American Axle & Manufacturing Holdings Inc (AXL) 2010 Q4 法說會逐字稿

Good afternoon.

My name is Steve, and I will be your conference operator today.

At this time, I would like to welcome everyone to the American Axle & Manufacturing fourth quarter and full year 2010 earnings conference call.

(Operator Instructions) As a reminder, today's call is being recorded.

I would now like to turn the call over to Mr.

Christopher Son, Director of Investor Relations, Corporate Communications and Marketing.

Please go ahead, Mr.

Son.

Thank you, Steve, and good afternoon, everyone.

Thank you for joining us today and for your interest in American Axle & Manufacturing.

We released our fourth quarter and full year 2010 earnings announcement earlier this afternoon.

If you've not had an opportunity to review this announcement, you can access it on the AAM .com web site or through the PR news wire services.

A replay of this call will also be available beginning at 5.00 PM today through 5.00 PM Eastern time February 15 by calling 1-800-642-1687.

Reservation number is 36036010.

Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements, which 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 that you refer to our filings with the Securities and Exchange Commission.

Also during this 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 our web site.

Over the next several months, we will participate in the following conferences.

The Barclay's Industrial Select Conference tomorrow, on February 9, JPMorgan's High Yield and Leverage Finance Conference on March 1, the UBS Mini Conference on March 9, and the Bank of America Merrill Lynch New York Automotive Summit on April 20.

In addition, we are always happy to host investors at any of our facilities.

Please feel free to contact me to schedule a visit.

With that, let me turn things over to AAM's Co-Founder, Chairman and CEO Dick Dauch.

Thank you, Chris, and good afternoon, everyone.

Thank you for joining us today to discuss AAM's financial results for the fourth quarter and full year of 2010.

Joining me on the call today are David C.

Dauch, AAM's President and Chief Operating Officer, John Bellanti, AAM's Executive Vice President, Worldwide Operations, along with Mike Simonte, our Executive Vice President of Finance and Chief Financial Officer.

To begin my comments today, I will cover the highlights of our fourth quarter and full year 2010 financial results.

I will also discuss the excellent progress we are making at AAM to achieve long-term strategic objectives of properly growing and diversifying our business globally.

Finally, I will make a few comments on AAM's 2011 outlook, before turning things over to Mike to discuss the details of our financial performance.

After that, we will open the call up for any questions you ladies and gentlemen may have.

So let us get started.

The fourth quarter of 2010 completed a very successful year for AAM.

AAM's fourth year -- or fourth quarter 2010 sales was $583.3 million, up 26% on a year-over-year basis.

AAM's profitability in the fourth quarter of 2010 was strong.

Gross profit was $101.6 million, or 17.4% of sales.

EBITDA was $89.1 million, or 15.3% of sales, and net income was $34.9 million, or $0.47 per share.

For the full year 2010, AAM's financial performance ranked among the best in our Company's history, and marked a solid recovery from the restructuring and re-sizing that we successfully implemented over the past several years.

In 2010, AAM's sales grew by more than 50% on a year-over-year basis, to $2.28 billion, as compared to $1.521 billion in 2009.

AAM achieved new Company records for two measures of operating profitability in 2010, gross margin and EBITDA margin.

The gross margin was 17.6% for the full-year 2010, and AAM's EBITDA margin for the year was 14.9%.

AAM's net income in 2010 was $115.4 million, or $1.55 diluted earnings per share.

In each of the four calendar quarters of 2010, AAM generated positive free cash flow.

For the full-year, AAM's free cash flow generation was approximately $137 million.

This allowed us to reduce AAM's net debt obligations by more than $125 million in the year 2010.

Mike will have additional comments on AAM's fourth quarter and full year 2010 results later on this call.

In 2010, AAM's performance excellence was also evident in our global manufacturing operations.

In 2010, AAM continued to deliver world class quality on a daily basis, nobody in our peer group in the world can compare to it, at 4.2 discrepant parts per million, as measured by our largest customer.

We achieved this outstanding quality performance while launching 28 new products, processes, or facilities throughout the world for our customers.

It was done flawlessly and anonymously.

