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Operator
Good morning.
My name is Lisa, and I will be your conference facilitator today.
At this time, I would like to welcome everyone to the American Axle & Manufacturing third quarter conference call. [OPERATOR INSTRUCTIONS] As a reminder, today's call is being recorded.
I would now like to turn the call over to Mr. Chris Son, Director of Investor Relations.
Please go ahead, sir.
- Director of Investor Relations
Thank you, Lisa.
Good morning, everyone.
I hope all of you have had a chance to review our third quarter 2006 earnings announcement that we released earlier this morning.
If you have not, you can access it on the aam.com web site or through the PR Newswire Services.
A replay of this call will also be available beginning at noon today through 5:00 P.M.
Eastern daylight time November 1 by calling 1-800-642-1687 reservation number 7328819.
Before we begin, I would like to remind everyone that the matters discussed on this conference call may contain comments and forward-looking statements that are within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future results or conditions but rather subject to risks and uncertainties which cannot be predicted or quantified and which may cause results of operations to differ materially than those discussed.
For additional information, we ask that you refer to the Company's filings with the Securities and Exchange Commission and on the AAM.com web site.
During the call, we may refer to certain non-GAAP financial measures.
Information regarding these non-GAAP measures as well as our reconciliation of these non-GAAP measures to GAAP financial information is also available on the AAM.com web site.
We are also audio webcasting this call through our web site.
This call will be archived in the investor section of the web site and will be available there for one year for later listening.
Before the end of the year, we will be attending the Baird Industrial Conference in Chicago on November 8.
We look forward to seeing many of you at this conference.
In addition, we are always happy to host investors at our facility either here in Detroit or at our other locations.
With that said, let me turn things over to Dick Dauch, AAM's Co-Founder, Chairman and CEO.
- Co-Founder, Chairman, CEO
Thank you, Chris and good morning everyone.
Thank you for joining us today to discuss American Axle results for the third quarter of the year 2006.
Joining us on the call today, Yogendra Rahangdale, our President, Mike Simonte, our Chief Financial Officer, and David Dauch, our Executive Vice President of Commercial and Business Development.
After I provide some highlights for the quarter, I will turn things over to Mike to discuss our financial results.
After that, we'll open the call up for any questions you ladies and gentlemen may have.
The unprecedented and structural transformation of the domestic auto industry continues to impact the industry as well as AAM.
For the third quarter, AAM's customer production volumes was a major north American light truck programs that we serve were down 19% year-over-year.
That's a whopper.
This includes a 54% decrease in production volumes for the mid sized pickup truck and SUV volumes of that program that AAM supports.
It also includes an estimated 5.4% decrease for the full sized truck and SUV programs that AAM supports for both GM and the Chrysler Group.
During the quarter we decided and initiated necessary actions to improve AAM's global cost competitiveness as we go forward.
In connection with these necessary actions and supporting events that occurred in the quarter, AAM recorded special charges of $93.1 million equivalent to $1.17 per share for post employment benefit.
As a result of the significant volume decline and the special charges, AAM posted third quarter sales of $701 million and a GAAP loss of $63 million or a $1.25 loss per share.
Mike will have more to say later during this call.
In this time of structural change for U.S. automotive manufacturers, sustainability depends on being able to proactively meet the demands of first, intense global competition.
Second, customer demands for world pricing and third rapidly escalating domestic production costs.
Under global competition, it's arrived.
It's here.
It's operating on the U.S. soil.
Additional economic pressure is coming from low-cost countries from Eastern Europe, south America, Asia and other locations.
The customer demands for global pricing are part of the equation.
This is part of what creates a new economic reality we're all addressing and adjusting.
The only way to win in this competitive environment is to be globally competitive on costs and AAM's very proactive on that process.
These pressures continue to escalate, AAM continues to address increased domestic calls in steel, other metallics, energy, utilities, labor, healthcare and benefit costs that are associated.
AAM's taking actions to reduce costs on each and every item I've just discussed.
This will continue to include the consolidation, globalization and localization of our supply base.
AAM will accomplish these strategies while aligning our supply base with our expanding customer base, business and manufacturing footprint.
Other cost-saving actions includes addressing the rapidly growing and unsustainable costs of excess man power at AAM's master agreement facilities.
As a result, AAM announced a special attrition program called SAP. for hourly UAW associates on October 4, 2006.
Our associates receive their individual information regarding the program on October 23.
This action is being done to reduce our workforce and to realign our business with current and projected market conditions and expected production volumes and mix.
This unprecedented change that the domestic automotive industry is adapting to is not a cyclical event.
I've been saying for years it's structural.
And in this nature it's far reaching.
It's impacting each and every domestic automotive contributor.
During the time of transition in the domestic auto industry, AAM continues to emphasize managing the things that we control.
We'll continue to do this as we adjust rapidly to the changing conditions of the global marketplace and into the shifting demographic of our customer base.
AAM's focus can be narrowed down to the following three strategic initiatives.
First, continuously develop and successfully launch new sophisticated advanced products along with supporting process and systems technology.
We'll do this while continuing our investment in exciting new business growth initiatives that assist in customer diversification, product diversification while establishing appropriate global footprint.
We will meet these initiatives by continuing our focus on R&D as we have for 13 straight years.
Our R&D spending increased nearly 11% in dollars to in excess of over $60 million in the first three quarters of '06.
AAM's R&D efforts continue to result in the development of many new and exciting innovative products that are targeted for the growth segment of the global auto industry.
That includes rear wheel drive applications, all-wheel drive systems for passenger cars, cross road vehicles and many electronic breakthroughs.
These efforts also include many applications of technologies that package in to help the consumer.
AAM's R&D efforts are creating new business quoting opportunity.
In total, we're quoting approximately $900 million of potential new business.
About 90% of this activity is with customers other than the General Motors Corporation.
This includes opportunities with several major global OEMs that could give us a chance to further expand in the different continents of Asia, Europe and South America.
Second point, AAM will maintain flawless and anonymous launch performance for all new customer product programs and the highest emphasis obviously will be on the GM900 Program which has been so successful through the SUV and now into the GM900 pickup.
