of our 9.25% Notes outstanding at a redemption price of 103% of the
principal amount. This resulted in principal payments of $42.5 million and $1.3
million for the redemption premiums, as well as payments of accrued interest in
both 2012 and 2011. We expensed $1.0 million in 2012 and $1.4 million in 2011
for the write-off of a proportional amount of unamortized debt discount and
issuance costs related to this debt. We had been amortizing the debt discount
and debt issuance costs over the expected life of the borrowing. Pursuant to the
terms of our 9.25% Notes, we have the right to voluntarily redeem an additional
10% in October 2013. In addition, we have the right to redeem any remaining
9.25% Notes outstanding in January 2014. We may elect to exercise our right to
redeem the remaining 9.25% Notes, subject to our liquidity position and the
appropriate market conditions.
The 9.25% Notes share the collateral package equally and ratably with the
Amended Revolving Credit Facility described above. The indenture governing the
9.25% Notes limits our ability to make certain investments, declare or pay
dividends or distributions on capital stock, redeem or repurchase capital stock
and certain debt obligations, incur liens, incur indebtedness, transact with
affiliates or merge, make acquisitions and sell assets.
7.875% Notes In 2007, we issued $300.0 million of 7.875% senior unsecured notes
due 2017. Net proceeds from these notes were used for general corporate
purposes, including payment of amounts outstanding under our Revolving Credit
Facility. Pursuant to the terms of our 7.875% Notes, we may voluntarily redeem
any or all of the outstanding 7.875% Notes at any time. If favorable market
conditions exist in the future and we have other available financing options, we
would consider entering into a refinancing transaction to redeem or purchase the
outstanding 7.875% Notes.
7.75% Notes In 2011, we issued $200.0 million of 7.75% senior unsecured notes
due 2019 (7.75% Notes). Net proceeds from these notes were used for general
corporate purposes, including the repayment of certain amounts outstanding under
our Amended Revolving Credit Facility. In 2011, we paid debt issuance costs of
$5.0 million related to the 7.75% Notes.
6.625% Notes In the third quarter of 2012, we issued $550.0 million of 6.625%
senior unsecured notes due 2022 (6.625% Notes). Concurrently with the offering
of the 6.625% Notes, we made a tender offer to purchase our 5.25% Notes, of
which the aggregate principal amount outstanding at the time of the tender offer
was $250.0 million. Net proceeds from the 6.625% Notes were used to fund the
purchase of $137.8 million of the outstanding 5.25% Notes pursuant to the tender
offer, certain pension obligations and for other general corporate purposes. We
also used the net proceeds to fund the redemption of the remaining 5.25% Notes,
including the payment of interest, and to redeem $42.5 million aggregate
principal amount of our 9.25% notes. We paid debt issuance costs of $8.9 million
related to the 6.625% Notes in 2012.
5.25% Notes On September 18, 2012, in connection with the cash tender offer, we
purchased $137.8 million aggregate principal amount of the 5.25% Notes, and paid
accrued interest. Upon purchase, we expensed $9.2 million related to a tender
premium, $0.5 million of professional fees and unamortized debt issuance costs
of $0.1 million related to this debt. We had been amortizing the debt issuance
costs over the expected life of the borrowing.
On October 3, 2012, we voluntarily redeemed the remaining 5.25% Notes
outstanding. This resulted in a principal payment of $112.2 million, a payment
of $7.3 million related to a make-whole premium, as well as payment of accrued
interest. Upon redemption, we expensed $0.1 million of unamortized debt discount
and issuance costs related to this debt. We had been amortizing the debt
issuance costs over the expected life of the borrowing.
2.00% Convertible Notes In 2006, the 2.00% Senior Convertible Notes due 2024
became convertible into cash under terms of the indenture. The remaining
outstanding 2.00% Convertible Notes of $0.4 million were fully redeemed and
converted into cash in 2011.
