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Operator
Good morning.
My name is Rebecca and I will be your conference operator today.
At this time I would like to welcome everyone to the American Axle and Manufacturing fourth quarter and full year 2007 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session.
(OPERATOR INSTRUCTIONS) Thank you.
I will now turn the conference over to Mr.
Jamie Little, Director of Investor Relations.
Mr.
Little, please go ahead.
- Director IR
Thank you and good morning, everyone.
Thank you for joining us today and your interest in American Axle and Manufacturing.
This morning we released our fourth quarter and full year 2007 earnings announcement.
If you have not had an opportunity to review this announcement, you can access it on am.com website or through the PR Newswire services.
A replay of this call will also be available beginning at 5 p.m.
today through 5 p.m.
eastern time February 8th by calling 1-800-642-1687, reservation number 29997749.
Before we begin, I would like to remind everyone that the matters discussed in 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 are subject to risks and uncertainties which cannot be predicted or quantified and which may cause future activities and results of operations to differ materially from those discussed.
For additional information, we ask you to refer to our filings with the Securities and Exchange Commission.
This information is also available on the am.com website.
During the call we may refer to certain non-GAAP financial measures.
Information regarding these non-GAAP measures, as well as a reconciliation of these non-GAAP measures to GAAP financial information, is available on am.com website.
We are audio webcasting this call through our website, am.com.
This call can be archived in the investors section of the website and will be available there for one year for later listening.
During the quarter we are planning on attending the Morgan Stanley Global Automotive conference on March 19th.
In addition, we are always happy to host investors at our facilities, either here in Detroit or at other locations.
Please feel free to contact me to schedule a visit.
With that, let me turn things over to AM's Co-Founder, Chairman and CEO, Dick Dauch.
- Co-Founder, Chairman & CEO
Thank you, Jamie, and good morning, everyone.
Thank you for joining us today to discuss AM's financial results for the fourth quarter and full year of 2007.
Joining me on the call today are Yogen Rahangdale, our Vice Chairman, David Dauch, our Chief Operating Officer, and Mike Simonte, our Chief Financial Officer.
To begin my presentation today, I will provide a brief overview of our financial results for the fourth quarter and the full year of 2007.
I'll then review highlights of AM's achievements in 2007, which include significant progress on our major initiatives that we communicated to you at the beginning of 2007.
Finally, I will make a few comments on AM's 2008 outlook before turning things over to Mike to discuss the details of our financial performance.
After that we will open the call up for questions that you, ladies and gentlemen, may have.
Let me start off by saying that 2007 was a transformational year for AAM.
We made significant advances in customer and geographic diversity, along with product portfolio expansion.
We also strengthened our balance sheet, returned to profitability and generated significant positive cash flow.
AM's operating performance in 2007 was solid.
We maintained and improved upon AM's world class levels of quality, warranty performance, reliability, delivery, new product launch and overall launch success.
In 2007, AM executed various restructuring actions in North America, quietly, effectively and humanely.
These actions included the production idling of our Buffalo Gear, Axle & Linkage facility on December 21 of 2007.
Our Company executed these restructuring actions while we launched and prepared to launch new and expanded facilities throughout the world.
Those areas include locations in Brazil, China, India, Mexico, Poland, and Thailand, as well as locally here in Oxford, Michigan.
We are rapidly transforming our Company into the truly global enterprise with a firm financial and business foundation.
Today our Company is reporting our fourth consecutive quarter of positive operating performance and strong cash flow.
This translates into a solid year for AM as highlighted by the following two items.
First, AM's net income for the full year of '07 was $37 million.
Our diluted earnings per share was $0.70.
This compares to a net loss of $222 plus million or $4.42 in 2006.
Our earnings performance in 2007 is another important step in AM's plan and commitment to restructure, resize and recover.
We're certainly doing it.
AM's earnings in 2007 reflect the impact of special charges and non-recurring operating costs of $93.9 million or $1.18 per share.
These special charges were necessary to realign our production capacity and cost structure to current and projected operational and market needs and requirements.
These special charges include the cost of attrition programs, including the BSP, or Buffalo Separation Program, asset impairment and cost to redeploy assets.
As we reported January 17th at the 2008 Automotive Analysts of New York Detroit Auto Show conference, approximately 85% or 86% of our hourly associates represented by the UAW at our Buffalo facility did agree to participate in the Buffalo Separation Program.
The BSP is just the latest examples of the actions of AM working jointly with the UAW to work toward sustainable market cost competitiveness and cooperatively with our work force.
The second key metric I'll highlight today is cash flow.
Our free positive cash flow was $149.6 million for the full year of '07.
That represents a magnificent swing of $280 million versus 2006.
AM's strong 2007 free positive cash flow performance has allowed us to rapidly restore AM's net debt to recapitalization ratio at 36.6% as of December 31, '07.
That's a reduction of approximately eight whole percentage points, or 800 basis points, on a year-over-year comparison.
We are pleased with that.
Now let me turn our attention to the significant progress our Company has made on 2007 strategic initiatives.
Our first major initiative was to rationalize our U.S.
production capacity.
That included the production idling of our Buffalo Gear, Axle & Linkage facility and that was accomplished very quietly and successfully.
Another important component to this initiative was a redeployment of hundreds of pieces of underutilized equipment to support our new business backlog and to avoid future capital expenditure.
That was accomplished.
This helped us reduce our capital expenditure to $186.5 million, about 5.7% of sales in '07, approximately 25% lower than our original estimates.
A second major initiative was to transition AM's work force to a lower cost structure.
The goal of this activity is to be market cost competitive with the entire domestic market.
We must compete first in the United States of America.
In early 2007 AM administered various attrition programs affecting both hourly and salaried men and women.
Through these programs, our Company has eliminated nearly 2,500 hourly and salaried positions.
Structural cost reductions associated with this activity will exceed $100 million annually.
As a result of those activities and others, approximately 50% of AM's hourly associates on a worldwide basis are now working subject to market cost competitive labor agreements today.
This includes nearly all of AM's hourly associates working outside the U.S.
in places such as Brazil, China, India, Mexico, Poland, et cetera.
We operate on a highly cost competitive and operationally flexible manner at all those locations.
And people come to work.