In recognition of AAM's world class quality and AAM's commitment to excellence in the areas of engineering and manufacturing operations, AAM's Guanajuato Manufacturing Complex was awarded the prestigious Shingo Prize in 2010.

It is known worldwide as the Nobel Prize of manufacturing.

In addition, AAM's Three Rivers Manufacturing Facility in Three Rivers, Michigan, was recently recognized as one of the 10 best plants in North America by Industry Week magazine.

This award highlighted AAM's success in driving home the benefits of market cost competitiveness and productivity initiatives to achieve profitable growth at the Three Rivers location.

The Guanojuato Mexican Manufacturing Complex and the Three Rivers Complex are AAM's two largest operating units in the world.

In many ways, these facilities are the model for AAM's entire high quality, operationally flexible global manufacturing system, along with our engineering and sourcing footprint.

AAM is very honored to accept these awards in 2010 and we are committed to continue living up to these standards of excellence, represented by these awards, every day in all of our operations to serve our customers.

AAM made excellent progress in 2010 toward the achievement of our three most critical long-term strategic objectives, which are; one, achieving global profitable growth, two, improving our balance sheet strength, and three, accelerating the diversification of our business.

Let me now cover our progress on these items in a bit in further detail.

First, we are on track to double AAM's sales from $1.5 billion in 2009 to $3 billion in 2013.

Over this time period, we expect AAM's sales CAGR compound annual growth rate to be nearly double the entire industry at 18% to 20%.

At the same time, from 2009 to 2013, we expect AAM's profit to grow faster than our sales.

At the midpoint of our long-term guidance range of 12% to 15% EBITDA margin, we expect AAM to generate more than $400 million of EBITDA in 2013.

This is approximately four times AAM's actual adjusted EBITDA in 2009.

To summarize these points, we expect AAM sales to double from 2009 through 2013 while profits quadruple in the same time period.

Second critical point.

We have made significant progress to improve AAM's balance sheet strength.

In 2010, AAM generated approximately $137 million of positive free cash flow, allowing us to reduce AAM's debt obligations by more than $125 million in that period.

For all critical measures of credit worthiness, including leverage, coverage, and capitalization ratios, we expect AAM to return to investment grade credit metrics by 2013.

In 2010, we made a significant "down payment" on the commitment to return to investment grade metrics by reducing EBITDA leverage to 2.25 on a GAAP-derived basis.

Total available liquidity exceeded $600 million at year end 2010.

And the third point, AAM's plan to diversify the business is working very well, and picking up significant momentum.

It includes; one, growing AAM's customer base, two, increasing AAM's exposure to global growth markets and third, expanding and innovating AAM's product portfolio.

The favorable results of our customer diversification initiatives are clearly evident in the 2010 sales results.

Non-GM sales grew twice as fast as our total sales in the fourth quarter 2010, up 52% on a year-over-year basis, to $156.6 million.

For the full year 2010, AAM's non-GM sales increased approximately 70% over 2009, to $563 million.

Yes, 2010 was a breakout year for AAM, in terms of profitable growth and customer diversification.

By 2013, we expect our non-GM sales to grow to 40% or more of AAM's total sales.

This has been a hard slug but well worth the effort.

Our confidence in achieving this objective is supported by AAM's $850 million new business backlog for programs we will launch in the years of 2011, 2012 and 2013.

This business backlog has increased 20% from the previous backlog for the three years of 2010, 2011 and 2012.

Over half of AAM's new business backlog is for customers other than GM.

More than two-thirds of the backlog is for passenger cars, cross-over vehicles, and commercial vehicle programs.

And approximately 65% is for end market outside the United States.

In addition to this booked business, AAM is currently quoting approximately $950 more million dollars of potential business.

Most of these quoting opportunities are for major global programs that will help us continue to improve customer diversification in the future.

The second of our major diversification initiatives is to increase AAM's participation in global growth markets.

To support AAM's accelerated growth and diversification, we have realigned our production capacity on a global basis.

This positions us well to increase AAM's exposure to the fastest growing global markets, from facilities in Mexico, Brazil, Poland, China, India, and Thailand.

We continue to invest in AAM's regionally cost competitive and operationally flexible global manufacturing, engineering and sourcing footprint.