Foreign credit facilities We utilize local currency credit facilities to finance
the operations of certain foreign subsidiaries. At December 31, 2012, $61.0
million was outstanding under these facilities and an additional $15.1 million
Credit ratings To access public debt capital markets, the Company relies on
credit rating agencies to assign short-term and long-term credit ratings to our
securities as an indicator of credit quality for fixed income investors. A
credit rating agency may change or withdraw its ratings based on its assessment
of our current and future ability to meet interest and principal repayment
obligations. Credit ratings affect our cost of borrowing under our Amended
Revolving Credit Facility and may affect our access to debt capital markets and
other costs to fund our business. The credit ratings and outlook currently
assigned to our securities by the rating agencies are as follows:
Corporate Senior Secured Unsecured
Family Rating Notes Rating Notes Rating Outlook
Standard & Poor's BB- BB B Stable
Moody's Investors Services B1 Ba1 B2 Stable
Fitch Ratings B+ BB+ B- Positive
Dividend program In 2009, the Company's Board of Directors decided to
discontinue the quarterly cash dividend. We have not declared or paid any cash
dividends on our common stock in 2012, 2011 or 2010.
Purchase of noncontrolling interest In 2012, we paid $4.0 million to acquire the
remaining shares of e-AAM. e-AAM, previously a joint venture between AAM and
Saab Automobile AB, was created to design and commercialize electric and hybrid
driveline systems designed to improve fuel efficiency, reduce CO2 emissions and
provide AWD capability with the additional benefit of improved vehicle stability
when compared to traditional mechanical AWD systems.
Stock repurchase In 2012, we repurchased 0.5 million shares of AAM common stock
for $5.9 million, in 2011, we repurchased shares of AAM common stock for $0.1
million and in 2010, we repurchased 0.1 million shares of AAM common stock for
$1.3 million to satisfy employee tax withholding obligations due upon the
vesting of our restricted stock grants.
Exercise of employee stock options We received $0.1 million in 2012, $4.6
million in 2011 and $1.1 million in 2010 related to the exercise of employee
Off-balance sheet arrangements Our off-balance sheet financing relates
principally to operating leases for machinery and equipment, commercial office
and production facilities, vehicles and other assets. We lease certain machinery
and equipment under operating leases with various expiration dates. In the
fourth quarter of 2012, we entered into a sale-leaseback transaction for $13.2
million of machinery and equipment to be used in production starting in 2013.
Pursuant to these operating leases, we may have the option to purchase the
underlying equipment on specified dates. Remaining lease repurchase options are
$4.6 million through 2016.
Contractual obligations The following table summarizes payments due on our
contractual obligations as of December 31, 2012:
Payments due by period
Total <1yr 1-3 yrs 3-5 yrs >5 yrs
Long-term debt $ 1,448.5 $ 55.2 $ 5.8 $ 637.5 $ 750.0
Interest obligations 768.4 118.5 233.6 202.2 214.1
Capital lease obligations 5.6 0.3 0.8 0.9 3.6
Operating leases (1) 35.6 9.6 15.4 9.9 0.7
Purchase obligations (2) 231.9 208.7 23.2 - -
Other long-term liabilities (3) 608.8 53.9 129.0 119.8 306.1
Total $ 3,098.8 $ 446.2 $ 407.8 $ 970.3 $ 1,274.5
(1) Operating leases include all lease payments through the end of the
contractual lease terms, which includes elections for repurchase options and
excludes any non-exercised purchase options. These commitments include
machinery and equipment, commercial office and production facilities,
vehicles and other assets.
(2) Purchase obligations represent our obligated purchase commitments for
capital expenditures and related project expense.
(3) Other long-term liabilities represent our estimated pension and other
postretirement benefit obligations, net of GM cost sharing, that were
actuarially determined through 2022, as well as our unrecognized income tax
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 an extended shutdown of operations
(typically 1-2 weeks) in conjunction with their model year changeover and an
approximate one-week shutdown in December. Accordingly, our quarterly results
may reflect these trends.
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 effect on our financial condition, results of operations or cash
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 closely monitor our environmental conditions to ensure that we are
in compliance with applicable laws, regulations and ordinances. We have made,
and will continue to make, capital and other expenditures (including recurring
administrative costs) to comply with environmental requirements, including
recurring administrative costs. Such expenditures were not significant in 2012,
2011 and 2010.