This also includes nearly 1,000 UAW representative associates in the U.S., working at AM's wholly owned Colfor and MSP subsidiary.
AM's third major initiative was to expand our global footprint.
We are rapidly expanding AM's global manufacturing, engineering and sourcing footprint to support our customer global vehicle program and develop a need, production requirements and the proximity to those markets.
AM's footprint has grown from our original five troubled U.S.
manufacturing plants with some 7,500 people, to 29 facilities around the world and we currently employ approximately 10,000 associates.
Roughly 35% of our work force is now working outside the U.S.
These are very market cost competitive locations with excellent operating flexibility in attendance and extremely well educated men and women.
AM's growth outside the U.S.
will continue to be a key focus for our operations.
95% of the projected automobile growth is expected to occur outside the U.S.
over the next five-year period.
Approximately 75% of AM's new $1.3 billion new business backlog relates to awards' sourced to AM's non-U.S.
locations.
In addition to ongoing expansions in Brazil, China, Mexico and Poland, these awards will also lead to the construction of new AM facilities in 2008 which include, first, AM announcing a joint venture with Sona Koyo Steering Systems Ltd of India.
This new Company, AM Sona Axle Private Ltd, will launch in 2008 in a greenfield facility located in the northern sphere of India.
The joint venture will supply rear axles to the Company of Tata Motors, for one of their segment vehicle's light duty truck program called the Ace.
Second point, AM will build a wholly owned manufacturing facility in southwestern India, hundreds of miles away from the one I just talked about.
This facility will launch in 2009 and focus on commercial axle production segment.
Our first customer in that facility will be Mahindra International Limited, which I'll refer to as MIL.
Third point.
Our Company will construct a new regional manufacturing facility in Rayong, Thailand to support our largest customer beginning in the 2010 model year, which in the auto industry is like tomorrow.
I would like to update you on the final major initiatives for '07, that is broadening AM's product portfolio and diversifying AM's customer base and served market.
Our Company continues to invest in these critical design, engineering, expansion and modernization of the product portfolio to meet the changing need of the global automotive marketplace and consumer requirements.
Our focus is on vehicle safety, performance, fuel economy and energy efficiency.
We're also achieving these objectives through improvement in mass reduction, packageability, continued durability, quality and reliability, and in support of the objective our Company in our R&D segment spent around $80 million in 2007.
We're having exceptionally good results with it.
AM leverages our R&D investment through advanced global technical capability and resources.
As you know, our AM Rochester Hills technical center anchors all our world initiatives on this segment and is supported by 10 other engineering centers located in nine different countries on five different continents throughout.
AM's new line of all-wheel drive systems for passenger cars and cross-over vehicles have been designed to meet shifting customer buying habit.
We have secured purchase orders for AM's new products which include the following -- Rear drive modules, which I refer to as RDMs; independent rear drive axles, which I refer to as IRDA; independent front drive axles, or IFDA; power transfer units, called PTUs; torque transfer devices, referred to as TTDs; as well as multi-piece drive shafts, one, two and three piece, steel, aluminum, et cetera.
Approximately half of AM's $1.3 billion new business backlog relates to these new products supporting all-wheel drive passenger cars and cross-over utility vehicles.
These program awards are rapidly diversifying our Company's product portfolio and will soon add more balance to AM's sales concentration.
AM is expanding its product portfolio to add drive train products in addition to our traditional focus on drive line products.
This product line expansion plays right to AM's strength in developing very sophisticated high engineered products, advanced technology, and systems with great precision and industry-leading quality, warranty reliability, with our proven absolute always on time delivery.
This includes a heavy focus on electronic integration embedded right into the componentry.
Our Company continues to integrate electronics into our product offerings, such as the TracRite differentials, transfer cases and the TTZs.
In total, approximately 80% of AM's products include electronic integration as compared to just 5% when we created the Company in 1994.
New AM products in drive train include -- PTUs, power transfer units for all wheel drive, front wheel drive based vehicle applications for both past cars as well as CUVs; transfer cases and transmission differentials for the four wheel drive, all wheel drive, rear wheel drive based vehicle applications on light truck and/or SUV; and high precision gearing and shafts for six speed transmission applications for light truck, SUVs and passenger cars.
The expansion of AM's product portfolio has tripled the size of AM's primary served market from 8 billion to well over 27 billion throughout the world.
This has increased our new business opportunities for our Company.
It's a key reason why AM's new business backlog has recently increased to the $1.3 billion for programs launching from 2008 to 2012.
That's another increase of over $100 million since we last talked to you on October 30 of 2007.
AM's expanded product portfolio is creating new business opportunities today.
Our Company is quoting on approximately $800 million of potential new business.
Substantially all of AM's current new business quotes are with customers other than the General Motors Corporation.
This includes opportunities with several major global OEMs and bodes very well for the continued diversification of our Company's customer base.
Before I turn it over to Mike, let me wrap up by making a few closing comments to you.
2007 represented a transformational year, in which our Company made excellent progress improving our operating flexibility, cost competitiveness, rationalization capacity, business diversification, quality and warranty performance, financial return and balance sheet strengthen.
The year '08 is sure to be a most difficult, demanding and tough year for all business people, especially the auto sector, and I'm speaking here of all components.
It could be the OEM's, the Tier 1 suppliers as well as dealers.
Our Company is well prepared to face all these harsh business realities.
We include a strategic emphasis on improving our Company's manufacturing capacity utilization, manpower utilization, while jointly developing new innovative labor agreements with our strategic partners.
With our future agreements we will hope to enhance AM's operating efficiency, operating flexibility and better utilization of our work force.
All these are needed for AM to achieve market cost competitiveness with our primary focus on the United States of America.
These actions are enhancing AM's ability to invest in the continuing diversification of our product portfolio, the expansion of our customer base, the continued profitable growth of AM's global manufacturing enterprise.
I thank each and every one of you, men and women, for your attention today and for your vital interest in our Company, AAM.
Let me now turn this call over to our Group Vice President of Finance, Chief Financial Officer, Michael Simonte.
Mike.
- Group VP & CFO
Thank you, Dick, and good morning, everyone.
We have a lot to cover today so I'm going to get right to it.
2007 is now four weeks in the history books and it was a solid bounce back year for our Company.
