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Operator
I would like to welcome everyone to the AAN fourth quarter and full year 2014 earnings conference call.
(Operator Instructions).
As a reminder, today's call is being recorded.
I would now like to turn the call over Christopher Son, Director of Investor Relations, Corporate Communications and Marketing.
Please go ahead.
Christopher Son - Director of IR, Corporate Communications, and Marketing
Thank you.
Good morning, everyone and thank everyone for joining us today and for your interest in AAM.
Earlier this morning, we released our fourth quarter and full year 2014 earnings announcement.
We also filed an amendment to our third quarter 2014 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014.
If you have not had an opportunity to review the earnings announcement or these filings, you can access them on the AAM.com website or through the PR Newswire services.
A replay of this call will be available beginning at 2 p.m.
today through 5 p.m.
Eastern Time March 2nd, by calling 855-859-2056, using reservation number 34605151.
Before we begin, I would like to remind everyone that the matters discussed in this call may contain comments and forward-looking statements that are subject to risks and uncertainties which cannot be predicted or quantified and which may cause huge future activities and results of operations to differ materially from those discussed.
For additional information we ask that you referred to our filings with the Securities and Exchange Commission.
Also during the call we will refer to certain non-GAAP financial measures, information regarding these non-GAAP measures, as well as the reconciliation of these non-GAAP measures to GAAP financial information, is also available on our website.
Over the next several months, we will participate in the following conferences: the JPMorgan Global High-yield and Leverage Finance conference on February 24, and the Bank of America Merrill Lynch New York Automotive Summit on April 1. In addition, we are always happy to host investors at any of our facilities.
Please feel free to contact either myself or Vitalie Stelea to schedule a visit.
With that, let me turn things over to AAM's Chairman, President, and CEO, David Dauch.
David Dauch - Chairman, President and CEO
Thank you, Chris, and good morning to everyone.
Thank you for joining us today to discuss our financial results for the fourth quarter and for the full year of 2014.
Joining me on the call today is Mike Simonte, our Executive Vice President and Chief Financial Officer.
To begin my comment today, I will review the highlights of our fourth quarter and full year 2014 financial performance.
Next, I will summarize our AAM's accomplishments in 2014 and, finally, I will comment on AAM's 2015 outlook before turning things over to Mike.
In addition to providing further details regarding the results of our operations for the fourth quarter and full year 2014, Mike will also address the accounting matters that caused us to reschedule this call.
After that, as always, we will open up the call to any questions that you may have.
So let me begin by stating 2014 was a very successful year for AAM, characterized by strong year-over-year sales growth that continues to outpace the industry, improved profitability, and a positive inflection in cash flow generation.
A quick summary of our 2014 financial performance is as follows.
Starting with sales, AAM's fourth quarter 2014 sales were approximately $940 million.
For the full year 2014, AAM's sales increased approximately 15% on a year-over-year basis to $3.7 billion.
This compared to a 5% increase in North American light vehicle build and a 6% increase in the US SAAR.
AAM's net income in the fourth quarter of 2014 was $13.2 million or $0.17 per share.
For the full year of 2014, AAM's net income totaled $143 million or $1.85 per share.
AAM's fourth quarter and full year results reflect the impact of a non-cash charge of $35.5 million related to AAM's 2014 pension payout offer.
Under this very successful program, AAM terminated more than $130 million of US pension obligations by making lump sum payments of approximately $104 million from the pension trust to eligible former associates.
Mike will have more to say about the economy for this activity later.
AAM's adjusted EBITDA, when you exclude only the impact of the 2014 pension buyout offer, in the fourth quarter of 2014 was $135.1 million.
For the full year 2014, AAM's adjusted EBITDA was $512 million.
This is an increase of approximately $90 million as compared to 2013, marking the second consecutive year AAM's adjusted EBITDA grew by more than 20%.
AAM's adjusted EBITDA margin was 14.4% in the fourth quarter of 2014 and 13.9% for the full year of 2014.
And, finally, AAM closed out the year with solid cash flow performance in the fourth quarter.