In February 2012, the International UAW filed suit in the United States District
Court for the Eastern District of Michigan, alleging that AAM violated certain
provisions of the collective bargaining agreement covering represented hourly
associates at the Detroit Manufacturing Complex and Cheektowaga Manufacturing
Facility related to pension and postretirement benefits. In 2012, we recorded
$28.7 million in cost of goods sold related to pension and postretirement
benefits to be provided to certain eligible UAW associates as a result of our
election to apply the provisions of Moving Ahead for Progress in the 21st
Century Act (MAP-21) and the subsequent recertification of our U.S. hourly
pension plan. In December 2012, we settled this matter with the International
UAW. This settlement had no further impact on our operating results in 2012.
EFFECT OF NEW ACCOUNTING STANDARDS
On January 1, 2012, we adopted new accounting guidance on the presentation of
comprehensive income. The new guidance allows an entity to present components of
net income and other comprehensive income in one continuous statement, referred
to as the statement of comprehensive income, or in two separate, but consecutive
statements. We have elected to present the components of other comprehensive
income in a separate statement immediately following the statement of income.
The guidance eliminates the previous option to report other comprehensive income
and its components in the statement of changes in equity. While the new guidance
changes the presentation of comprehensive income, there are no changes to the
components that are recognized in net income or other comprehensive income under
current accounting guidance. Other than the change in presentation, the adoption
of this new guidance has had no impact on our consolidated financial statements.
On January 1, 2012, we also adopted new accounting guidance on testing goodwill
for impairment. This new guidance allows us the option to first assess
qualitative factors to determine whether it is necessary to perform the two-step
quantitative goodwill impairment test. Under this guidance, we are not required
to calculate the fair value of a reporting unit unless we determine, based on a
qualitative assessment, that it is more likely than not that its fair value is
less than its carrying amount. The guidance includes a number of events and
circumstances to consider in conducting the qualitative assessment. The adoption
of this new accounting guidance did not have an effect on our 2012 goodwill
On July 27, 2012, the FASB issued new accounting guidance, which amends the
previous accounting guidance on testing indefinite-lived intangible assets,
other than goodwill, for impairment. This new guidance allows us the option to
first assess qualitative factors to determine whether it is necessary to
calculate the fair value of the asset being tested. This new guidance will be
effective for us as of January 1, 2013, with early adoption permitted. We do not
believe that the adoption of this new accounting guidance will have a
significant effect on our indefinite-lived intangible asset impairment
assessments in the future.
CRITICAL ACCOUNTING 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. 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 below. We have discussed
and reviewed our critical accounting estimates disclosure with the Audit
Committee of our Board of Directors.
PENSION AND OTHER POSTRETIREMENT BENEFITS In calculating our assets, liabilities
and expenses related to pension and OPEB, key assumptions include the discount
rate, expected long-term rates of return on plan assets and rates of increase in
health care costs.
The discount rates used in the valuation of our U.S. pension and OPEB
obligations were based on an actuarial review of a hypothetical portfolio of
long-term, high quality corporate bonds matched against the expected payment
stream for each of our plans. In 2012, the weighted average discount rates
determined on that basis were 4.01% for the valuation of our pension benefit
obligations and 4.05% for the valuation of our OPEB obligations. The discount
rate used in the valuation of our U.K. pension obligation was based on a review
of long-term bonds, including published indices in the applicable market. In
2012, the discount rate determined on that basis was 4.30%. The expected
long-term rates of return on our plan assets were 7.50% for our U.S. plans and
4.35% for our U.K. plan in 2012. We developed these rates of return assumptions
based on future capital market expectations for the asset classes represented
within our portfolio and a review of long-term historical returns. 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 35-65% of the U.S. plans' assets to equity
securities, depending on the plan, with the remainder invested in fixed income
securities, hedge fund investments and cash. The rates of increase in health
care costs are based on current market conditions, inflationary expectations and
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 OPEB obligations at year-end 2012, 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 December 31, 2012, our valuation
Discount Return on
Decline in funded status $ 64.7 N/A
Increase in 2012 expense $ 1.9 $ 2.4
No changes in benefit levels and no changes in the amortization of gains or
losses have been assumed.