As Dick said, AM posted full year 2007 GAAP earnings of $0.70 per share.
As we've discussed during previous calls, this result includes the impact of special charges and non-operating costs, primarily related to attrition programs and remember, this covers both hourly and salary programs, and the redeployment of machinery and equipment and other actions to rationalize underutilized capacity.
In the fourth quarter of 2007 we also incurred $11.6 million of asset impairments.
The total impact of these special items was $88.4 million, or $1.11 per share in the full year 2007.
AAM's 2007 results also reflect the impact of an additional charge of $5.5 million, or $0.07 per share, for the write-off of unamortized debt issuance costs and other costs related to the prepayment of a $250 million term loan we made in the second quarter.
This loan was otherwise due in 2010.
We refer to this activity as debt refinancing costs, again, $0.07 in addition to the $1.11 of restructuring items.
No matter how you look at it, excluding items, including items, with tax rate adjustments or without, somewhere in between AAM's financial results were much improved in 2007 as compared to a loss of $4.42 per share in 2006.
Our improvement is even more pronounced in cash flow.
We define free cash flow as GAAP cash from operating activities, by this I mean the top third of the cash flow statement, less CapEx and dividends paid.
In 2007 AM generated $368 million of GAAP cash from operating activity.
That's more than 11% of sales and nearly double the prior year.
CapEx was down $100 million year-over-year.
After dividends paid of $32 million, AAM generated $150 million of free cash flow in 2007.
That compares to a use of cash of $132 million in 2006.
In Glendale this weekend they would say that we just had a big change in momentum.
We believe the quality of AAM's free cash results are very high in 2007.
Not only did we reduce capital spending to less than 6% of sales, but we absorbed $130 million of payments for restructuring activities.
A little more than 60% of this total, or $80 million, related to the various attrition programs that we ran for both hourly and salaried associates.
The rest of these restructuring related payments related to the redeployment of underutilized capacity, literally hundreds of pieces of machinery and equipment to support new programs and AAM's global expansion.
This is a positive trend for AAM.
This is helping us to reduce capital investment.
This is also helping us to accelerate new program launches.
The manufacturing processes and systems that we're transitioning have proven capabilities, so launch complexity is reduced.
If GAAP permitted us to report cash flow figures excluding restructuring payments, we'd be talking about a much larger amount of free cash flow being generated from quote unquote running the business in 2007.
This is what I mean by the quality of AAM's free cash flow results.
Before I get into further details about our full year report, let me comment on our fourth quarter 2007 results.
In the fourth quarter of 2007, AAM generated sales of $755.3 million, that's down approximately $26 million or 3.3% from the fourth quarter of 2006.
Our major program production volumes, which are comprised of the various light truck and SUV programs we currently support for GM and Chrysler in North America, these programs were down 4.5% on a year-over-year basis.
Favorable mix helped to offset the impact of weaker volume.
In the fourth quarter of 2007 content per vehicle was up 2% to $1,300 round.
For the year, AAM's consent per vehicle was $1,293, right in line with our guidance for a 5% increase as compared to 2006.
We're projecting another 1% to 2% increase in content per vehicle in 2008, which will probably be the first full year which we eclipse the $1,300 mark for a full calendar year.
That will be the first time in our history.
This metric is important to us because it demonstrates that our customers recognize the value in our products and services.
It is very difficult for auto suppliers, especially domestic auto suppliers these days, to earn such net pricing increases.
This tells me our strategy is working.
Gross margin was approximately breakeven in the fourth quarter of 2007.
This compares to a negative 28% in the fourth quarter of 2006.
AAM's fourth quarter of 2007 gross profit results included $70.6 million, or approximately $0.92 per share, of the special charges I mentioned just a few minutes ago.
Approximately $0.26 of additional such charges were incurred in previous quarters in 2007.
The biggest piece of these special charges in 2007 relates to the Buffalo Separation Program or BSP.
The BSP is a voluntary separation program that was offered to approximately 650 UAW represented associates at our Buffalo Gear, Axle & Linkage facility in Buffalo, New York.
Production at this facility was idle in December of 2007.
Under the BSP, AAM offered a range of retirement incentives and buyouts to all eligible associates beginning in September of 2007.
A total of 558 associates agreed to participate in the program.
Back in August of 2007 we estimated that we would incur special charges of as much as $85 million for the BSP, including pension and other post retirement healthcare benefit curtailments and special termination benefits.
The actual cost of the BSP was $56.2 million.
$53.5 million of this total was incurred in the fourth quarter.
The remaining portion of $2.7 million was recorded in the third quarter of 2007.
The actual cost of the BSP was less than our original estimates and there are two reasons why that is true.
Number one, just short of 100 associates eligible for the program, or approximately 15% of the total population, chose not to participate.
Number two, some of the assumptions used by our actuaries to calculate the pension and [OPEP] charge associated with the BSP in the fourth quarter were more favorable than originally estimated.
This was especially true for the discount rate, which was approximately 50 basis points higher than the rate assumed in the original estimate.
You know as well or better than we do how volatility in the credit markets are affecting interest rates and credit spreads and this of course affected that discount rate.
So again, the BSP cost us $56.2 million in total.
Also included in the fourth quarter were asset impairments of $11.6 million and an additional $5.5 million of nonrecurring operating costs related to the redeployment of machinery and equipment and other actions to rationalize underutilized capacity.
Another item in the fourth quarter was approximately $5 million of noncash asset disposals distinguished from our asset impairment.
For the year in total we had $8.5 million of this activity, that's about consistent with what we've seen over the past many years.
But in the fourth quarter we were back loaded with this activity about $5 million.
In comparison to the prior year, AAM reported $285 million in special charges in the fourth quarter of 2006, primarily for asset impairments and the special attrition program, or what we have referred to as the SAP.
Setting aside the year-over-year impact of these charges, AAM's profitability was markedly improved in the calendar year 2007 and also the fourth quarter of 2007.
This improvement was due primarily to four things.
First, AAM achieved high single-digit productivity gains and other structural cost reductions resulting from and enhanced by the various attrition programs that we administered this year.
We met, and in many cases exceeded, our internal targets for productivity gains in 2007 due to a daily focus on first time quality, overall equipment effectiveness, lean manufacturing principles, and controlling all elements of our cost structure.