That also effectively launched for their first vehicle assembly plant on October 2 at General Motors truck facility in Oshawa, Canada.
GM is having an excellent launch of that product at Oshawa and the 900 pickup launch will continue at GM's truck facility at Port Wayne, Indiana early next month, November.
And then subsequently in Silao Mexico in February of next year.
The heavy duty derivative pickup trucks of the 900 will be launching next year in the Pontiac, Michigan in January and also Flint, Michigan during March.
We're locked and loaded and ready to support them on that.
We're very excited these new vehicles are now getting the show room the customers will have their new product.
AAM's investments to support the launch, that is behind us.
We're both product, [inaudible] and equipment programs [inaudible].
Through these major investments, our company continues to provide world class quality and working performance of highly engineered products and always on-time delivery.
AAM continues to deliver advanced technology products to our other customers as well as GM with bulletproof quality.
It's unparalleled in our industry for the segments of products that we produce with very sophisticated applications of engineering.
Our company's flawless launch of performance, standards has always extended and will continue to in the expansion of our global manufacturing footprint.
These expansions are in operations such as Guanajuato, Mexico, [inaudible] Brazil, Guangzhou China and Gliwice Poland.
As we speak, our President is about to depart to bow to Asia, to China, for the launch of that critical plant with our head of manufacturing, Rick Dauch.
They're all important and they contribute to these profitable growth plans as we have meshed into an all-global company.
We'll continue in AAM to leverage our product, our processes system engineering capability, as we position our company for the vital required support of the existing and growing OEM customer base for our company.
The third point, our company is achieving significant reductions in our cost structure.
The present business model of AAM [Payne] Associates will not work.
That is a cost burden that we must work through and we're being very proactive on that and dignified with our people.
The special attrition program or SAP, we announced on October 4 has been done jointly with our national supplemental new hire agreement.
These are good first steps in the process of restructuring America.
They contribute to the business model of adjusting our overall structural costs reducing here in the home country of the U.S. and will assist us as we also more globally costs compete.
Before I turn it over to Mike, let me state this is the most challenging year for the U.S. domestic automotive industry.
We're enjoying it.
It's needed to be done.
We're doing it proactively at AAM.
That would include the other OEMs and supplier as well as dealers and the communities where they reside.
Our company is converting this difficulty into an opportunity.
It's always been our philosophy to turn a negative into a positive.
AAM is focused, determined and we will continue to build a viable, profitable sustainable global company.
Our best years are ahead of us.
Thank you, ladies and gentlemen, for your attention today and your interest in AAM is very important to us.
Let me now turn the call over to AAM's Vice President and Chief Financial Officer, Mike Simonte.
Mike will now discuss our financials.
- Vice President, Chief Financial Officer
Thanks, Dick.
Good morning, everyone.
We've we've got a lot to cover this morning so I'm going to get right to it.
As Dick said, today we reported third quarter 2006 sales of $701 million, and a GAAP loss of $1.25 per share.
This compares to sales of $848 million and GAAP earnings of $0.38 per share in the third quarter of 2005.
AAM sales of the third quarter of 2006, again, that was $701 million are down 17% year-over-year.
The key thing here is on an overall basis, our major program production volumes were down approximately 19% versus the prior year.
Mix was also weak in the third quarter of 2006.
Our content per vehicle was down almost 3% on a year-over-year basis.
About half of that variance to the prior year is explained by a one-time retroactive metal market recovery we had in the third quarter of 2005.
The other primary reason for the reduction in AAM's content per vehicle in the third quarter of 2006 was lower four-wheel drive and all-wheel drive penetration.
That was only 58% in this current quarter.
That compares to about 65.9% in the third quarter of 2005.
And I want you to remember that the third quarter 2005 was unusually strong as particularly GM was rebuilding their inventories after the summer depletion and were heavily contenting the vehicles that we were supporting.
In any case, now that we're up and running on support of the GMC900 Program, particularly the pickups, our content per vehicle should increase over the next several quarters.
As Dick mentioned, AAM recorded special charges of $93.1 million in the third quarter of 2006 relating to post employment benefits.
Almost all of this amount or $91.2 million relates to benefits that are estimated to on payable to our UAW associate who are expected to be permanently idled through the end of the current contract period and that contract expires in February 2008.
Future severance payments to associates in our European operations of approximately $1.9 million are also included in that amount.
Our third quarter results also include a net gain of $9.1 million or $0.12 per share associated with the favorable outcome of various legal proceedings in claims resolved in the quarter.
This was net of costs incurred to resolve these matters.
Including costs incurred earlier in the year related to the same legal proceedings, the net favorable impact of these items for the first three quarters of the year was a little less, $7.6 million or $0.10 per share.
Before I make some more detailed comments on some of these issues, I want to address a couple of the points in our third quarter results and how they compare to the prior year.
First, as we have previously reported to you, noncash expenses relating to depreciation and amortization, pension, post retirement benefits and stock-based compensation will be much higher for the full year 2006 as compared to 2005.
This issue, which you know is due in part to changes and discount rates applicable for this year and also the adoption of a new accounting standard relating to stock-based compensation.
Significantly impacted the year-over-year comparison of our earnings in 2006.
In the third quarter of 2006, these noncash expenses were up approximately $10 million versus the prior year.
That's about the same as the impact we saw during the first quarter and second quarter of this year and through three quarters of this year, these expenses are up about $30 million in total.
Another key factor in our third quarter results is is the cost of benefits we pay to our hourly associate associates on layoff.
We sometimes refer to this as SUB or supplemental unemployment benefits.
Layoff costs were up $11 million in the third quarter of 2006 as compared to the third quarter of 2005.
That's an increase of over 100% in just one year.
On a year-to-date basis, we've incurred nearly $59 million of layoff costs.
It's important to note that that's in addition to the $91.2 million special charge that we recorded in the third quarter of 2006.
In total, layoff costs have exceeded $150 million for the first three quarters of 2006.
And that's simply costs we cannot sustain and a big reason why we kicked off the special attrition program earlier this month.
Let's get into the details starting with the income statement.