AAM now operates 33 technical business and manufacturing facilities in 13 countries on four continents.

In the fourth quarter of 2010, AAM took over full ownership of our manufacturing facility in Pantnagar, India, up in the north end of India, previously a joint venture between AAM and Sona Koyo Limited.

AAM Pantnagar Axle Private Limited will continue to manufacture and sell light truck, passenger car and SUV axle assemblies for the market in India.

As a wholly owned entity, we now have greater flexibility to pursue a wide range of opportunities for this facility in the India market.

AAM's ability to partner with customers on global product programs is a key reason for our solid financial performance in 2010, and why we have been successful increasing AAM's new business backlog in recent years.

AAM's progress on diversification also involves expanding and innovating AAM's product portfolio.

This is AAM's third major diversification focus.

The global automotive industry is entering a new phase of innovation and design.

This encompasses hybrid vehicles, all electric vehicles, independent drive vehicles, and other equally sophisticated technologies.

All of this is needed to meet more stringent fuel saving and CO2 emission regulations.

AAM is meeting these challenges head-on with an aggressive plan to increase investment in new technology, designed to supply manufacturers with products that meet these new and emerging market demands.

In the year 2010, we launched AAM's EcoTrac brand of fuel efficient and environmentally friendly products.

The exciting new products featured in the EcoTrac brand break new ground in fuel optimization, electronic sophistication, and light-weight design.

This includes the following.

One, electric all wheel drive systems, or e-all wheel drive, from a strategic investment in our new e-AAM Driveline System AB joint venture in Trollhattan, Sweden.

AAM's e-all wheel drive systems are designed to improve fuel efficiency up to 30% and reduce CO2 emission.

In addition to providing all wheel drive capability, AAM's e-all wheel drive systems are differentiated from the competition by unique and proprietary attributes that improve safety, ride and handling performance.

AAM's e-all wheel drive systems will be featured in the next generation of Saab vehicles beginning in 2012.

Global customer response to this system has been very strong.

We're excited about the opportunity to introduce this innovative technology as part of our global product programs in the future and to help our customers.

Second, AAM's EcoTrac all wheel drive system enables a vehicle manufacturer to offer a passenger car or cross-over vehicle with an all-wheel drive option that minimizes the impact of fuel economy and emissions -- reducing emissions, when compared to a front wheel drive normal vehicle.

The EcoTrac system allows the all-wheel drive vehicle to utilize its primary drive system, the front wheels, when all wheel drive is not required.

Vehicles equipped with the advanced fuel economy optimization system can automatically transition to all-wheel drive, transparent and seamless to the driver, and when the vehicle senses the AWD may be necessary.

AAM's EcoTrac all-wheel drive system will be featured on a major global passenger car and cross-over vehicle program beginning next year, 2012.

This is a non-GM program and supports our customer diversification efforts.

Third point is AAM's EcoTrac high efficiency axles, representing a new standard in axle efficiency, taking advantage of proprietary technologies that optimize design and lubrication efficiency.

Innovations in AAM's new axles include our power dense hypoid designs, gear finishes, high efficiency bearings and our proprietary lubricant.

Power film and the combination of these advanced technologies can reduce axle-related energy losses by a whopping 50%.

Let me now comment on another important announcement.

Today, AAM's Board of Directors has amended and restated AAM's Stockholder's Rights agreement.

AAM had previously amended this rights plan in 2009 to preserve the long-term value and availability of AAM's net operating losses on carry-forward NOL's and related tax benefits.

This action today was determined to be appropriate, as a result of the favorable impact of first, improved business conditions and second, actions we have taken to accelerate the realization of AAM's deferred tax assets.

The modification to AAM's rights plan include increasing the beneficial ownership threshold, sometimes called the rights plan trigger, from 4.99% to 15% of AAM's outstanding shares of common stock.

We believe this is the best interest of AAM, our stockholders, and all relevant stake holders.

Before I turn it over, ladies and gentlemen, to Mike, let me wrap up by making a few closing remarks, beginning with AAM's 2011 outlook.

We believe global economic and market conditions will continue to stabilize and improve during 2011.

For the full year 2011, we expect total US light vehicle sales to increase from approximately 11.6 million vehicles in 2010, to approximately 12.5 to 13 million unit vehicle range in 2011.