Second, AAM ended the year of 2007 with just a little less than $15 million of savings from material cost reduction.
2007 was a second consecutive year of achieving savings of this magnitude for our Company.
I might also add that we accomplished this result while quietly managing through the bankruptcy of at least 20 direct material suppliers during the year.
Quietly is the word I would emphasize in that sentence.
This will continue to be a major area of focus for us in 2008, as we both globalize and localize our supply chain to support our rapidly expanding and cost competitive global manufacturing footprint.
The third item I would highlight here is the favorable impact of higher sales content.
That should be evident in our higher content per vehicle and fourth, we had a lower overall effective income tax rate.
We have more to say about that in just a couple minutes.
To summarize, we posted a net loss of $25.5 million or $0.50 per share in the fourth quarter.
Special charges in the quarter were $70.6 million or $0.92 per share.
Of course this was the restructuring costs that I described to you earlier.
And just to be clear, when I use the word restructuring cost or restructuring activities or restructuring payments I'm referring to this activity.
Let me briefly recap the full year sales trends and a couple other matters before we turn our attention to cash flow and the balance sheet.
For the full year 2007, AAM sales were approximately $3.25 billion, that's actually an increase of 1.8% versus $3.19 billion in 2006.
For the year our major program production volumes were down approximately 3.3%.
Our full sized programs were down approximately 1.5%, our mid-sized programs were down 11%.
As I have already said, favorable mix helped us to offset the production volume declines, content per vehicle was up 5% in 2007.
We also saw increases in revenues from our wholly owned Colfor and MSP subsidiaries.
These forging and machining operations are cost competitive and they are growing.
Examples of this growth includes our 6B transmission components and other new programs and customers.
We are working with Harley-Davidson, Jacko and Coil at these locations.
Not in all cases but in many cases the sales at these locations are not captured in our major program production volumes.
Let's cover interest and taxes before we move on to cash flow.
For the full year 2007 net interest expense of $52.3 million.
That's quite a bit higher than AAM's net interest expense of $33.8 million in 2006.
Most of this increase relates to higher average borrowings.
Said another way, this is a cost we're incurring to firm up our liquidity position at a time when rates, terms and conditions were very favorable.
We are glad we did that.
Interest rates were also a little higher for us in 2007, approximately 8% on a weighted average basis and that's about 30 basis points higher than 2006.
For the full year 2007, AAM's effective income tax rate was a benefit of approximately 110%.
This compares to a benefit provision of 37.4% last year.
We have covered these issues on every recent earnings teleconference, so I'm going to try to be a little brief on this topic today.
I suspect we might have some Q&A on this as well.
Most of the special charges we are incurring are in the U.S.
From a tax accounting perspective, we are recognizing deferred tax assets on many of these charges.
This is what drives the benefit tax rate, that's what we've been saying all along.
This is also a financial volume and mix story.
The fact that much of our operating income is currently being generated in foreign locations with relatively low effective tax rates compounds this analysis.
And I think this is going to help color what a normal tax rate is for our Company for many years to come.
I'm not sure what you think is normal, but normal for us is going to be a little bit lower than our historical run rates and that's a positive development for our Company.
AAM is not and never has been in a tax net operating loss provision in the U.S.
In fact, at the year-end 2007 we're in an excess foreign tax credit position.
This position is much different than some other highly publicized situations in our industry and gives us comfort on our deferred tax accounting.
With respect to the fourth quarter on a standalone basis, some of you are writing about some of the discrete adjustments that hit our P&L.
These are one-time favorable adjustments.
They approximated $4 million or $0.08 per share in the fourth quarter.
This is above and beyond the impact associated with special charges.
These adjustments relate principally to routine, but favorable this time around, provision to return adjustments and currency translation.
Again, these are favorable developments for our Company.
The bottom-line for 2007 is that our GAAP earnings were $37 million or $0.70 per share in 2007.
This reflects the impact of charges amounting to $88.4 million or $1.11 per share.
These are all the special items I talked about earlier, including the pension and post retirement benefit curtailments and special termination benefits associated with the BSP.
AAM's full year 2007 earnings also reflect the impact of an additional $5.5 million charge or $0.07 for the debt refinancing costs.
Our 2007 earnings, excluding the impact of all these special charges, reflects a tax rate around 11% for 2007.
Again, reflecting the positive changes we've made to expand our global operations, take advantage of low tax rates available to us in some of these foreign jurisdictions and recognizing the future cash tax savings we're going to see in the U.S.
on these deferred tax assets.
No matter how you look at it, this is a much improved result over the prior year.
Let's talk about cash flow.
AAM's fourth quarter free cash flow was a use of $25.2 million.
This compares to a use of $26.8 million in the fourth quarter of 2006.
Excluding payments for restructuring activities of $70.4 million, AAM generated approximately $45 million in free cash flow from quote, unquote, running the business in the fourth quarter of 2007.
This capped off a year in which our free cash flow aggregated $150 million in total, as we've already told you.
Our cash flow performance improved in 2007 for two major reasons that are going to continue into 2008.
The first is structural cost reductions and the second are cyclical advantages primarily relating to product life cycle.
Structurally, we are reducing costs and improving capacity utilization.
CapEx requirements are being cut because we have the ability to redeploy underutilized capacity to support our new programs and our global expansion.
Cyclically we are benefiting from lower maintenance CapEx in the U.S.
on the GMT900 program in particular.
By itself this program accounts for more than half of our top-line today.
We incurred higher CapEx spending on this program in 2005 and 2006 and now we're in the sweet spot of the product life cycle from a cash flow perspective.
This should continue for at least the next two or three years.
These dynamics both structural and cyclical, as I've said, will continue to positively impact our cash flow performance in 2008.
Our free cash flow results had a positive impact on our capital structure in 2007.
Net debt outstanding at the end of 2007 was approximately $515 million.
That's down about $144 million from the prior year-end.
This is primarily explained by our year-to-date free cash flow results.
AAM's liquidity position is strong and stable.
At year-end 2007 we had $344 million of cash on the balance sheet and total available liquidity, and by this I mean cash and borrowing capacity under existing credit facilities, of $1.1 billion.
No significant portion of our debt capital structure expires before 2010.
Most do not expire until 2012, 2014, or 2017.