AAM's sales in the third quarter of 2006, as I mentioned, came in at $701 million, about 17% less than the prior year.
I already mentioned that our overall major programs were down 19%.
The mid-sized light truck programs we support were up 54%.
That's primarily the GMC360 and 355.
That was a little bit more severe than we thought but a significant reduction pretty close to that amount was expected.
The 5% decline in production for our full-sized program in third quarter of 2006 was not really expected.
The GMC900 program and the Dodge Ram Heavy Duty Series pickup trucks are the programs we're talking about here.
Down time related to the launch of the GMC900 pickups was a major factor in the third quarter.
For example, the Oshawa facility -- GMs Oshawa facility, which is the first to launch the new pickups on October 2, 2006 was down nearly the entire month of September.
The Dodge Ram Heavy Duty production volumes were also very light in September as our customer reacted to growing inventory levels by taking down time.
We didn't have much notice on that.
AAM's sales to customers other than GM in the quarter war $153 million or 22% of sales.
During the first three quarters of 2006, non-GM sales were $561 million or 23% of sales.
That's about the same as in the prior year.
Even despite the lower run rate on the Dodge Ram Heavy Duty program.
In the second half of 2006, we're launching and/or expanding production of new products with the Chrysler Group.
That includes BBDC, Ssangyong, Hino, Jatco, Koyo and Harley Davidson, Audi, Nissan and others will join our customer base in the next couple years.
We expect these programs and other similar opportunities that we're quoting on right now to drive our sales over the next several years.
Okay, now let's talk about the special charge we recorded in the third quarter a little bit more detail.
We recorded a $91.2 million charge to cost of sales related to post employment benefits that we estimate to be payable to our hourly associates through the end of the contract period.
These associates are expected to be permanently idled during this period.
Previously as you know, the total cost of a layoff or SUB all the related benefits associated with this were expenses incurred.
During the quarter, several triggering events occurred and contributed to a condition in which SUB costs are both probable and reasonably estimate and that's why we recorded this charge.
Of course we announced on October 4 the chief activity in this regard and that was the signing of the supplemental new hire agreement and the kickoff of our special attrition program.
Based on all this, we recorded a charge for these expected costs through the end of our current contract in February 2008.
Growth and noncash expenses also affected the year-over-year comparison of our profitability metrics.
Particularly the gross margin and EBITDA margin.
The third quarter of 2006 SG&A expense was $48 million, that's almost the same as in the prior year.
R&D spending was up about 11% or almost $2 million in the quarter on a year-over-year basis.
This increase was offset by reductions in other general and administrative expenses.
Let me comment on interest and taxes before I move on to cash flow statements.
Net interest expense in the third quarter 2006 was $11.7 million that's up from 7.3 million a year ago.
Our average bore borrowings were up year-over-year but a larger portion of this increase was due to higher interest rates.
Now let's talk about our tax provision.
As we said on previous calls, we're making excellent progress expanding our global business and manufacturing footprint.
In each of our major foreign operations, currently Mexico, Brazil and the UK and soon also China and Poland.
We had the opportunity to benefit from effective tax rates that are lower here in the U.S.
Combined with a 35% benefit on our U.S. loss in the quarter, again primarily related to the special charge we took in this quarter, lower foreign tax rates on our foreign source income drove our effective tax rate for the quarter to a 44% benefit.
We also benefited in the quarter from a one-time adjustment to our deferred tax liabilities associated with the sales of machinery and equipment in Mexico.
This related to a transition we're making to adopt a [inaudible] regime for our Mexican operation.
On our last earnings call, I said we expected our effective tax rate to be less than 30% for the last several quarters.
We expect that to be the case as soon as we return our U.S. operations to profitability.
The bottom line for the third quarter 2006 is that our GAAP results were a loss of almost $63 million, a $1.25 per share.
Through the first three quarters of 2006, our GAAP results were a loss of $34 million or $0.67 per share.
Remember, these totals reflect the impact of a $93.1 million special charge approximately $1.17 per share that we recognized in this third quarter.
Let's move on to cash flow.
In the third quarter 2006, we generated $62 million of cash from operating activities.
On a year-to-date basis, our GAAP cash from operating activities was $162 million.
After deducting Cap Ex of just short of $244 million, and dividends of $23 million, our free cash flow was a use of $105 million during the first three quarters of this year.
That's about $20 million better than the first three quarters of 2005 and almost all that positive variances related to favorable working capital flows in 2006.
One other point out on cash flow, it's typical in our industry, and our history certainly supports this, operating cash flow to be very strong on the fourth quarter on a relative basis.
We expect that to be true again this year.
One thing, our capital spending rate will slow down quite a bit now when we have our GMC900 investments behind us.
We're moving into our sweet spot now where we've got our investments made and now we're going to be running higher volumes in that full-size truck program.
We're also targeting inventory reductions to improve our cash flow and performance in the fourth quarter of 2006.
Our total cash flow performance will be affected by the special attrition program and some of the other related restructuring actions, particularly the salaried workforce reduction.
However, we should be able to use ongoing operational cash flow to offset some or all of these nonrecurring items in the fourth quarter 2006.
In terms of our capital structure, net debt outstanding at the end of the third quarter was approximately $650 million.
That's up approximately $130 million versus year end 2005.
This reflects an additional $50 million of term loan financing we completed in this third quarter and higher outstandings on our bank line.
At the end of third quarter 2006 and we reported this to you on October 4, we had more than $670 million of availability under our existing credit facilities.
Reflecting the impact of the special charge we recognized in this third quarter, stockholders equity at September 30th was $951 million.
Net debt to cap was approximately 39%.
Let's talk about the remainder of 2006.
Obviously a key issue we're addressing in our business is the continuing rapid decline of production volumes scheduled by our customers for the major programs we support.
Production cuts unplanned down time and other scheduled reductions are affecting the programs and facilities we support.
This is continuing to impact our operations in an adverse manner.
Our current expectation is that our volumes for the year will be down approximately 8 to 10% in 2006 versus 2005 for the major programs that we support.
In the fourth quarter of 2006, we expect our volumes to be down 15% or more as compared to the prior year.