Based on this industry sales assumption and the anticipated launch timing of AAM's new business backlog, we expect AAM's full-year 2011 sales to approximate $2.4 billion top revenue.

We expect AAM's 2011 EBITDA to range from 14.5% to 15% of sales, or $348 million to $360 million.

We believe AAM is well positioned to benefit from a recovery in global automotive markets in 2011 and beyond, and we're anxious to get at it.

With the dual focus on driving performance in our daily operations and building value for our many key stakeholders, we're excited about AAM's plans for continued profitable global growth, improved balance sheet strength, and accelerated business diversification.

I would like to thank each and every one of you for your attention today, and your vital interest in AAM.

I would like to now call on Executive Vice president of Finance and Chief Financial Officer, Mike Simonte.

Mike?

Thank you, Dick, and good afternoon, everybody.

It was a relatively clean, straightforward quarter from a financial perspective, so my comments will be brief today.

Dick already covered the highlights.

So I will start by getting right into the details, starting with sales.

AAM's sales in the fourth quarter of 2010 were up 26% in total as compared to the fourth quarter of 2009, and that number for our fourth quarter was $583.3 million of sales.

On a sequential basis, our sales in the fourth quarter of 2010 were down 5.6%, versus the third quarter of 2010.

This is primarily attributable to an expected seasonal fluctuation.

In the third quarter of 2010, most of the GM assembly plants that we support in the United States work through the customary summer shutdown period, and ran a total of 64 production days.

Again, that's for the third quarter of 2010.

In the fourth quarter of 2010, there were only 57 production days for these facilities.

That's about 11% fewer, on a sequential basis.

AAM's content per vehicle in the fourth quarter of 2010 was $1,508.

This was an increase of $107 on a year-over-year basis, or 7.6%.

This was also up 50 bucks per vehicle on a sequential basis versus the third quarter of 2010.

On a year-over-year basis, the increase in AAM's content per vehicle, again, was expected, due to two factors.

Number one, higher metal market pass-throughs, and number two, the launch of the GMT900 Heavy-Duty series pickups.

We have new sales content on this critical program, and that is driving higher content per vehicle.

And that began to affect our business in June of 2010.

On a sequential basis, the increase in AAM's content per vehicle was due to mix shifts in the fourth quarter, favoring four wheel drive applications in general, and secondly, the Heavy Duty series pickups, not just produced by General Motors, but also Chrysler.

As Dick said, AAM's profitability in the fourth quarter of 2010 was strong.

Gross profit was $101.6 million, or 17.4% of sales.

Operating income was $51 million, or 8.7% sales.

Net income was $34.9 million.

That's 6% of sales, and that represents $0.40 per share on a diluted EPS basis.

Now, our fourth quarter EPS was impacted by a benefit tax provision.

This was primarily the result of adjustments we recorded in the fourth quarter to reflect changes in two tax jurisdictions.

And by changes, I mean changes in estimates that we had previously made.

First, the first issue was our income tax in Brazil, and the second issue was an AMT tax equivalent in Mexico.

The amount of these individual adjustments were relatively minor, but the impact they had on the provision stands out because we have such a low effective tax rate.

If the effective tax rate was normalized to our planning assumption of 10%, AAM's EPS in the fourth quarter of 2010 would have been reduced by approximately $0.06, to $0.41 per share.

EBITDA was $89.1 million, or 15.3% of sales.

This was in line, or slightly ahead, of consensus estimates for the quarter.

On a sequential basis, we estimate the reduction in AAM's EBITDA for the fourth quarter of 2010 was approximately 18% of the decline in our sales as compared to the third quarter of 2010.

Sometimes this is referred to as a decremental margin.

When sales decline, a decremental margin of less than 25% indicates a good cost control performance.

We were pleased with our sequential margin performance in the fourth quarter of 2010, especially considering that shipments on the GMT900 program were down 35,000 units in the fourth quarter, versus the third quarter.

That's the primary driver of the decremental margin in the fourth quarter.

Okay, let's turn to SG&A expense.

SG&A, including R&D, in the fourth quarter of 2010, was $50.6 million, or 8.7% of sales.