AAM's free cash flow in the fourth quarter of 2014 was $39.2 million and, for the full year in 2014, AAM's free cash flow was $123 million or 23% higher than our target for the year.
Mike will provide additional information regarding the details of our financial results later on this call.
So let me now give you an update on some key business accomplishments in 2014.
First, from a quality standpoint, AAM continues to operate at levels less than 10 discrepant parts per million, which is world-class when it comes to drive line and drivetrain segments.
Second, with regards to operational excellence, in 2014, AAM flawlessly and anonymously launched 16 critical programs for our customers.
And, third, in 2014, we made excellent progress improving AAM's business diversification.
In 2014, AAM booked new orders from both the Volkswagen Group, specifically the MAN company or customer, Ford, FCA and others.
This success has positioned us to make additional diversification improvement in the coming years, and building upon recent gains such as the following.
In 2014, non-GM sales grew by almost 30%, which is double the total rate of the growth of our Company, to $1.2 billion.
Since 2009, AAM's non-GM sales have more than tripled.
Approximately 70% of AAM's current $825 million new and incremental business of backlog, which covers the 2015 through 2017 period of time, has been ordered by customers other than GM.
And approximately 85% of the backlog is for programs sourced outside the United States.
And approximately 75% of the backlog supports passenger car and crossover vehicle programs.
A major driver of AAM's rapid growth in passenger car and crossover vehicles is driven because it successful introduction of our EcoTrac disconnecting all-wheel-drive technology.
After giving effect to launches anticipated in the next three years, AAM is targeting annual EcoTrac sales of as much as $500 million across multiple customers -- multiple customer programs by the 2017 period of time.
Especially when you take note that EcoTrac did not launch until the second half of 2013, this is a very impressive start to AAM's latest and newest technology, which highlights our fuel efficient all-wheel-drive technology.
And, in addition to EcoTrac, AAM's new and incremental backlog business includes important contributions from other new and innovative product technologies, which we believe will pave the way for additional profitable growth and business diversification as we move forward.
Some examples of these new and highly valuable technologies include, first, high-efficient axle design features that can reduce friction and other forms of parasitic losses to the lowest levels available in the industry.
Second, to light-weighting technologies applicable to axles and other driveline components; AAM's newest light-weighting capabilities include extensive proprietary design tools that allow us to optimize component designed to reduce weight and mass, and also improve the ability of our customers to package out driveline products in increasingly smaller spaces.
And, third, AAM's hybrid and electric driveline system.
As most of you know, we already have booked business that launches in 2017, and we are currently demonstrating our latest technology and systems capability and the benefits of this technology at Winter Test both here and North America as well as in Europe for multiple customers.
And, fourth, AAM's silent driveshaft technology, which provides a much-improved ride quality due to advanced MVH systems integration.
AAM's continued focus on product innovation and product line extensions have allowed us to successfully expand and broaden our product portfolio and customer base in 2014.
With over $1 billion of quoted and emerging opportunities, we are positioned to build upon this success in 2015 and beyond.
This leads me to my next item, AAM's technology leadership and our R&D investment.
The automotive industry worldwide is in a technological race, with OEMs invested heavily to develop new and advanced technologies to differentiate themselves from the competition.
This encompasses autonomous vehicles, hybrid and electric vehicles, advanced powertrain application, and other equally sophisticated technologies.
In support of these efforts, AAM's R&D spending in 2014 was $104 million.
As we have previously said, AAM's primary R&D focus is to concentrate efforts on developing innovative and cost-efficient solutions to assist our customers in meeting these new market demands.
This includes increasing driveline and drivetrain efficiency, reducing weight and mass in the vehicle, and otherwise enhancing safety and ride and handling performance.
In 2014, we strengthened AAM's commitment to technology leadership by announcing plans to open up a new advanced technology development center, which we refer to as ATDC, here in the city of Detroit.
AAM will invest approximately $20 million in the ATDC facility, which will open here in 2015 and bring in additional complement of 75 to 100 jobs to the city of Detroit.
The objective of the ATDC is to combine advanced product, process and systems technology and development into a single consolidated innovation setting.