Net debt-to-capital was 36.6% at the end of 2007.
We were up in the mid-40s on this leverage ratio at year-end 2006, but now we're pretty much back to our targeted level.
At December 31, 2007 net debt to EBITDA was approximately 1.7 times.
That's very healthy.
Stockholders' equity finished up at $891 million at the end of the calendar year 2007.
Net income and stock compensation programs drove it up.
In the fourth quarter 2007 we also had a favorable increase associated with the year-end valuation of our pension and post retirement healthcare obligations.
If you need more information about this just ask a question and we will get into further detail.
Let me close with some comments on 2008.
We're not going to provide any earnings or cash flow guidance today for 2008.
This is due primarily to the timing of our ongoing negotiations with the UAW.
We don't know what the financial impact of that process is going to be and neither does anybody else.
We're not going to speculate on that outcome.
As Dick said, 2008 is shaping up to be a tough year for us and the rest of the domestic automotive industry.
We are basing our plans for 2008 on an assumption of 15.4 million units [SAR] and North American light vehicle builds of 14.3 million units.
We currently expect our major program production volumes to be down 8% to 9% for the full year of 2008.
In the first half of the year we expect volume in these programs to be down more than that, probably around 15%.
The second half should be improving on a relative basis and become positive on a year-over-year comparison, probably in the fourth quarter of 2008.
Some of you have commented in recent days that that means we see a recovery in the second half of 2008.
I don't think that's an accurate way to describe our view.
We do believe that our sales trends will improve in the second half of the year.
So we will see a recovery in our Company in the fourth quarter but the general economy I do not say we see a recovery.
I think that should be evident in our SAR North American light vehicle build.
Let me explain why we're going to see a recovery in our business.
There are a couple more production days in the back half of the year 2008.
Simply a calendar issue, but it is going to affect any year-over-year comparison.
The second point is we believe some of the weakness in the first half that we're seeing, you remember we see volumes down in our programs as much as 15%, we see some of this being related to our customers' efforts to right-size dealer inventory.
This is especially true for the full sized pickup programs we support and we think this can be accomplished in the first half of the year.
We should also benefit from favorable launch activity in the second half of the year.
So maybe my final comment on this would be if we do see a recovery in 2008, then there should be some upside for American Axle.
As always, we'll focus on managing what we control in 2008.
We made excellent progress in 2007 in our efforts to improve our market cost competitiveness in nearly all the major geographic regions of the world.
We still have some work to do in this area of 2008.
A major area of our cost structure, really the only major area of our cost structure that is not currently market cost competitive is our domestic labor cost structure, specifically at the master agreement facilities.
We are working jointly and effectively with all of our stake holders to find the appropriate solutions to this issue.
In 2006 and 2007 we have made some difficult but necessary decisions about how to improve capacity utilization, operating efficiency and cost competitiveness.
We've restructured some operations and resized others.
We idled our Buffalo operation.
We are prepared to take further actions if necessary to create a sustainable future and a viable, market competitive and profitable business model for each and every operation in our AAM family.
Thank you for your time and attention this morning.
I'm going to stop here and turn the call back over to Jamie so we can start the Q&A.
- Director IR
Thank you, Mike and Dick.
We reserved some time to take questions.
I would ask you please limit your questions to no more than two.
So at this time please feel free to proceed with any questions you may have.
Operator
(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster.
Your first question comes from Itay Michaeli with Citi.
- Analyst
Remind us where your capacity utilization is today and how you see that progressing over the next two years towards your 90% goal in 2010.
- Vice Chairman
The capacity utilization today on average is about 75%.
With the initiatives we have taken, we're moving towards by 2009, 2010 timeframe to 90% capacity utilization.
- Analyst
Great.
Right.
That's helpful.
And just moving on quickly, what is your implied assumption for sales of large full sized pickup trucks and SUVs in 2008, just beyond the actual production, what are you looking for for sales in particular?
- Group VP & CFO
Itay, this is Mike and I think our working assumptions for 2008 is that they're going to be reasonably correlated with our production volumes.
We see our production volumes down about 8% to 9% in total on the full sized programs.
We'll probably be off a little bit higher than that, particularly the GMC900 program, mostly due to that inventory situation that we see resolving itself early in calendar year 2008.
- Analyst
Great.
And just finally, I know you're not talking about EPS and free cash flow guidance specifically today, but do you plan to provide some guidance later on once the union contract visibility improves?
- Group VP & CFO
Well, we certainly, Itay, will be in a better position to analyze that in just a few weeks and we'll reconsider doing that in our next earnings conference probably in April.
- Analyst
Terrific.
Thank you.
- Co-Founder, Chairman & CEO
Thank you, Itay.
Operator
Your next question comes from Brian Johnson with Lehman Brothers.
- Analyst
How are you looking at your operating margin performance in 4Q?
It looks like when you back out special items it's about 3%, which would be the lowest operating margin of the year.
Is A, is that the right way to look at it and B are there operational things beyond the contract we should be aware of.
- Group VP & CFO
Brian, good morning.
Couple things I would point out.
Our volumes in the fourth quarter were down about 4.5% on an overall basis.
That was a little weaker than the full year and had an impact on our margins, no question.
Specific to one program I haven't mentioned yet today, the Dodge Ram heavy duty program was down almost 50% on a year-over-year basis.
In certain parts of our business we did have some challenges relative to volume and volatility.
We also, as you know, we're winding down our operations at our now idle Buffalo Gear and Axle facility.
We're not complaining, we're simply explaining, that we ran at a low level capacity utilization and efficiency in that operation in the fourth quarter and that is now behind us.
The other item I mentioned in my comments that had an impact on operating margin, I'm not too terribly concerned about it, quite frankly, was the $5 million of noncash asset disposals we had that were above and beyond the asset impairments.
It's appropriate actions to take and reasonably well consistent with our prior experience.
We had about $8.5 million of this activity this year.
If you go back and look at our history we're somewhere between 5 and 10 most years.
That was back weighted this year based on the nature of activity we had and not really indicative of the run rate of our operations.
I think we felt pretty good about the progress we made in the fourth quarter.
From a margin perspective we had a bunch of messy things impacting our press release and 10Q and all that stuff this quarter.