This compares to $39.4 million, or 8.5% of sales, in the fourth quarter of 2009.

R&D spending was up approximately $7.3 million on a year-over-year basis, in the quarter, and $2.5 million on a sequential basis, versus the third quarter of 2010.

The sequential increase in AAM's R&D spending, fourth quarter versus third quarter, was almost all attributable to the addition of our newly-formed joint venture with Saab in Sweden.

We call this e-AAM.

Beginning in the fourth quarter of 2010, e-AAM's financial results are included in AAM's consolidated results.

So that's another key factor to consider when you look at our fourth quarter of 2010 financials versus our third quarter of 2010 financials.

For the full year of 2010, SG&A was $197.6 million, or 8.7% of sales, and that compares to $172.7 million last year, or 11.3% of sales.

AAM's R&D spending was up $15.5 million, to $82.5 million for the full year of 2010, compared to $67 million in 2009.

Now, this increase in our R&D spending is intended.

It is due to a more aggressive approach to increase our spending on product diversification initiatives.

This includes e-AAM, again our joint venture with Saab in Sweden that is focused on electric and hybrid driveline systems, and also covers the introduction of AAM's new EcoTrac brand of fuel efficient and environment friendly products.

In addition, we are also developing a greater range of products for the commercial vehicle market, and we continue to make improvements to our proven stable of high efficiency axle products designed for the light truck market.

Under GAAP, all of this R&D activity needs to be reported as expense in our financial statements, but it is clearly an investment in our future.

A future, we believe will be characterized by profitable growth and accelerated diversification.

So we're going to keep on doing it.

Let me now address cash flow and AAM's improving balance sheet position.

We define free cash flow to be net cash provided by, or sometimes used in, operating activities, less capital expenditures, and we think CapEx should be presented net of proceeds received from the sale of equipment.

GAAP cash, provided by operating activities in the fourth quarter of 2010, was $46.8 million positive CapEx in the quarter, net of proceeds from the sale of equipment, was $42.9 million.

Reflecting this operating activity in CapEx, AAM generated positive free cash flow of approximately $4 million in the fourth quarter of 2010.

This reflects the impact of sequentially higher CapEx and higher pension fundings.

AAM's CapEx in the fourth quarter represented approximately 40% of the total CapEx for the year of $108 million.

Similarly, AAM's defined benefit pension funding of $18 million in the fourth quarter of 2010 represented approximately 40% of the total pension funding for the year.

For the full year 2010, AAM's free cash flow was $136.9 million.

This allowed us to reduce net debt by approximately $128 million in 2010, to $765.4 million at year end, and that's on a GAAP balance sheet basis.

In just 15 months, starting from September 30 of 2009, we have now reduced AAM's net debt by more than $240 million.

That's a lot of good progress in a short period of time.

EBITDA leverage, or the ratio of EBITDA to net debt, was reduced to 2.25 times at year-end 2010, on a GAAP derived basis.

If you adjust this metric for the impact of the accelerated payment terms with General Motors, this rises to 2.7 times.

Now, because the accelerated payment terms are in substance a source of working capital financing for our Company, we believe the adjusted ratio of 2.7 times is the most appropriate way to measure EBITDA leverage in 2010.

This is a little higher than our long-term EBITDA leverage target of 1.5 to 2 times, however, we are pleased with the improvement that we've made on this critical metric in 2010, and we expect to achieve our target range of leverage by 2013, and maybe even a little sooner.

Interest coverage was also much improved in 2010.

AAM's EBIT coverage, or the ratio of earnings before interest and taxes to interest expense, was 2.3 times at year-end 2010.

Our target for this coverage ratio is three to five times.

Again, we expect to achieve this coverage level by 2013.

AAM's net debt to capitalization ratio, the third of three critical credit metrics I'm covering with you today, is approximately 45%.

For purposes of making this calculation, we have determined AAM's equity value on a market capitalization basis, and adjusted AAM's net debt upward for the estimated impact of the accelerated payment terms, which again we believe is truly a source of working capital financing.

This is a little higher than AAM's target range of 30% to 40% for the net debt to capitalization ratio, but again, much improved from last year, and this also, we believe, will be in line with our long-term targets by no later than 2013.