These estimates of volumes are the same that we reported to you on October 4th.
While reductions to this magnitude in such a short period of time are making it difficult for to us run our plants most efficiently, we are taking steps to control what we can control in terms of costs.
The special attrition program and salaried workforce reductions are just two examples of the hard actions we're taking in 2006 to improve our cost structure in 2007 and beyond.
Redeploying under utilized capacity and of course here we have the opportunity to reduce future Cap Ex.
That's another example.
The favorable impact of new business launches including the all important GMC900 series pickup trucks, just about 55% of our top line.
This should help offset some of the weakness of our programs as we move forward.
Another item I should mention is that the FASB issued a new standard is the statement number 158.
Now impact our results in the fourth quarter of 2006.
FASB statement 158 requires balance sheet recognition of unfunded pension and OPEB obligations.
This new standard requires companies to use a fiscal year end measurement date for their pension and OPEB obligations.
We expect adoption of this newest standard as it will for anybody else who has an unfunded plan to result in an increase in OPEB and pension liabilities as compared to the current standards.
We're also considering the early adoption of the measurement date standards of FASB 158 and 2006 year end.
Transition to a year end measurement date will likely also increase the benefit liabilities we report on our balance sheet.
Let me finish by saying that we recognize our financial performance in 2006 is not up to AAM standards.
That's why we have aggressively rededicated our team.
Dick told about you that earlier today to pursuing a course of action that Dick outlined.
First, continue to develop and successfully launch new advance product, process and systems technology.
Second, maintain the flawless and anonymous launch performance for all of our new customer product programs.
And third, achieve significant reductions in our fixed cost structure.
Our task quite simply is to keep focused and determined on these objectives.
We must adapt to a new economic reality as Dick said and improve our global cost competitiveness.
Supplemental new hire agreement and special attrition program should be two very important enablers in this process.
So well the launch of our new regional manufacturing facilities in China and Poland as well as the continuing expansion of our other existing low-cost operation many Mexico and Brazil.
Very simply, we need to take our medicine here in the U.S. so that we can take advantage of new opportunities that will emerge as the industry continues to work through this period of structural change.
We're prepared to do just that.
Thank you for your time and attention this morning.
I'm going to stop here and turn the call back over to Chris so that we can address your questions.
- Director of Investor Relations
Thank you, Mike and thank you, Dick.
We have reserved some time to take some questions.
I would ask that you please limit your questions to no more than two so at this time, please feel to proceed with any questions you may have.
Operator
At this time, I would like to remind everyone --
Excuse me?
Can you just put me through?
Operator
Your first question comes from the line of Rod Lache.
- Analyst
Can you hear me?
- Co-Founder, Chairman, CEO
Good morning, Rod.
- Analyst
Good morning.
First of all, point of clarification on this charge.
Did you say that this was for your future expected subcosts so you are not going to be incurring the subcost through the P&L going forward?
- Vice President, Chief Financial Officer
Yeah, Rod, that is a good description of the situation.
Let me be more specific, though.
There are different accounting standards that govern portions of the benefits that we paid to our laid off associates.
First pension being chief among it.
This charge we're taking does not include any element of pension and OPEB costs that would be incurred related to these associates.
So we will continue to incur certain expenses, and those are the two biggest pieces on an ongoing basis.
Otherwise, yes, we are accruing the supplemental unemployment benefits, the unemployment taxes that relate directly to this for the future time period through the end of this current contract.
- Analyst
Okay.
So the $22.7 million that you incurred in the quarter, that's going to be basically in the charge then you're going to have another charge for the buyouts at some point in the near future?
- Vice President, Chief Financial Officer
That's right, Rod.
We will have a charge in the fourth quarter relating to the buyouts.
Of course some of this may also require a true up to our sub accrual if we see a significant reduction as we expect and the number of associates on layoff.
So these two activities will work together in the fourth quarter.
We'll also deal with curtailment or we expect, Rod, depending on how many people take the buyout to deal with the pension and OPEB in the fourth quarter in the form of a curtailment [inaudible] of benefits for those associates.
- Analyst
Could it be a curtailment gain?
- Vice President, Chief Financial Officer
We don't expect so, Rod.
You know, obviously this activity will reduce eventually our future pension and OPEB costs and funding, but in the short run there's going to be some unrecognized prior service costs that's going to come through.
I think you know, Rod that in some cases, it's a person by person actuarial determination and there will be associate where there will be an actuarial gain but in total we expect it to be an actuarial loss.
- Analyst
My second question is just could you just talk about this decline in the non-GM revenue and a little bit more detail?
How much new business are you guys recognizing from your backlog at this point?
How did that split between the GM and non-GM?
- Vice President, Chief Financial Officer
Most of the new business launched here in the fourth quarter of '06 and into '07 does relate to the GMC900 content.
The drive shafts in particular, also the [inaudible] content and some other engineering changes.
So that will drive our new business activity during this next 12 to 15 months.
However, we're also launching business with Hino, Jatco and Koyo.
Those are in support, as you know of Toyota and Nissan programs ultimately.
We've got the first high volume run of our Smart Bar launching this quarter with DaimlerChrysler.
And we've also got the D.C. cab chassis running at this time as well.
All of those activities are ongoing.
- Analyst
Right, but up until now, you've been incurring like 6 or 7% year on year revenue growth from new business.
Obviously getting offset to some extent by either content per vehicle or volume.
Could you just tell us what was the magnitude of the new business that came in, in the third quarter?
- Vice President, Chief Financial Officer
In the third quarter, Rod, I don't have those specific numbers.
The real issue that you're dealing with in this question is the fact that our Dodge Ram production was down substantially in the quarter.
That drove a significant reduction in our revenue to the Chrysler Group.
That's what's really driving the trend.
- Analyst
Okay.
Thank you.
- Co-Founder, Chairman, CEO
Thank you, Rod.
Operator
Your next question comes from the line of Jon Rogers with Citigroup.
- Analyst
Yes, good morning.
- Co-Founder, Chairman, CEO
Good morning, John.
- Analyst
Hey, Mike.