But when you strip back and see the progress we're making on productivity, material cost reductions, the improvement we made on our market cost competitive positions particularly outside the U.S.
and a variety of other things that Dick mentioned today, we feel we have got Big Mo on our side and feel darn good about it, Brian.
- Analyst
So that $5 million of asset impairment wasn't part of the special charge?
- Group VP & CFO
No, technically it's not an impairment.
These are relatively normal course of business activities.
We didn't feel it was appropriate to spike them out as an impairment or a special charge.
And I'm not trying to do that right now.
I'm just trying to explain that that activity was back weighted in the fourth quarter.
- Analyst
Okay.
And was there any new backlog hitting 4Q or any backlog going to or some backlog (inaudible) 4Q was it delayed in terms of where revenues came in?
- Group VP & CFO
In 2007, Brian?
- Analyst
Yes, 4Q 2007, was there delayed backlog that should have hit that didn't?
- Group VP & CFO
No, nothing significant.
The revenue that we ended up with is, in our view, simply the result of the volumes in mix that we saw and that we have described to you and there were no changes from our expectation.
- Analyst
Okay.
Thanks.
Operator
Your next question comes from the line of Brett Hoselton with KeyBanc Capital.
- Analyst
Good morning, gentlemen.
- Co-Founder, Chairman & CEO
Good morning.
- Group VP & CFO
Good morning, Brett.
- Analyst
Dick, I have a couple of strategic questions for you.
My questions are two-fold.
First, how do you view the commercial vehicle business?
You're obviously involved in England and I'm wondering, do you view this as a really good growth opportunity globally for you or is it more of an ancillary business to what you currently have?
- Co-Founder, Chairman & CEO
Well, first of all, the commercial business we've been in since 1998 when we acquired our wholly owned subsidiary Albion based over in Glasgow, Scotland.
We've been consistently as a management exploring ways over many years on how to leverage their particular expertise, help the market, especially in emerging markets.
As we take a look at that, for example, we just recently announced to you and the public an order valued in $30 million, $40 million on MIL in India.
There we created a joint venture which involves Mahindra and International Truck and as a result, we continue to expand on these kinds of things.
So that's what we're doing.
We're focusing on commercial, have been since 1998 and we also established an engineering organization in Fort Wayne, Indiana to supplements those things.
- Analyst
Would you have an interest at any point in time in making some sort of an acquisition to really accelerate the growth in that area?
- Co-Founder, Chairman & CEO
If we did we'd tell you.
- Analyst
Great.
Then second question I have for you is, and correct me if I'm wrong, Dick, I see your business in two pieces, the forging side of the business and the machining and assemble side, maybe that's an incorrect perception.
If that's an reasonable way of looking at it, how do you view the forging side versus the machining and assembly side.
Do you see yourself continuing to invest and grow.
The forging side, is it a key component, a key asset, is it necessary for what you're doing?
- Co-Founder, Chairman & CEO
First of all, forging is a very, very critical piece of the auto industry.
Secondly, it's been around since the biblical times.
Third, it's going to be around in the future.
Fourth, we have one of the finest forging operations in the world, bar none.
We've put in incredible investments into it over the last 14, 15 years.
It continues to help us and if you look at our track record, the best quality, the best warranty, the best engineering, the best reliability on the road of anybody in our business in the world.
Obviously, forging has its contribution.
Are we flexible for future business discussions on that?
Potentially.
- Analyst
Okay.
Very good, then.
Thank you very much, gentlemen.
- Co-Founder, Chairman & CEO
Thank you.
Operator
Your next question comes from Rick Kwas with Wachovia.
- Analyst
Hi.
Can you hear me?
- Co-Founder, Chairman & CEO
Yes, we can hear you, Rick.
Good morning.
- Analyst
Good morning.
Mike, question here on these charges.
Do they all hit the COGS line or is there some in SG&A.
- Group VP & CFO
Almost, substantially all, to the most I can say almost all, of these charges hit the cost of goods sell line.
- Analyst
Just remind me on the tax rate on a continuing Ops basis, if you back this out it seems like you got a tax credit this quarter.
Is that correct?
- Group VP & CFO
Well, yes, what I described in our, in my comments, Rich, was that we had -- I wouldn't call it a tax credit item, although R&D tax credits, foreign tax credits, obviously there are credits embedded in our tax provision run rates.
But in the fourth quarter we had about $4 million, or $0.08 per share upside, associated with discrete item adjustments, as they are referred to in the accounting literature.
These items were basically return to provision adjustments and little bit of currency translation impact that flowed through our provision.
These were unusual items that arguably could be stripped out and viewed as nonrecurring.
That's why I pointed them out.
- Analyst
Okay.
And then just, Dick, on the quotable activity here, the $800 million, when we think about that from a geographic perspective, what are the splits between non-North America and North America.
And then when you look at that business, it's mostly non-GM, within the North American piece would you be able to share what percentage of that business you're quoting in North America?
- Co-Founder, Chairman & CEO
Rich, this is David Dauch.
The majority of the business that we're quoting right now is non-GM related business, substantial amount of it is non-GM related.
And I would say, based on the distribution between North America and global opportunities, it's probably a 50/50 split right now.
- Analyst
So there's sizable opportunity here in North America?
- Co-Founder, Chairman & CEO
Yes, there is.
- Analyst
Okay.
Thank you.
- Co-Founder, Chairman & CEO
Thank you, sir.
Operator
Your next question comes from Himanshu Patel with JPMorgan.
- Analyst
Mike, I'm sorry, I must have missed part of this.
Can you review the non-restructuring sort of onetime nonrecurring items you mentioned.
I think you highlighted three of them, asset impairments, some transitional costs associated with Buffalo and then the noncash asset disposal items.
- Group VP & CFO
No problem.
First of all, you mentioned three items.
I'll review them.
Asset impairments I would characterize as restructuring.
And we have characterized as restructuring in our release.
In addition to those asset impairments, we had approximately $5 million of ongoing, normal activity in PP&E disposals.
Our typical run rate, as I've said, in this area is somewhere between 5 and 10 million.
For 2007 it was about 8.5 total and 5 of that hit in the fourth quarter, so a little bit disproportionately affecting our results in the fourth quarter.
Okay.
So differentiated from asset impairments.