Now, as to liquidity, AAM ended 2010 with total available liquidity in excess of $600 million.

AAM's excellent operating performance, accelerating business diversification, and all of these improving credit metrics, leverage, coverage, and capitalization ratios, are pointing to higher credit ratings for AAM in the future.

Earning these rating upgrades in 2011 is a priority for our Company.

So, the bottom line, on the year 2010, a very good year for our Company, from a financial perspective, is this.

Total sales were up 50% to $2.28 billion.

Non-GM sales were up 70% to $563 million, excellent diversification progress.

Net income was $115.4 million, or $1.55 per share.

EBITDA was $340.3 million, or 14.9% of sales.

This EBITDA margin of 14.9% was a new Company record.

Free cash flow was $136.9 million, and this helped us reduce our net debt by $128 million.

We are very pleased with our results in 2010.

We're especially proud of the stakeholder returns that we're generating as a result of this financial performance, and execution of our long-term strategic objectives to profitably grow and diversify our customer mix, product portfolio in certain markets on a global basis.

That's all I have.

Thank you for your time and participation today.

I'm going to stop here and turn the call back to Chris, so that we can start the Q&A.

All right.

Thank you, Mike.

And thank you, Dick.

We have reserved some time to take some questions.

I would ask that you please try to limit your questions to no more than two.

So at this time, I'm going to turn it back over to Steve so we can proceed with the questions, through the Q&A.

(Operator Instructions)

And your first question comes from the line of John Murphy from Bank of America.

Your line is open.

Good afternoon, guys.

Good afternoon, John.

Hello, John.

Dick, you mentioned a fairly large quoting number of $950 million.

That's a big number.

I was just wondering if you could put some parameters around that on sort of when that could potentially roll on, and how much of that you think you could potentially get, and does that have a similar makeup to your existing backlog of 850 million bucks, just as far as the end markets?

Thank you for the question, John, and I'm going to have David Dauch respond to you, after I make one or two comments.

The $900 million is accurate.

As a matter of fact, it is more than that.

Secondly, over a third of that is in the commercial vehicle segment of the business.

And David, if you want to embellish more on that, go right ahead.

Yes, John, the 950 is what we're quoting at this point in time, covers the 2011 to 2014 period of time, so yes, it could come in, in those periods of time to add to our current business backlog.

That sits at the $850 million covering the 2011 through 2013 period of time.

Yes, it follows along the lines of the markets that we have been serving in the past, as far as our traditional light truck and SUV, and also the cross-over and into the passenger car business.

But also, as my father indicated, a strong emphasis on the commercial vehicle side, as well.

Okay.

And then just a second question.

You guys are bumping up on the high end of your range, at 15% on your EBITDA.

I mean as we think about 2011 and 2012 and revenue, I think by our estimate and your estimate, you know, by any stretch of the imagination, should be up pretty significantly.

Is there any major factor there that you think is limiting expansion above that 15%, or could you get above that 15% EBITDA margin for a period of time?

John, this is Mike.

Listen, we've never considered the 15% an upper boundary for our EBITDA performance.

We think that the long-term range of 12% to 15% is a good expectation for all different types of business conditions.

Right now, we are operating in a market with relatively higher capacity utilization, meaning higher production volumes, and relatively moderate material cost inflation.

So we're able to perform at the high end of the range.

You know that we have very effective operating leverage in all of our core programs, and we can handle a lot more volume without adding fixed costs.

So, we've been operating above 15% for the last two calendar quarters.

It is quite possible that we could continue to do that.

I think it is important that I point out one issue that is going to affect this, at least in the short term, for the first quarter of 2011, on a sequential basis.

You know, in September of 2009, we entered into mutually beneficial agreements with General Motors for commercial and financing arrangements.

On the commercial side, none of the concessions, quote-unquote, that were due to General Motors in those agreements had any financial impact on our Company in 2009 and 2010.

So beginning in 2011, we will step up to the warranty sharing provisions, incremental changes in our metal market arrangements, and also some price downs that we've talked about now for several quarters.

It shouldn't be news to anybody.

But this will have an impact in the first quarter of 2011, if you take a look at our margins versus the fourth quarter of 2010.