The ATDC will enable us to expand AAM's benchmarking capabilities and accelerate the development of critical competencies needed to successfully address the dominant industry trends affecting future driveline systems.
We will accelerate AAM's evaluation of additional light-weighting opportunities within the traditional axle designs and our manufacturing processes with a goal of achieving massive step function improvements in weight reduction, power density, and efficiency without sacrificing performance.
AAM will also continue to aggressively expand our capabilities to further integrate electronic control systems and mechatronic features with AAM's legacy mechanical technologies to deliver more sophisticated torque management performance to our customers.
We believe these and other initiatives will position AAM very well to further differentiate our Company, our products, and our manufacturing processes as shining examples of global driveline technology leadership.
Before I wrap up my comments today, let me say a few final things about 2014.
As I said earlier, 2014 was another successful year for AAM, with strong sales growth and financial performance that was highlighted by solid profitability and improved cash flow.
We made great strides in achieving global operational stability, while also delivering world-class quality products.
In a few minutes, Mike will update you on certain adjustments that were necessary to ensure that our 2014 financial statements were presented in conformity with GAAP.
Let me clearly state that these adjustments have no effect on AAM's guidance or financial targets for any future period.
We are confident in our ability to sustain solid profitability performance and to improve cash flow generation, as we have discussed with you for many years now.
Today, AAM is reaffirming the guidance and targets we shared with you at the 2015 North American International Auto Show here in Detroit on January 14, 2015.
We believe the trend in global automotive market conditions will continue to be positive in 2015.
For the full year of 2015, we expect total US light vehicle sales to increase of approximately 16.4 million vehicle units in 2014 to a range of 16.5 million to 17 million units in 2015.
We actually believe there is a bias to the high end of this range.
Based on these industry sales assumptions and the anticipated launch timing of AAM's new business backlog, AAM is targeting full-year sales in the range of $4 billion to $4.1 billion in 2015.
Again, this represents year-over-year sales growth of approximately 10% versus an expected industry growth rate in the range of 2% to 4%.
In 2015, AAM will support several major launch programs that will drive profitable sales growth and, again, strengthen our business diversification.
The largest of these launch programs include the following.
For Jaguar Land Rover, we will deliver both front and rear axles for a new global passenger car program referred to as the XE platform.
In our Rayong, Thailand facility, we will launch AAM's first-ever major driveline program for Ford Motor Company in support of a global rear-wheel drive SUV program.
And for the refresh of the Nissan Titan light-duty pickup truck program here in North America, AAM will provide our latest high-efficiency front and rear axle technology for them.
And, for Mercedes, we are supporting the next generation of C-class and E-class vehicles in China, and we will also be expanding our supply relationship in that market by launching independent rear drive axles for multiple SUV variants manufactured for Mercedes.
And, finally, for FTA, we will be providing PTUs and RDUs for our third EcoTrac derivative, this time for the China market.
For the full year of 2015, AAM is targeting EBITDA margins in the range of 13.75% to 14% of sales.
The big story for AAM in 2015 is cash flow generation.
AAM is targeting positive free cash flow in the range of $175 million to $200 million for the full year of 2015.
As to our key financial targets for the periods covering 2015 through 2017, AAM is targeting annual organic sales growth in excess of 5%, EBITDA margins in the range of 13% to 14%, and free cash flow in the range of 4% to 5% of sales during this period.
As we look to the future, we remain focused on delivering our plan to sustain solid profitability and improved free cash flow performance, while leveraging AAM's technology leadership to deliver innovative, market-driven products to achieve profitable growth and business diversification.
That is our commitment to all of our key stakeholders and we look forward to updating you on our progress and success along the way, much like we have done over the years.
So that concludes my comments for this morning.
I would like to thank each and every one of you for your attention here today.
So now let me turn it over to our Executive Vice President and Chief Financial Officer, Mike Simonte.
Mike Simonte - EVP and CFO
Thank you, David, and good morning, everybody.
We have a lot to cover today, so let me get started by addressing why we needed additional time to prepare our 2014 year-end financial statements and why we rescheduled the earnings call.
Earlier today, we made four filings with the SEC.