I'm just wondering with this subcharge, is there the potential that depending on the is excess of the attrition program that you won't need as much because I would imagine that if people in the [subattrit] that you wouldn't have to pay the ongoing accruals throughout end of the contract.
Is that true?
- Vice President, Chief Financial Officer
That's what I meant when I said we'll have to true up the subaccruals in this fourth quarter.
The special attrition program buyouts range from $30,000 up to about $100,000.
And this accrual for supplemental unemployment benefits because it does not include the total cost of benefits we incur for laid off associates is closer to something like $40,000 per associate.
So the differential between the ultimate weighted average of what we see in the special attrition program will, in fact, be the net cost that we have in the fourth quarter.
But you're right, a part of that will involve or we expect to involve a true up of the sub accrual.
- Analyst
Okay.
So as we go forward, the sub is totally out of the P&L next year?
- Vice President, Chief Financial Officer
Well, Jon, as I said, the portion of the total layoff costs that relate to the contractual benefits that we pay to our hourly associates is what we're accruing now.
And of course that's based on estimates so the number of associates that we expect to be permanently idled through the end of the period.
It's possible that those numbers could change.
So we'll have to continue to monitor that and if we have a change in estimate, that's what we'll do.
But again, the pension and OPEB costs will be something we have to deal with through the other accounting standards.
- Analyst
Then Mike, the lower four-wheel drive mix, is there -- that's probably the first time in a while that I remember that number going down by that magnitude.
Is there something going on with the customer or is it just kind of a one-time idle issue?
- Vice President, Chief Financial Officer
Yeah.
Jon, a couple things.
I think there's a change in mix.
There's clearly a change in mix in our overall production volumes.
The mid-sized SUVs that are down sold significantly this year are heavily four-wheel drive contented.
So simply the reduction of that production volume will change the weighted average of our total in this time period.
The other thing I mentioned was that in the third quarter of 2005 we saw a very strong, I'm not sure if it was our strongest but it sure would have been close.
At 65.9% four-wheel drive penetration, we saw an unusually strong period as GM was rebuilding their inventories after that big summer sale.
So again, the reduction of heavily four-wheel drive contented programs, some of which are structural, some of which we think is dealing with fuel efficiency concerns.
The fact that the GMC800 program was really down a little bit in this period as GM got ready to launch and run hard beginning October 2 of the GMC900 program, I think these are the primary factors.
We do expect our four-wheel drive to increase again beginning in the third quarter.
- Analyst
Just one more for Dick.
It looks like over 50% of the North American axle business is in bankruptcy or inside either Ford or Chrysler.
Seems like some of those assets are getting pushed out for sale sooner.
Can you just help us reconcile your push to lower cost regions with the fact that significant market shares for sale in the U.S. and just kind of give us some color on your strategy?
- Co-Founder, Chairman, CEO
Well, obviously, the strategy for our company is dissimilar to the strategy of other companies.
Our company has core competency in drive line, axle, gear, componentry and we're exceptionally good at it.
Some of the other competition is not as good at it.
It gives us a fertile opportunity but we also did not want to just stay in the Americas.
That's why we've been expanding globally the last many years.
We had good success in doing that.
We think probably right now there's major discussions and the only soon decisions by some of the other companies you talked about that could be opportunities for us.
- Analyst
Thank you.
- Co-Founder, Chairman, CEO
Thank you, Jon.
Operator
Your next question comes from the line of Joe Amaturo with Calyon.
- Analyst
Good morning, guys.
- Co-Founder, Chairman, CEO
Good morning, Joe.
- Analyst
Two quick question.
First, Mike, could you just give us order of magnitude what the charge related to SFAS 158 will be and what impact that will have on your equity?
- Vice President, Chief Financial Officer
Yeah, Joe.
I really can't.
I'll tell you why.
Until we know the number of people who take the special attrition program, we really won't understand the demographic mix of what we're dealing with.
So we started the year with a roughly $70 million equity charge under the old accounting standard but again, because we're going to wait until the end of the year to adopt this measurement day provision, we haven't done the actuarial work that's necessary in order for me to answer that question for you.
- Analyst
Could you just remind us what your pension and OPEB funding status was at the end of '05?
- Vice President, Chief Financial Officer
We had $140 million unfunded pension plan and we had a little over $400 million of OPEB liabilities on our balance sheet.
- Analyst
Okay.
Then the next question is regarding your steel contract negotiations.
Could you just give us an update on how those are going and what impact you could possibly see in '07 compared to '06?
- Co-Founder, Chairman, CEO
Joe this is David Dauch.
As far as our steel negotiations, as you know we pulled ahead our steel negotiations last year.
We have the majority of our steel on contract as far as the special bar quality securities through the next year.
So we feel very good about where we are with regards to the steel at this point in time.
- Analyst
Okay.
Thank you.
- Co-Founder, Chairman, CEO
Thank you, sir.
Operator
Your next question comes from the line of Ronald Tadross with Banc of America Securities.
- Analyst
Good morning, everyone.
- Co-Founder, Chairman, CEO
Good morning.
- Analyst
I guess on the all-wheel drive, four-wheel drive mix, can you just give us what you guys, the '06 year-to-date number and where you guys think that'll go in '07?
- Vice President, Chief Financial Officer
Yeah.
I'll tell you what.
We're going to get that for you here in just a minute.
Chris is looking it up.
I have the quarter by quarter numbers handy but not the aggregate.
- Analyst
On the gross profit dollars, I guess they were down about $30 million year-over-year.
That was it little looks like it was relatively good given the sales decline.
I'm wondering if you could help us out with what were the big swing factors on gross profit dollars?
Maybe give us an idea of where you think your variable margin was.
- Vice President, Chief Financial Officer
There's a couple three things all year long that are coming through here.
First of all, we were launching much of our GMC900 processing a year ago and incurred a lot of the quote unquote launch inefficiency you would see in the early days back in the SUV program.
So we're getting better every day, every week, every month on our operations and that's coming through.
There's lower project expense associated with the uncapitalizable portion of our Cap Ex programs on these activities again because we're farther down the road in terms of getting our Detroit gear and axle site ready to run on this 900 program.