Okay.

Just one small housekeeping issue.

Mike, there was a GM-post retirement cost sharing line on the balance sheet, jumped up from 214 to 244.4 from the third quarter into the fourth quarter.

What was that for?

Is that mean that there is some $30 million in cash that might be coming to you in the near term?

I'm just trying to understand why that line item changed.

It is not a near term change, John.

It is simply the result of our year-end actuarial evaluation.

That is a long tail liability, very sensitive for example, to the discounts rate assumption.

Our year end discount rate assumption was something like 40 to 45 basis points lower than a year ago, and that's driving the liability higher.

Now, we avoided an increase in our pension funding deficit this year.

We had the same head wind in terms of discount rate, but good asset returns and $44 million of pension funding helped us to actually reduce our pension funding deficit, but on the OPEB side, that is an unfunded liability, so you're seeing the impact of the higher discount rate.

Got you.

Thank you very much.

Thank you, John.

Your next question comes from the line of Himanshu Patel from JPMorgan.

Your line is now open.

Hello.

Good afternoon, guys.

Hello, Himanshu.

Just two questions.

First, on the guidance you've provided for margin, can you give us some directional color on kind of just what you're baking in for steel costs?

And my second question was, on the 2012 backlog, can you give us a sense for the cadence of how that sort of flows in over the course of the year.

And maybe one more revenue question, Mike.

How should we think about content per vehicle growth for -- I'm sorry, I was mentioning the 2011 backlog, not the 2012.

How should we think about content per vehicle in 2011 as well?And if it is growing, how much of that is content growth versus metal market pass-through?

Okay.

All right.

Let me try to take them one at a time.

Relative to the 2011 backlog, and how that is going to be impacting our business in the coming year, we've got about $150 million of new business backlog launching this year.

It is weighted a little bit more towards the back half of the year than the front half, Himanshu, but it is not materially different as we work through the year.

On the content per vehicle question, we had an outside content per vehicle result in the fourth quarter.

For the entire year 2010, we had higher metal market pass-throughs, so that impacted our result all year.

But in the fourth quarter, we had a situation where the heavy duty mix on the pickups for both GM and Chrysler were up.

In GM's case they had a little bit of downtime at the light duty facilities and ran the heavy duty facilities with a lot of overtime, so we saw a little bit of mix shift there that was favorable.

I would expect our 2011 content per vehicle to be probably somewhere in the range of where we've been the last couple of quarters, $1450 to $1500 per vehicle.

In terms of the material cost issue, what we've said, Himanshu, and what we've planned on is, relatively moderate material cost inflation.

We did consider higher steel costs, higher metallic costs, in our budget but a relatively moderate increase, very similar to the rate of increase we've seen now over the last year or so.

I guess the question is, just you know, what is happening with steel prices right now, are you still sort of comfortable with that moderate assumption?

And if so, can you just give us a sense for how long this stuff sort of takes to flow through?

Himanshu, this is David Dauch.

We are very comfortable with the assumptions that we've put in our plan.

Obviously, we work very close with our strategic partners from a steel supply standpoint, so we have the appropriate contracts in place with them.

We are also trying to take a long term view in regards to how we look at all of the commodity pricing, steel just being one of them.

All right.

Thank you.

Thank you, Himanshu.

Your next question comes from the line of Chris Ceraso from Credit Suisse.

Your line is now open.

Thanks.

Good afternoon.

Hello, Chris.

A couple of questions.

On the Stockholder Rights plan, is this related at all to GM's exercise of its warrants which could push it above 5%?

Or if you decided to borrow on that second lien term loan, could get it up close to that 15%?

Chris, it has absolutely nothing to do with General Motors.

Okay.

Completely unrelated.

Next question.

Okay.

You mentioned that you expected profit to grow faster than revenue from 2009 to 2013.

Is that still the case, if you started at 2010 and we look at revenue growth versus profit growth from 2010 to 2013?

Probably not.

It is probably much more in line with the revenue growth for that time period, but Chris, remember, we're traveling at sort of a 15% margin, very attractive profit margin.

We will be very pleased to have our profits grow about the same pace as our sales, from this point forward.