For 2013, we assumed a weighted average annual increase in the per-capita cost
of covered health care benefits of 8.0% for OPEB. The rate is assumed to
decrease gradually to 5.0% by 2019 and remain at that level thereafter. A 0.5%
decrease in the discount rate for our OPEB would have decreased total expense in
2012 and increased the postretirement obligation, net of GM cost sharing, at
December 31, 2012 by $0.5 million and $22.6 million, respectively. A 1.0%
increase in the assumed health care trend rate would have increased total
service and interest cost in 2012 and the postretirement obligation, net of GM
cost sharing, at December 31, 2012 by $1.6 million and $35.9 million,
As part of our 2009 Settlement and Commercial Agreement, GM confirmed its
obligation to share in the cost of OPEB for eligible retirees proportionally
based on the length of service an employee had with AAM and GM. We estimate the
future cost sharing payments and present it as an asset on our Consolidated
Balance Sheet. As of December 31, 2012, we estimated $273.0 million in future GM
cost sharing. If, in the future, GM was unable to fulfill this financial
obligation, our OPEB expenses may be different than our 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 complex.
We are required to estimate whether recoverability of our deferred tax assets is
more likely than not, based on forecasts of taxable income in the related tax
jurisdictions. In these estimates, we use historical results, projected future
operating results based upon approved business plans, eligible carryforward
periods, tax planning opportunities and other relevant considerations. This
includes the consideration of tax law changes, prior profitability performance
and the uncertainty of future projected profitability.
Under applicable GAAP, a sustained period of profitability in our operations is
required before we would change our judgment regarding the need for a valuation
allowance against our net deferred tax assets. During 2012, our business
returned to a position of cumulative profitability on a pre-tax basis,
considering our operating results for the current year (2012) and the previous
two years (2011 and 2010). We concluded that this record of cumulative
profitability in recent years, in addition to the restructuring of our U.S.
operations and our long range forecast showing continued profitability, has
provided sufficient positive evidence that our net U.S. federal tax benefits
more likely than not will be realized. Accordingly, in the fourth quarter of
2012, we released the valuation allowance against our net federal deferred
assets for entities in the U.S., resulting in a $337.5 million benefit in our
2012 provision for income taxes.
As of December 31, 2012, we have retained a valuation allowance of $166.1
million related to deferred tax assets in several foreign jurisdictions and U.S.
state and local jurisdictions. As of December 31, 2011 and 2010, we had
valuation allowances of $426.9 million and $560.9 million, respectively. In 2011
and 2010, these valuation allowances mainly related to the full valuation
allowances on our U.S. net deferred tax assets.
If, in the future, we generate taxable income on a sustained basis in foreign
and U.S. state jurisdictions for which we have recorded valuation allowances,
our current estimate of the recoverability of our deferred tax assets could
change and result in the future reversal of some or all of the valuation
allowance. 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 or our tax liabilities.
To the extent our uncertain tax positions do not meet the "more likely than not"
threshold, we have derecognized such positions. To the extent our uncertain tax
positions meet the "more likely than not" threshold, we have measured and
recorded the highest probable benefit, and have established appropriate reserves
for benefits that exceed the amount likely to be defended upon examination.
As of December 31, 2012, 2011 and 2010, we have recorded a liability for
unrecognized income tax benefits and related interest and penalties of $30.9
million, $33.2 million and $69.0 million, respectively. Our U.S. federal and
certain state income tax returns and certain non-U.S. income tax returns are
currently under various stages of audit by the relevant tax authorities. We will
continue to monitor the progress and conclusions of all ongoing audits and will
adjust our estimated liability as necessary.
PRODUCT WARRANTY We record a liability against cost of goods sold for estimated
warranty obligations at the dates our products are sold or when specific
warranty issues are identified. Liabilities for product recalls are recorded at
the time the company's obligation is probable and can be reasonably estimated.
Product warranties not expected to be paid within one year are recorded as a
non-current liability on our Consolidated Balance Sheet. Our estimated warranty
obligations for products sold are based on significant management estimates,
with input from our warranty, sales, engineering, quality and legal departments.