Two were Current Reports on Form 8-K, including our standard earnings release.
We also filed a Form 10-Q/A for the third quarter of 2014, and just before this call started we filed our Annual Report on Form 10-K for the year ended December 31, 2014.
Let me provide some commentary on what happened.
In connection with the preparation of our year-end 2014 financial statements, we determined that entries recorded in the third quarter of 2014 to reduce certain accounts payable accruals at a single location by $8.4 million reduced the cost of goods sold in the quarter, but should have been recorded as an adjustment to the opening accumulated deficit as of January 1, 2012.
We made that determination because the amounts giving rise to the entries originated prior to January 1, 2012.
AAM plant finance executives at this location believe that certain expenses recognized in 2014, including some that related to prior period activity and contingencies in the normal course of business, could be properly matched to the accrual.
However, the accounting documentation supporting the basis of the accrual did not match this approach.
We therefore concluded that we must revise the financial statements for the third quarter of 2014.
Reducing the accrual was the right thing to do.
However, there was a more appropriate way to do it.
We care deeply about quality and integrity in everything we do.
And, in this context, we are very concerned about the credibility of our financial reporting and all investor communications.
As a result of the conclusions we reached, we determined the following actions were necessary to ensure our financial statements were presented in conformity with GAAP.
First, as I said, the opening balance sheet was adjusted as of January 1, 2012, to decrease the accumulated deficit and, therefore, increase stockholders' equity.
Second, the 10-Q for the third quarter of 2014, and specifically the income statement and the statement of comprehensive income was restated to reduce income $8.4 million.
That is $6.9 million net of tax.
The impact of these adjustments had no net effect on stockholders' equity as of December 31, 2014.
In addition, the impact of revising the third quarter of 2014 financial statements had no effect on AAM's sales and revenue recognition, no effect on cash flow, no effect on cash balances, no effect on debt balances or liquidity in any period.
This is true for all quarters and for all years.
Other than the immaterial adjustment to the opening balance sheet as of January 1, 2012, no financial statements for any annual period were restated as a result of this matter.
And all periods presented are in conformity with GAAP.
The impact of correcting the overstatement of the accounts payable accruals had no effect on AAM's compliance with financial covenants, NYSE listing requirements, or any similar requirement relating to a debt or financing obligation.
More importantly, AAM's earnings and cash flow guidance for 2015, as well as the targets established for 2016 and 2017, are not affected by this in any way.
As David already mentioned, AAM is reaffirming all of this 2015 guidance and that 2016 and 2017 targets today.
As a result of the restatement of our third quarter of 2014 financial statements, and a consideration of the appropriate regulatory standards, we determined that a material weakness in our internal control of our financial reporting existed in 2014.
During the fourth quarter of 2014, and in connection with the preparation of our consolidated annual financial statements for the year ended December 31, 2014, which, of course, occurred in January and February of this year, we have implemented new procedures including enhanced documentation, analysis and review of changes in the accrued accounts payable balances.
We have retrained finance executives at the location where the overstatement of accrued accounts payable originated, as well as those working in corporate finance as to the importance of appropriate communication and review of non-routine changes in accruals so that any such changes can be properly assessed under generally accepted accounting principles.
As of today, February 23, 2015, the material weakness has been remediated.
If you have any questions about this subject, I refer you to the four SEC filings I just described, all of which are available to you today.
In addition, we can address this in the Q&A session at the end of our call this morning.
Now let's get back to our regularly scheduled programming, so to speak, and make some comments about our financial performance in the fourth quarter and full year 2014.
As David mentioned, AAM sales in the fourth quarter of 2014 were $940 million, up over $108 million or approximately 13% as compared to the fourth quarter of 2013.
AAM's non-GM sales also increased approximately 13% in the quarter and rose to a quarterly total of $317 million.
That is the highest quarterly total we have ever had.
For the full year 2014, AAM's non-GM sales increased to $1.2 billion.
That is an increase of 30% on a year-over-year basis, twice the growth rate of our entire Company.
AAM's content per vehicle is measured as the dollar value of our product sales supporting our customers' North American, light truck, and SUV programs.