Material cost reductions have aggregated about $10 million through the course of three quarters of this year and in the third quarter we're a little bit higher than a one-third impact of that.
So that's coming through.
And, you know, otherwise it's good old fashioned productivity.
We continue to keep focused on the lean manufacturing wro shops and other activities to make it happen every day.
That's really all that I could point out.
We were hoping and expecting that to be the case and it turned out to be true.
Ron, I have an answer to your question about four-wheel drive and all-wheel drive.
Through three quarters of 2006, we're at about 61% versus 64% of the first three quarters of 2005.
- Analyst
What do you think that will be in '07?
Is it up or down?
- Vice President, Chief Financial Officer
Again, it's obviously going to be impacted by the mix of production we see.
On the GMC900 program we expect the mix to be pretty good particularly as you launching new products and fill up the inventory bank.
Otherwise, I expect it to be reasonably flat.
Let me also take a moment right now, Ron -- Rod Lache asked the question earlier about our DiamlerChrysler, non-GM sales mix and I mentioned I knew our Dodge Ram sales were down, that represented a $40 million reduction in sales for the quarter on a year-over-year basis.
- Analyst
Just to follow up on the gross profit thing.
Was there anything there that helped you significantly on the positive side?
Like how much was the lower project expense?
Anything else like that?
- Vice President, Chief Financial Officer
Well, the project expense activity would have been relatively nominal.
Really, the material cost reductions and the productivity initiatives that the launch, the good launch performance we've had is what's driving that, Ron.
- Analyst
Okay, thanks.
- Co-Founder, Chairman, CEO
Thank you, sir.
Operator
Your next question comes from the line of Rob Hinchliffe with UBS.
- Analyst
Thanks, good morning.
- Co-Founder, Chairman, CEO
Good morning, Rob
- Analyst
Couple of clarifying things, the $22.7 million subexpense this quarter,that in the $91.2 million charge or no?
- Vice President, Chief Financial Officer
No, no.
I'm glad you asked.
It is not.
- Analyst
Okay.
- Vice President, Chief Financial Officer
The accrual that we took in this quarter is a forward-looking issue.
It does not include any activity from our third quarter 2006.
- Analyst
Okay.
And on the call back on October 4, you said you thought there would be 1300 to 1400 workers on layoff in the second half.
Is that playing off pretty much as you expected?
- Co-Founder, Chairman, CEO
Well, one thing you have to understand is that's a mix of indefinite layoffs and temporary layoffs.
- Analyst
Okay.
- Co-Founder, Chairman, CEO
Okay?
- Vice President, Chief Financial Officer
Yeah.
I would say that's largely been the case.
As you know, Rob, we will adjust our man power every week based on the schedules.
Some weeks have been stronger than others.
We're beginning to run into a period of time where there will be a little stronger production level.
On average, that's an approximate level that makes sense.
And I think that's the answer to your question.
- Analyst
How many -- to Dick's point, how many are on permanent or I guess what I'm ultimately trying to get at is how many folks are you assuming are permanently idled and therefore in this $91 million charge?
- Vice President, Chief Financial Officer
Based on what we're looking at right now will be a little bit higher than the numbers, the 1300 or 1400 level of 2006.
- Analyst
That are permanently idle.
- Vice President, Chief Financial Officer
This has been trending up.
Not just for production by considerations but also by productivity issues in the plants.
That's a big driver.
It might have even been you, Rob.
I know a call maybe two or three quarters ago where we talked about this.
I remember now, Chris Ceraso, the question had to do with where do you see this trend?
And we talk about the fact that we create some of this layoff situation through our own good productivity initiative.
- Analyst
Is there a reason to think that, I don't know if you can answer this but the take rate and the number of people that are permanently idled will be dramatically different?
- Co-Founder, Chairman, CEO
I think that's a question that you are getting into speculation.
We as management have to wait and allow our associates to make their own individual choices as we just indicated.
They just received their individual packages October 23.
It's far too early for us to be able to give any response to that.
- Analyst
Okay.
Then just reading in the paper that American Axle's won the Camaro Axle.
One, can you confirm that?
And two, does that give you a leg up if you have won it for the Zeta Program?
- Director of Investor Relations
Yes, we can confirm we won the Camaro Axle.
That's public knowledge.
At the same time, we're not in a position to comment on the Zeta Program.
- Analyst
Okay.
Thank you.
- Director of Investor Relations
Thank you.
Have a great day.
I'd like to remind everyone to please try to limit your questions to no more than two.
We've got a lot of people in the queue.
So Lisa, please continue.
Operator
Your next question comes from the line of Jonathan Steinmetz with Morgan Stanley.
- Analyst
Great, thanks.
Good morning, everyone.
- Co-Founder, Chairman, CEO
Good morning, Jonathan.
- Analyst
Just to follow up again on this $91.2 million charge and the 22.7 million number, the 22.7 to be clear includes both wage and benefit costs, is that correct?
- Vice President, Chief Financial Officer
Yeah.
Technically, it's all benefit costs because it's the supplemental unemployment benefits, the taxes and all of the related benefits.
Healthcare being a very big piece of that in addition to pension and OPEB and other types of benefits that we accrue according to GAAP.
- Analyst
If I were to use something like two-third as -- I guess you're calling it benefit -- in lew of wage type number, and then do it on a monthly basis through contract end, it seems like that $91.2 million number suggests that not a lot of people come out from the attrition program.
Do you have to reserve for a number of people coming out?
Is there just a conservative number or is there just nothing in there and it comes down when you get a real take rate?
- Vice President, Chief Financial Officer
Under GAAP, we're looking at this special attrition program as a contingent liability.
So it has not been accounted for in any way through the third quarter of 2006.
You are looking at this right.
- Analyst
So this charge has nothing but room to come down unless the size of the job bank so to speak would go up for business reasons?
- Vice President, Chief Financial Officer
That's correct.
- Analyst
Last question, can you give an explicit volume forecast on the heavy duty Ram in the fourth quarter when you talk about a 15% total, I'm just wondering where that falls into that?
- Vice President, Chief Financial Officer
Let me see.