I mentioned really two other factors that impacted our margin performance in the fourth quarter.
I mentioned that we had lower volumes in the fourth quarter as compared to other periods.
That our volumes were down 4.5% overall in that period, that compares to a 3.5% down side variance for the year.
And specifically, I pointed out that the Dodge Ram heavy duty program was off about 50% in the fourth quarter on a year-over-year basis.
So in certain pockets of our business, we had some difficult comps relative to revenue and margin performance opportunities.
The third item that I mentioned, Himanshu, relating, again, these items I would characterize explaining, not complaining.
But the third item was Buffalo Gear Axle Linkage was idle, this facility was idled in December of 2007 in the fourth quarter.
We were winding down operations, volumes were low, capacity utilization was low, our operating efficiency was low.
That's behind us now.
- Analyst
Any way to quantify the impact of the underutilization at Buffalo this quarter?
- Group VP & CFO
I'm not going to get into all those details, Himanshu, but it was worth mentioning, significant enough to mention and I think you in your comments this morning pointed out a little bit lower operating margin performance overall for the quarter and I think these items explain that.
- Analyst
Okay.
Couple other questions.
I know the union contract talks it's a sensitive issue but can you just refresh us, what happened in the last UAW contract talks in terms of time scale, when did the conversations really accelerate, how long did it take after the contract expired for you guys to settle on something?
- Co-Founder, Chairman & CEO
It's more important to take a look at what we're doing today and we started talking informally with the UAW, I think that's the union you're specifically talking about, maybe a couple years ago and more formally let's say middle of December of last year and we are now February 1.
Our contract expiration is February 25, 11:59, so we have got about three and-a-half weeks of intense work to do as a joint team.
- Analyst
Okay.
Two separate questions.
One, I think you mentioned something about several sub-suppliers that you guys ended up assisting in 2007.
Is there a way to quantify the cost associated with that and I guess my bigger question is, is there something on that front that is concerning you more now than it was at the start of the year.
- Group VP & CFO
Himanshu, let me tag team this.
I'm going to answer the financial aspect of this question.
Offer up David Dauch to provide a little bit more color on the supply chain implications.
What I said was that we quietly handled approximately 20 supplier bankruptcies and that is embedded in our net material cost reductions of approximately $15 million.
We have many of these types of issues to manager every year.
They are a little bit more acute in the calendar year 2007, but we were able to overcome them and still achieve our financial goals in this area.
- Co-Founder, Chairman & CEO
To continue with that, as we mentioned earlier, we managed through about 20 different bankruptcies last year.
Obviously it had some financial impact but was contained within the material productivity that we attributed to our overall performance.
2008 is going to be a difficult year.
We still factor that in to our mature performance, which we expect to be favorable and positive in 2008 also.
- Analyst
I guess my question is given the magnitude of the production cuts in North America in the first half, could we have a situation where the fragility of some of these Tier 2 suppliers is kind of re-tested in the first half?
Do you see the situation potentially being kind of at a cusp now where things could get considerably worse over the next six months or you don't have any reason to say that right now?
- Co-Founder, Chairman & CEO
For AM, this is Dick Dauch talking, we have a solid supply base and we have nothing to announce today.
We just have good stability and we're working coordinated with them.
I want to put something in perspective.
When we started our Company, we only did our sourcing in two countries, U.S.
and Canada.
Today we source throughout the world, 30 countries, five continents.
We have more than doubled our top-line sales.
We're significantly reducing and rationalizing our supply base.
We have much stronger supply base, much better technology and in better financial situation.
If we have something else to share, we'll share it with you at the right time.
- Analyst
Lastly, Mike, have you provided any tax rate guidance for '08?
- Group VP & CFO
We provided no earnings or cash flow guidance of any sort for 2008.
What I would point out is that we will continue to have healthy profitable growing operations outside the U.S.
that will be taxed at rates much lower than the statutory rate of 35%.
Depending on what happens in the U.S., both with the volume environment as well as our ongoing opportunities to improve our cost structure, it's anybody's guess where we end up on that relative to 2008.
- Analyst
Thank you.
Operator
Your next question comes from Chris Ceraso with Credit Suisse.
- Co-Founder, Chairman & CEO
Good morning, Chris.
- Analyst
Mike, just one more to follow up on the tax thing, just to make sure I understand where the numbers come from.
Is it fair to think about it like okay, in the U.S.
you had a loss of, let's just pick a number, $50 million and that generated favorable tax of 35% on that.
Outside the U.S.
maybe your profit was $60 million or $61 million, so that you netted a positive 10 or 11 but the tax rate on that was maybe 15%, so net/net you had positive pretax income but a tax benefit as opposed to a tax provision.
Am I thinking about that right?
- Group VP & CFO
You're thinking about it exactly right.
I'm not commenting on the precision of your estimates.
But you've got exactly the right thought process.
That's exactly what I've been explaining.
That's how to look at it.
- Analyst
Okay.
Thanks.
You mentioned the adjustment to your equity because of the favorable discount rate move and the pension and healthcare balances.
Do you care to give us a feel for what that might do to the P&L expense of those two items in '08 versus '07?
- Group VP & CFO
We're not going to say anything about 2008, although you're right to point out that that would have an impact.
If you look at our previous disclosures about the impact of a 50 basis point movement in our discount rates, I think you'll get a pretty good indication.
Of course that's why GAAP requires that type of disclosure.
- Analyst
Okay.
That's helpful.
And then on steel cost overall, what are you seeing right now and I know you're expecting to achieve savings but is the market for steel and your cost of steel looking more challenging in '08 than it was in '07?
- Co-Founder, Chairman & CEO
We actually see it being fairly stable.
We've been in negotiations with several of our large steel suppliers most recently, so we feel very comfortable where we are with our current contracts and commitments from our supply base.
- Analyst
Okay, thank you all very much.
- Co-Founder, Chairman & CEO
Have a great day.
Operator
Your next question comes from Rod Lache of Deutsche Bank Securities.
- Analyst
Can you provide just a rough number on the year-over-year savings that you're anticipating from the restructuring?
Just what you've executed so far, how much benefit would that give you year-over-year in '08 and what exactly are your expectations for material cost changes?
I know you said it's favorable '08 versus '07.
- Group VP & CFO
Yes, Rod, this is Mike.
