American Axle develops restructuring plan to restore balance sheet health, return to profitability in 2009

By Jennifer Lanning Drey

Portland, Ore., July 25 - American Axle & Manufacturing Holdings, Inc. has launched a comprehensive restructuring plan to resize the business to better align with current demand after experiencing "the most challenging and difficult quarter in AAM's history," Richard E. Dauch, American Axle's chief executive officer, said Friday during the company's second-quarter earnings call.

The plan's key objectives include returning to profitability in 2009 and restoring balance sheet strength and stability.

"We are focused, determined and ready to do what it takes to move AAM down the path to a successful future," Michael K. Simonte, chief financial officer of American Axle, said during the call.

American Axle's second-quarter results were severely impacted by an 87-day workforce strike that caused quarterly sales to drop by an estimated $275 million. The issue was compounded by the weakening U.S. economy and consumer preferences continuing to shift away from light trucks and SUVs.

During the quarter, American Axle's balance of cash on hand dropped to $196 million, down from $350 million at the end of the first quarter. The decrease was tied to the company's free cash flow, which showed a use of $143.7 million in the second quarter, compared with free cash provided of $183.8 million in the second quarter of 2007, Simonte reported.

The working capital impact of the strike was the primary driver of the negative cash flow results.

"We need to resize the company and our cost structure, and that's exactly what we're going to do, with due care, but great urgency," Simonte said.

American Axle reported a second-quarter net loss of $644.3 million, compared with net earnings of $34.6 million in the second quarter of 2007. The current-year loss included $575.6 million of special charges and non-recurring operating costs, 95% of which were non-cash.

Possible sales, new credit facilities

On the financial side of its restructuring plan, American Axle is evaluating the potential sale of two to three of its businesses that are not a core part of its long-term plan, along with excess land, equipment and facilities to raise an estimated $25 million to $50 million.

American Axle is also looking to establish new foreign credit facilities to fund growth on a local basis, as more of its growth is expected to come from countries other than the United States in the next few years.

American Axle also plans to reduce U.S. production capacity by about 70%, and the company is looking to save $350 million annually through structural labor reductions that will cut its U.S. workforce by nearly 2,500 employees.

To promote cost reductions, the company said it would eliminate its 2008 employee bonus program as well as cut its quarterly dividend by 87%. American Axle also expects to experience cost savings through new labor agreements and an inventory reduction that could provide as much as $75 million of additional liquidity in the second half of the year, Simonte said.

"Our conservative balance sheet posture over the past several years has served us well in recent months. Although our restructuring plans, as well as the impact of the market dynamics, will weaken our balance sheet position in the short run, we are committed to rebuilding this balance sheet strength as quickly as we can," Simonte said.

$869.2 million long-term debt

American Axle ended the second quarter with $869.2 million of long-term debt and was in compliance with the debt covenants included in its long-term credit facility.

When asked during the question-and-answer session for an estimation of where revolver borrowings are likely to stand at the end of 2008, Simonte said it would depend on factors including working capital movement and overseas activity.

He added, "I'm not going to make any significant comments relative to how much revolver borrowings we're going to have, but what I will tell you is that we would expect our total borrowings under the long-term fixed structure to fund most of our requirements in this calendar year."

American Axle is a Detroit-based manufacturer of driveline systems and related powertrain components and chassis modules for light trucks, sport utility vehicles, and passenger cars and crossover vehicles.

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