In the fourth quarter of 2014, AAM's content per vehicle was $1697.
That is an increase of $118 on a unit basis or 7.5% on a year-over-year basis compared to the fourth quarter of 2013.
On a sequential basis, content per vehicle in the fourth quarter was up $21 or roughly 1.25% as compared to the third quarter of 2014.
The primary driver of the sequential increase in content per vehicle was seasonally higher four wheel drive penetration.
In the fourth quarter of 2014, four wheel drive penetration reached 72%.
That is up from 68% in the third quarter, and that can be typical for this time of year.
Now, let's move on to profitability.
On an adjusted basis, excluding only the impact of the 2014 pension payout offer, which increased operating expenses by $35.5 million in the quarter, all of the key operating profit metrics for the fourth quarter and the full year of 2014 reflect strong year-over-year improvement.
Adjusted EBIT, earnings before interest and taxes, again excluding the impact of the non-cash charge related to the pension payout offer, grew by approximately 23% to $81.3 million in the fourth quarter of 2014, as compared to $66.1 million in the fourth quarter of 2013.
The adjusted EBIT margin was 8.7% in the fourth quarter of 2014.
On a full year basis for 2014, adjusted EBIT was $312.1 million in 2014 as compared to $245 million in 2013.
The adjusted EBIT margin was 8.4% for the full year 2014.
AAM's adjusted EBITDA in the fourth quarter of 2014, which we define to be earnings before interest, taxes, depreciation, and amortization, again excluding the impact of the non-cash charge relating to the 2014 pension payout offer, was approximately 20% higher on a year-over-year basis.
Adjusted EBITDA was $135.1 million in the fourth quarter.
That translates to 14.4% of sales.
For the full year 2014, AAM's adjusted EBITDA increased 21% on a year-over-year basis to $512 million.
That translates to a margin of 13.9% of sales.
Let me now cover SG&A and interest.
SG&A expense, including R&D, in the fourth quarter of 2014 was $72.6 million or 7.7% of sales.
Now, of the $35.5 million total charge for the pension payout offer, $4.3 million was included in SG&A.
Excluding the pension payout offer impact, adjusted SG&A was $68.3 million or 7.3% of sales.
This compares to $60.5 million in the fourth quarter of 2013, also 7.3% of sales.
For the full year 2014, adjusted SG&A expense was $250.9 million or 6.8% of sales.
This compares to $238 million in 2013 or 7.4% of sales.
Expressed as a percentage of sales, AAM's SG&A burden was reduced by approximately 60 basis points in 2014.
In dollar terms, the $12.5 million year-over-year increase in SG&A was due primarily to higher IT spending, as we have discussed many times before, and net salary and wage inflation.
AAM's 2014 R&D spending was about the same in 2014 as in 2013, or $104 million, just short of 3% of sales.
Net interest expense was $23.9 million in the fourth quarter of 2014.
This compared to $27.8 million in the fourth quarter of 2013.
For the full year 2014, net interest expense was approximately $98 million as compared to $115 million one year ago.
Cash interest payments were approximately $91 million in 2014, down over $30 million as compared to 2013.
The reduction in net interest expense was driven by the favorable impact of the debt refinancing actions we completed in 2013.
The weighted average interest rate for our debt capital structure at year-end 2014 was 6.4%.
Okay, I'm going to cover tax accounting next.
AAM's effective tax rate in the fourth quarter of 2014 was 37.4%, about twice as high as the full year 2014 tax provision rate of 19%, which, as you recall, is right in line with our full year guidance range of 15% to 20%.
There were two large discrete items, as they are referred to in accounting literature, that affected our tax accounting in the fourth quarter.
First of all, we recorded tax expense of $23.1 million in the fourth quarter for changes to prior year uncertain tax positions related to transfer pricing, and expense of $3.4 million for a change in estimate for the US tax on unremitted foreign earnings.
So there was a total of $26.5 million of expense recorded for these two items.
As to the uncertain tax position, let me try to explain this in plain English.