We would see it -- we wouldn't see it significantly different.
The fourth quarter of 2005 was a reasonably strong quarter for that production.
We'd expect to be down similar level for that program as we are in total.
- Analyst
Thank you.
- Co-Founder, Chairman, CEO
Thank you, sir.
Operator
Your next question comes from the line of Chris Ceraso with Credit Suisse.
- Analyst
Oh, thanks.
Good morning.
- Co-Founder, Chairman, CEO
Good morning.
- Analyst
Mike, I'm sorry to be thick on this but the subcost that you've taken as part of the charge, that goes away then so should we expect an improvement in the profitability as soon as the fourth quarter even before the attrition program was completed because you've already approved for it?
- Vice President, Chief Financial Officer
In the fourth quarter, it's going to be difficult to discern what's going up and when's going down because we're going to have the special attrition program coming into it, but yeah, in terms of the number of associates that will be earning or being paid subbenefits and the impact on our financial statements, you're reading it right.
- Analyst
Okay.
I think one of the things that we haven't talked about here at all as it relates to the four-wheel drive is maybe the length with gas prices.
Have you started to see that penetration rate come back up a little bit in September and October on your shipments?
- Vice President, Chief Financial Officer
The answer is yes.
I'm not sure personally whether it has more to do with seasonal trends that we see every year at this time or the fuel efficiency issue.
But certainly as we talked about earlier in the call, we do think a portion of the lower run rate for this penetration rate does have to do with fuel efficiency.
- Co-Founder, Chairman, CEO
One of the nice things there, of course,the new product of GM has a significant fuel efficiency improvement on the 900 over the previous generation 800.
- Analyst
Okay.
And last one based on the schedules that you're seeing, how do you see the plus/minus balance coming out between the T900 SUVs and the T900 pickups in the first half of '07?
- Vice President, Chief Financial Officer
Well, that's a good question, too and one that's difficult to know.
We would expect the pickup production to outweigh the SUV downside in that first part of the year particularly because GM will be interested in not only meeting the demand for the new product and also building inventory levels.
- Analyst
Thanks.
- Co-Founder, Chairman, CEO
Thank you, Chris.
Operator
Your next question comes from the line of Himanshu Patel with JP Morgan.
- Analyst
Good morning.
- Vice President, Chief Financial Officer
Good morning, Himanshu.
- Analyst
When would you start hearing from the big three about any potential extended shutdown time around the holidays?
- Co-Founder, Chairman, CEO
We have already heard because we usually go out around a 20-week communication between our key customers and ourselves.
So we have information.
- Analyst
Okay.
And so presumably that's in your forecast for the fourth quarter?
- Co-Founder, Chairman, CEO
Yes it is.
- Analyst
And then separately, we've heard from a few suppliers already that it seems like the cost of aiding distress suppliers is starting to go up.
You know, it sounds like it was quite high in '04.
Maybe relatively benign in '05 and into the first half of this year and it seems like it's starting to go up for a few guys.
Could you guys give some color on how that's going?
- Vice President, Chief Financial Officer
We haven't seen any significant amount of costs or distress quote unquote on that issue.
- Analyst
Okay.
Then last question, Mike, you mentioned the accrual, the charge essentially worked out to be $40,000 per employee but that you would still have to incur the pension and OPEB costs for them per employee.
Could you quantify that per employee roughly?
- Vice President, Chief Financial Officer
We said all along we'd see our total layoff cost to be in a range 60,000 to $65,000 per associate.
Not 100% but most of the differential between those two numbers is related to the pension and OPEB costs.
- Analyst
Right, okay.
Thank you.
- Co-Founder, Chairman, CEO
Thank you, sir.
Operator
Your next question comes from the line of Brett Hoselton with KeyBanc Capital Markets.
- Analyst
Good morning, gentlemen.
- Co-Founder, Chairman, CEO
Good morning, Brett.
- Analyst
Trying to understand how the 22.7 million or the 58.6 million is going to change going forward given your charge of 91.2 million.
Can you just talk through that again for me, please?
- Vice President, Chief Financial Officer
Yeah, Brett, we picked up again the cost of supplemental unemployment benefits, unemployment taxes and active healthcare for the associates that we expect to be permanently idle through the end of the current contract period.
So that expense has been accrued and would therefore not be recognized again in future periods.
- Analyst
Okay.
And so when we look at that 22.7 or the 58.6, what would you say would be a reasonable split between those items that you've already taken a charge for and the other items that you are going to continue to be charged for?
In other words, the pension and the OPEB?
- Vice President, Chief Financial Officer
Well, the same proportional share we just talked about with Himanshu, to the extent that what we're accruing --
- Analyst
The 40 and the 65, right?
- Vice President, Chief Financial Officer
Yeah.
Close to two-thirds.
Then that's what we're talking about.
One point I'd caution you on though, as the accounting standards require, we're going to deal with the pension issue as a curtailment or we expect to deal with it as a curtailment so at the end of the year, we'll give you a better estimate of what that part of the story is.
But at this point in time, what we know is that the roughly one-third, two-third split is how it's going to be affected.
- Analyst
Okay, so as we go to the fourth quarter we can look at the 22.7, very roughly and say one-third, two-third split, something along those lines and that can be adjusted downwards as a result of the curtailment at the end of the fourth quarter?
- Vice President, Chief Financial Officer
Look, what we're trying to do very simply to the extent that we can have a good acceptance rate with our special attrition program, we're trying to eliminate all of the costs or as much as we can for these laid off associates.
And that's really the goal and expectation of this program.
- Analyst
Okay.
Now, these charges aside and special charges aside and so forth as we move from the third quarter to the fourth quarter sequentially, obviously we're seeing some increases in production levels for the three main programs that you discussed today.
Are there any other major factors that you would say would drive your earnings upwards or downwards sequentially that we need to be aware of as we think about the fourth quarter earnings number?
- Vice President, Chief Financial Officer
No.
The key thing here will be in the fourth quarter on such a short-term basis will be the volumes.
The volumes are going to be up.
Our production volumes in the aggregate sequentially should be up about 10%.
So that will be helpful.