Okay, And Mike, what are you assuming for taxes for 2011?

We have budgeted a 10% tax provision for 2011, Chris.

Okay.

Thank you very much.

Thank you, Chris.

Your next question comes from the line of Rod Lache from Deutsche Bank.

Your line is now open.

Good afternoon, everybody.

Hello, Rod.

.A couple of things.

The year-over-year incremental growth margin did moderate a little bit in the fourth quarter.

It looks like 27.9%.

Could you just clarify for us, how did those reimbursements on raw materials play into that?

I think you also started production in Thailand, where there is some significant launch costs in that.

And just how should we be thinking about incremental grosses, just with all of these products launching and the modest raw material cost inflation as you look out to next year?

Rod, I don't think the metal market issues had too significant of an impact.

Obviously, from a net bottom line impact, it didn't really impact the comparison at all.

To the extent our sales were up a little bit higher in calendar year 2010, I guess you have a little bit of a margin impact.

But I think the bigger issues really, as you point out, on a year-over-year basis, our project launch expense was higher.

And also, as I pointed out, our R&D expense is significantly higher.

We've got both our EA and joint venture affecting our financial statements on a consolidation basis for the first time in the fourth quarter, and also in just general, we're spending more on R&D.

The other factor that we have talked about for several quarters now, it is the fact that again, on a year-over-year basis, we had an increase in compensation-related expenses, for the salaried associates who took pay cuts in 2008 and 2009.

Is that in the gross margin as well or wouldn't that be in SG&A?

No, no, we've got lots of salaried people at our plant facilities, Rod, who were affected by that.

Okay.

So how should we be thinking about 2011 for just incrementals on the gross?

The incremental margins -- we've talked about this for some time.

We're running at sort of 15% of sales on an EBITDA margin basis.

We think that is going to be a very good target for us, long-term.

And so our incrementals are going to reflect sort of 15% to 20% on a portfolio basis, taking into consideration all of the business that we're launching.

On some programs like the GMT900 ,where we've got really all of the fixed costs we're going to need, we've got the opportunity to outperform that significantly.

But our incremental margin going forward, you know, should be a little bit lighter than the very high rate to conversion we are able to have here in 2010.

Okay.

And now that you've got this Saab JV in the numbers, is this kind of the run rate of G&A that we should be looking for, or is there some seasonality in that?

And just lastly, did you mention what your FAS 87 pension funded status was, after the re-measurement?

Okay, both questions we can handle.

On an SG&A basis, we're going to be probably a little bit higher than $50 million a quarter in calendar year 2011.

Again, we continue to increase our spending on R&D, and we're also putting in place a little bit more resource in some foreign markets, to make sure that we can really make good on the opportunities that are presenting themselves right now, particularly in the emerging commercial vehicle market.

So that is your first question.

The second issue -- you know, I forgot what the second issue was.

Pension fund.

Oh, yes, yes, yes.

The pension funding status, Rod, was about $8 million or so lower at the end of 2010 than it was at the end of 2009.

And again, 50 basis points of a move on the discount rate is something like $45 million higher liability sensitivity.

So we overcame all that and then some with our pension contributions and good asset returns.

So you know, we think we're pretty well positioned, Rod.

As the interest rate environment, eventually, I'm not going to predict when, but eventually increases, we're going to see pretty fast improvement in that pension funding status because we're also planning to make good solid contributions going forward.

Great.

Thanks for that.

Thank you.

Thanks, Rod.

(Operator Instructions)

And your next question comes from the line of Jacob Strumwasser from AWM Capital.

Your line is now open.

Hello, guys.

Congratulations on a great year, and thanks for all you've done for shareholders.

A quick question for you.

The metals market, I think Himanshu really touched upon, but is there any lumpiness or can there be lumpiness just on a quarter over quarter basis, if you get big velocity in steel price moves?

Jacob, I think theoretically, there could be, but it would have to be a very significant change.

Again, we have long-term contracts, and while the metal market industry certainly can move quickly, we have not experienced very significant quarter to quarter changes on that metric.

Okay.

And the rest of my questions were asked and answered, so thank you.

Thanks, Jacob.

And we appreciate all of those who have participated on this call.

We look forward to talking with you in the future.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.