I'm sorry to treat this question this way.
We'll probably have more color at a later date.
We're just not in a position to provide earnings guidance right now.
I think your basic analysis is right, that we do see continuing favorable trends from this area.
We have given you some broad indication that the structural cost reductions are well in excess of $100 million in total.
I look forward to answering that question because we think it's going to be a very positive story for our Company once we have more information about where exactly we are headed in 2008.
- Analyst
Did some of the 100 million flow into 2007?
- Group VP & CFO
Absolutely.
- Analyst
So okay.
But you're not giving any color then on -- this is not an incremental savings from the BSP and so forth.
- Group VP & CFO
As we've said -- I'm not sure I totally understand your question, Rod.
Are you saying is the $100 million incremental to 2007?
- Analyst
Right.
Well, it's not incremental to 2007.
- Group VP & CFO
No it's not.
- Analyst
But you've executed certain things over the fourth quarter, including that BSP.
- Group VP & CFO
Exactly right.
The SAP that was put in place largely in the first -- fourth quarter of 2006 and first quarter of 2007 had a major positive impact in allowing our Company to generate cost reductions in excess of $100 million.
During the course of 2007 we had various salary attrition program activities.
We, of course, had these rationalization activities relating to capacity utilization and other things that we're actively working on.
You know exactly what that is.
So we're going to be well in excess of $100 million and there's going to be incremental opportunities for us in 2008 and we're working on that right now.
- Analyst
Okay.
And on the raw materials?
- Group VP & CFO
On the raw material side, I think David answered that question.
We saw about $15 million of savings now two years in a row.
We would expect to have similar and consistent opportunities in 2008 and that's our working assumption as we go forward.
- Analyst
Right.
Can you quantify the amount of backlog that you have launching this year?
- Group VP & CFO
Rod, what we've said about our backlog is we have got about $800 million launching in the next three years.
Substantial portions of that are launching in 2009 and 2010.
Although we will see some pickup for us in the fourth quarter, it's going to be a reasonably small percentage, 10% to 15% probably of that $800 million.
- Analyst
Okay, thank you.
- Co-Founder, Chairman & CEO
Have a great day.
- Director IR
Thanks, we have time for one last question.
Operator
Your final question comes from the line of David Leiker with Robert W.
Baird.
- Analyst
Can you hear me all right?
- Co-Founder, Chairman & CEO
Yes, good morning, David.
- Group VP & CFO
Hi, David.
- Analyst
Thanks.
I had a couple housekeeping items and then a bigger picture question.
Your non-GM revenue base, that's predominantly the Ram truck, how much of that is the Ram?
- Group VP & CFO
Well, --
- Co-Founder, Chairman & CEO
I think the different way to say it is Chrysler is around 10% to 12% of our total revenue.
Multiplicity of components.
You know how much of that is Ram.
- Analyst
I can figure that one out.
Thank you.
As you look at your footprint changes that you've been going through here, how far through that cycle are you?
What percentage of that do you have completed today?
- Co-Founder, Chairman & CEO
We're certainly happy with where our progress is today and as we indicated we've gone from five troubled locations to around 30 at the end of this year.
And we're extremely comfortable with where we're at, especially with the way the world demographics are going.
And we have got a couple more that we will announce at the right time.
- Analyst
(inaudible) If you take your North America kind of moving assets around, how much of that is completed?
- Co-Founder, Chairman & CEO
I did not understand your question at all.
- Analyst
Moving your assets in the idle facility in Buffalo to other locations, how much of that work is completed?
- Co-Founder, Chairman & CEO
We have already announced what we're doing on that.
- Analyst
In terms of the moves are done and the costs are behind you?
- Co-Founder, Chairman & CEO
Yes.
- Group VP & CFO
David, yes, there's not very much in the way of cost to be incurred on that.
We still have some opportunities to redeploy some assets that are currently not being used.
We told you that that would occur over a roughly a three year time period 2007, 2008, 2009, so that by 2010 we're going to be at 90% or better capacity utilization.
That's our plan and we're on track.
We've incurred a fair amount of that cost in 2007 and when we provide guidance for 2008 if there's anything significant we'll include that in our guidance.
- Analyst
When you hit that 90% utilization, do you hit the margins you reached in the past?
- Group VP & CFO
David, as we talked about before, our margin performance as compared to where we were in the past, and I think you are referring to the glory days of 2003 when we say that, there's really two major factors that have caused our margins to decrease.
Three I guess in one sense.
One is the increased cost of materials.
And although we're having good success in the last couple years achieving material cost reductions, we still have the elevated levels of metal market costs that may or may not go away.
So I'm not sure, because we just can't control that part of the commodity market, I'm not sure whether that's going to be the case.
But we would need that metal market cost to moderate back to levels that we saw then in order to get all the way back to that sort of 14%, 15% level based on what we see right now.
- Analyst
Okay.
- Group VP & CFO
(multiple speakers]
- Analyst
And then just lastly here, I understand and appreciate the difficulty in providing guidance but just see if you can -- see if we can put some things in some buckets.
If you take your revenue line, you've got your normal price downs and you've got the volumes and you've got the new business coming through.
In 2008 would you expect your revenues to be up or down from what you're using in your macro assumptions right now.
- Group VP & CFO
David, in our form 8-K filing this morning and I think also at the auto show conference, we said that we'd expect our volumes to be down 8% to 9% in total, maybe 15% in the first half of the year.
And today we clarified that means a range of $3 billion to $3.1 billion of sales in 2008.
- Analyst
In the context that you've got this labor negotiation and no one really knows how that's going to transpire, if you excluded that, do you think your profitability is up or down on an operating basis in '08 versus '07.
- Group VP & CFO
David, you and everyone else is trying to pin me down on that.
We're simply not going to provide any guidance today.
We look forward to providing that guidance as soon as we can get a better handle on the total picture.
I think it's dangerous and just not prudent to speculate on all these pieces until we understand the total picture.
- Analyst
Thought I'd try one other way.
- Director IR
Thank you, David, and we thank all of you who have participated on this call and appreciate your interest in American Axle and Manufacturing.
We certainly look forward to talking with you in the future.
Operator
This concludes today's American Axle and Manufacturing conference call.
You may now disconnect.