- Analyst
Great.
Thank you very much, gentlemen.
- Co-Founder, Chairman, CEO
Thank you, sir.
Operator
Your next question comes from the line of Rich Kwas with Wachovia.
- Analyst
Good morning, guys.
- Vice President, Chief Financial Officer
Good morning.
- Analyst
On launch cost and project cost, Mike, how does that move forward here given that you are launching the pickups and fully launched on the SUVs?
How do you see that going through the next few quarters?
- Vice President, Chief Financial Officer
Yeah, Rich, good morning.
Most of the reduction and expense that we anticipated in terms of run rate basis coming into the third and fourth quarter of the year is go going to be consistent in the fourth quarter.
So I don't see any major variances there.
In terms of production efficiency, we're getting better every day, every week, every month.
As we ramp up higher production levels on the GMC900 program and very importantly stop production of the GMC800 program where there are duplicate types of processes.
We're going to be more efficient.
That's going to be an advantage for you particularly in 2007.
- Analyst
Okay.
And then Dick, I apologize if I missed this, but have you talked about the business you are quoting on and the level that you're quoting?
- Co-Founder, Chairman, CEO
Yes, approximately $900 million that we're bidding and quoting on right now, sir.
- Analyst
What's the time frame where you expect resolution on those boats?
- Co-Founder, Chairman, CEO
We -- this is David Dauch here.
We expect a good portion of the 900 million to be sourced between now and the first quarter of next year.
And I'd say probably about 200 million of that would be by the end of this year.
- Analyst
Thank you.
- Co-Founder, Chairman, CEO
Thank you.
- Director of Investor Relations
At this time, we've got time for a couple more questions in the queue.
Operator
Your next question comes from the line of David Leiker with Robert W. Baird.
- Analyst
Good morning, all.
- Vice President, Chief Financial Officer
Good morning, David.
- Analyst
I may ask a repetitive question because I want to make sure I understand this 22 million.
Is this comparable to these charges you've taken in the past for head count reduction?
- Vice President, Chief Financial Officer
No.
It is not.
What it is, is just the ongoing expense that we have historically incurred for layoff costs.
So we were all year long estimating this cost to be approximately $75 million.
- Analyst
Right.
- Vice President, Chief Financial Officer
It's a little higher than that and this that's all it is.
- Analyst
These are catching up and smoothing it out to true up your actual versus your estimate?
- Vice President, Chief Financial Officer
No, no.
Up until this point in time, we have expensed these costs as.
- Analyst
I got it.
- Vice President, Chief Financial Officer
And so we had about a little bit less than $60 million a year ago and total for the year.
We also had some one-time charges associated with what we call at that time our voluntary separation program or VSP, but otherwise in this third quarter if was just the normal ongoing run rate of benefits paid to our laid off associates.
- Analyst
[Inaudible], right?
- Vice President, Chief Financial Officer
Yeah.
Technically, we don't have a jobs bank but it's our laid off associate.
- Analyst
Is there a way that you can walk through it all with the restructuring actions and I know that you can't put any real firm numbers on it because you don't know the number of folks that are going to take you up on the offer, but just kind of the flow of, you know, quantify for us somewhat the flow of cash here in Q4, and then '07 that's going to be going out beyond the operating side of the business some.
- Vice President, Chief Financial Officer
Yeah.
I'll tell you there's nobody that would like to know that more than us.
You know, the flow of cash is going to be substantially dependent on the number of associates who elect to participate in the program.
As we said back on October 4, we just can't give you more precise information at this time until we know near the end of this year how many people have elected to participate in the program.
- Analyst
What about the flow of cash for things that are not head count reduction but are more moving equipment and capacity-related issues.
- Vice President, Chief Financial Officer
We'll see some of that begin here in the fourth quarter, and you're right to point out that that will continue as we go forward but the substantial portion of what we see as the cash outlay for these action will come quickly in the form of the special attrition program payments.
- Analyst
Is that 80, 90% of that total amount?
- Vice President, Chief Financial Officer
Again, until we know how many people elect to participate, we won't know, and also, I mean, the number of people that participate may guide our actions in terms of pacing or how quickly we accomplish other objectives.
- Analyst
You've gotten very good at answering the question, Mike.
That's all I have.
Thank you.
Operator
Thank you.
Your last question comes from Ryan Johnson with Lehman Brothers.
- Analyst
I have a more of a strategic question probably for Dick Dauch.
You are going to be assuming Delphi gets new wages coming out of its bankruptcy.
The last real parts manufacturing paying the old Tier I wages, which this quarter could have cost you about rough estimate $75 million versus, say, what [Adana] would pay its workforce.
How should we be thinking about that opportunity over the next two, three years?
- Co-Founder, Chairman, CEO
We have announced we have agreed with our major union, UAW, to do a supplemental agreement plan, point one.
Point two, that gives an opportunity as we a company require new associates in the future to be at a fully loaded all-in cost at less than $30 per hour.
Third, until we go through the SAP, we don't know exactly what the demographic will be, what the timing will be and the numbers that impacts our labor costs but those are very important points, that being the supplemental agreement and also the SAP.
- Analyst
And if you get 1,000 retirements, you'd probably still have close to 4,000 workers at the old wage?
- Co-Founder, Chairman, CEO
Absolutely.
- Analyst
And --
- Co-Founder, Chairman, CEO
A lot of opportunists for the future.
- Analyst
Okay.
In terms of the Camaro, you mentioned the project earlier.
Are the news reports true that that axle's go to be made at your Guanajuato plant?
- Co-Founder, Chairman, CEO
That's correct.
- Analyst
What does that imply about shipability and freight cost, vis-a-vis wage differences?
- Co-Founder, Chairman, CEO
It implies the total land and cost that was the right source and decision for American Axle and our shareholders.
- Analyst
Thanks.
- Co-Founder, Chairman, CEO
You're welcome.
Have a great day.
- Director of Investor Relations
Thank you, Brian and we thank all of you that participated on this call and appreciate your interest in American Axle & Manufacturing.
We certainly look forward to talking to you in the future.
Operator
This concludes today's conference.
You may now disconnect.