For products and customers with actual warranty payment experience, we will
estimate warranty costs principally based on past claims history. For certain
products and customers, actual warranty payment experience does not exist or is
not mature. In these cases, we estimate our costs based on our analysis of the
contractual arrangements with individual customers, existing customer warranty
programs, sales history and internal and external warranty data, including a
determination of our involvement in the matter giving rise to the potential
warranty issue or claim and estimates of repair costs. These estimates are
re-evaluated on a quarterly basis.
As part of the 2009 Settlement and Commercial Agreement, we agreed to expanded
warranty cost sharing with GM, which began on January 1, 2011.
We actively study trends of our warranty claims and take action to improve
product quality and minimize warranty claims. Warranty accruals are evaluated
and adjusted as appropriate based on occurrences giving rise to potential
warranty exposure and associated experience. Our warranty accrual was $29.1
million as of December 31, 2012 and $13.4 million as of December 31, 2011.
Actual experience could differ from the amounts estimated requiring adjustments
to these liabilities in future periods. While we have not experienced any
significant differences between these estimates and our actual costs, it is
possible that changes in our assumptions or future warranty issues could
materially affect our financial position and results of operations.
ENVIRONMENTAL OBLIGATIONS Due to the nature of our operations, we have legal
obligations to perform asset retirement activities related to federal, state,
local and foreign environmental requirements. The process of estimating
environmental liabilities is complex and significant uncertainty exists related
to the timing and method of the settlement of these obligations. Therefore,
these liabilities are not reasonably estimable until a triggering event occurs
that allows us to estimate a range and possibilities of potential settlement
dates, and the potential methods of settlement.
As a result of the plant closures, idling and consolidation of facilities in
2011 and 2010, the methods and timing of certain asset retirement obligations
related to these facilities became reasonably estimable. Based on management's
best estimate of the costs, methods and timing of the settlement of these
obligations, we recorded a charge of $0.1 million in 2011 and 2010. As of
December 31, 2012, the accrual for this liability was $0.5 million. In the
future, we will update our estimated costs and potential settlement dates and
methods and their associated probabilities based on current information. Any
update may change our best estimate and could result in a material adjustment to
GOODWILL We review our goodwill for impairment annually during the fourth
quarter. In addition, we review goodwill for impairment whenever adverse events
or changes in circumstances indicate a possible impairment. This review
utilizes a two-step impairment test covering goodwill and other indefinite-lived
intangibles. The first step involves a comparison of the fair value of a
reporting unit with its carrying value. If the carrying value of the reporting
unit exceeds its fair value, the second step of the process involves a
measurement and comparison of the fair value of goodwill with its carrying
value. If the carrying value of the reporting unit's goodwill exceeds the fair
value of that goodwill, an impairment loss is recognized in an amount equal to
The determination of our reporting units, impairment indicators and the fair
value of those reporting units and corresponding goodwill require us to make
significant judgments and estimates, including the extent and timing of future
cash flows. As part of the determination of future cash flows, we need to make
assumptions on future general economic conditions, business projections, growth
rates and discount rates. These assumptions require significant judgment and are
subject to a considerable degree of uncertainty. We believe that the assumptions
and estimates in our review of goodwill for impairment are reasonable. However,
different assumptions could materially effect our conclusions on this matter. We
performed our annual analysis in the fourth quarter and determined there was no
impairment to goodwill in 2012.
IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, excluding goodwill and other
indefinite-lived intangible assets, to be held and used are reviewed for
impairment whenever adverse events or changes in circumstances indicate a
possible impairment. Recoverability of each "held for use" asset group affected
by impairment indicators is determined by comparing the forecasted undiscounted
cash flows of the operations to which the assets relate to their carrying
amount. If the carrying amount of an asset group exceeds the undiscounted cash
flows and is therefore nonrecoverable, the assets in this group are written down
to their estimated fair value. We estimate fair value based on market prices,
when available, or on a discounted cash flow analysis. Long-lived assets held
for sale are recorded at the lower of their carrying amount or fair value less
cost to sell. Significant judgments and estimates used by management when
evaluating long-lived assets for impairment include:
• An assessment as to whether an adverse event or circumstance has triggered
the need for an impairment review;
• Determination of asset groups, the primary asset within each group, and the
primary asset's average estimated useful life;
• Undiscounted future cash flows generated by the assets; and
• Determination of fair value when an impairment is deemed to exist, which may
require assumptions related to future general economic conditions, future
expected production volumes, product pricing and cost estimates, working
capital and capital investment requirements, discount rates and estimated
In 2012, we recorded asset impairment charges of $5.8 million related to
previously purchased lease buyouts of equipment that we no longer expect to use
in our operations. In 2011, we recorded asset impairment charges of $8.1 million
as a result of the announced closure of CKMF. In 2010, we recorded asset
impairment charges of $8.4 million as a result of the announced closure of our
Salem Manufacturing Facility. We also classified certain administrative and
engineering facilities located in Detroit, Michigan as held-for-sale and
recorded a loss of $5.1 million to write these assets down to their estimated
fair value using available market data in 2010.
ESTIMATED USEFUL LIVES FOR DEPRECIATION At December 31, 2012, approximately 77%
of our capitalized investment in property, plant and equipment 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 12 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.
In this MD&A and elsewhere in this Annual Report, we make statements concerning
our expectations, beliefs, plans, objectives, goals, strategies, and future
events or performance. Such statements are "forward-looking" statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and relate
to trends and events that may affect our future financial position and operating
results. The terms such as "will," "may," "could," "would," "plan," "believe,"
"expect," "anticipate," "intend," "project" and similar words or expressions, as
well as statements in future tense, are intended to identify forward-looking
Forward-looking statements should not be read as a guarantee of future
performance or results, and will not necessarily be accurate indications of the
times at, or by, which such performance or results will be achieved.
Forward-looking statements are based on information available at the time those
statements are made and/or management's good faith belief as of that time with
respect to future events and are subject to risks and may differ materially from
those expressed in or suggested by the forward-looking statements. Important
factors that could cause such differences include, but are not limited to:
• global economic conditions, including the impact of the debt crisis in
• reduced purchases of our products by GM, Chrysler or other customers;
• reduced demand for our customers' products (particularly light trucks and
SUVs produced by GM and Chrysler);
• our ability or our customers' and suppliers' ability to successfully
launch new product programs on a timely basis;
• our ability to realize the expected revenues from our new and incremental
• our ability to respond to changes in technology, increased competition or
• supply shortages or price increases in raw materials, utilities or other
operating supplies for us or our customers as a result of natural
disasters or otherwise;
• liabilities arising from warranty claims, product recall or field
actions, product liability and legal proceedings to which we are or may
become a party;
• our ability to achieve the level of cost reductions required to sustain
global cost competitiveness;
• our ability to attract new customers and programs for new products;
• price volatility in, or reduced availability of, fuel;
• our ability to develop and produce new products that reflect market demand;
• lower-than-anticipated market acceptance of new or existing products;
• our ability to maintain satisfactory labor relations and avoid work stoppages;
• our suppliers', our customers' and their suppliers' ability to maintain
satisfactory labor relations and avoid work stoppages;
• risks inherent in our international operations (including adverse changes
in political stability, taxes and other law changes, potential
disruptions of production and supply, and currency rate fluctuations);
• availability of financing for working capital, capital expenditures, R&D
or other general corporate purposes, including our ability to comply with
• our customers' and suppliers' availability of financing for working
capital, capital expenditures, R&D or other general corporate purposes;
• adverse changes in laws, government regulations or market conditions
affecting our products or our customers' products (such as the Corporate
Average Fuel Economy ("CAFE") regulations);
• changes in liabilities arising from pension and other postretirement
• our ability to attract and retain key associates;
• risks of noncompliance with environmental laws and regulations or risks
of environmental issues that could result in unforeseen costs at our
• our ability or our customers' and suppliers' ability to comply with the
Dodd-Frank Act and other regulatory requirements and the potential costs
of such compliance;
• our ability to consummate and integrate acquisitions and joint ventures;
• other unanticipated events and conditions that may hinder our ability to
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.
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