Based on new information that became known to us in the fourth quarter of 2014 regarding transfer pricing audits in a foreign jurisdiction, we changed our estimate of the cost to settle the audits and increased our tax liabilities.
The second discrete item in the fourth quarter of 2014 was a net tax benefit of $20.1 million, related to our ability to utilize certain tax credits in future periods, resulting in recognition of a deferred tax asset.
Again, let me try to explain this in plain English.
In the fourth quarter, we completed an analysis with our tax advisors, through which we substantiated the value of additional tax credits we expect to use in future periods, and therefore recognize deferred tax assets for these credits.
One of the things important to note regarding our cash provision tax in the fourth quarter: the charge related to the pension payout offer was recorded in the fourth quarter, and reduced our 2014 US tax provision accordingly.
If you exclude the impact of the two large discrete items I just described, you will notice that the adjusted fourth-quarter provision approximated $2 million or approximately 10% of pretax income.
This was lower than the running rate for the first three quarters because the fourth quarter picked up all of the benefit associated with the pension payout offer.
That is all I am going to cover on taxes for 2014.
If you need more detailed information, our tax footnote in the 10-K is available for you.
As it relates to 2015, we continue to expect that AAM's effective tax rate or the book provision based on tax laws currently in effect, will range from 15% to 20%.
Before I address the cash flow and balance sheet, let me point out that other income was $6.4 million in the fourth quarter of 2014.
And this represented most of the $6.9 million of such income that we reported for the full year of 2014.
The two primary components of other income for our Company are, first of all, foreign-exchange gains and losses, and secondly, earnings from our Hefei China joint venture.
In the fourth quarter of 2014, AAM benefited from the net favorable impact of foreign exchange gains relating to US dollar strength.
US dollar strength favorably impacts AAM in two ways.
First, AAM's operations in Mexico are US dollar functional.
A portion of our operating expenses in Mexico, especially wages and indirect materials, are paid for, therefore denominated, in pesos.
These operating expenses are lower in US dollar terms when the US dollar is stronger.
This effect is reflected in costs of goods sold, not other income.
And, of course, our operating income increases or decreases as does our cash flow for these changes.
So that is an important issue that we benefit from relating to US dollar strength.
But that is not the issue that affected other income, and I will cover that next.
Assets and liabilities that are denominated in a currency other than the reporting currency for our businesses must be re-measured at the end of every accounting period under GAAP.
Subject to certain exceptions, these gains and losses associated with the re-measurements must be reflected in current-period income.
In Mexico, we have a significant net peso liability position.
In the fourth quarter of 2014, we recorded gains related to this position as the peso-US dollar exchange rate grew to 14.72 at 2014 year-end.
Re-measurement gains and losses are non-cash transactions, but they do increase or decrease other income every period based on the quarter end point in time exchange rate.
Most of the $6.4 million of other income recorded in the fourth quarter of 2014 related to re-measurement gains associated with the favorable peso exchange rate.
If and when the peso US dollar exchange rate normalizes to levels experienced earlier in the year 2014, or those levels we experienced in 2012 and 2013, there is a risk that these gains will reverse and drive unfavorable re-measurements.
Of course, the other impact we will see from US dollar strength relates to the translation of foreign sales and profits.
So this is a third issue that affects our financial statements.
Our foreign sales and profits will be lower in US dollar terms when the US dollar is stronger.
Currency translation did not materially affect AAM in the fourth quarter or full year 2014.
So, to recap on foreign-exchange, first, we benefit from the US dollar strength because the costs we incur in Mexico are lower in US dollar terms.
Second, we do have liabilities denominated -- assets and liabilities, for that matter, denominated in other currencies that must be re-measured at the end of every accounting period.
That was favorable in 2014.
And, finally, just like every other multinational company, we are affected by currency translation.
However, for us, the impact of currency translation was not material in 2014.
Taking all these sales and cost drivers that we have just discussed into account, GAAP net income was $13.2 million or $0.17 per share in the fourth quarter of 2014, of course significantly affected by the one-time charge associated with the pension payout offer.
For the full year of 2014, GAAP net income was $143 million or $1.85 per share.
Let me now address cash flow and the balance sheet.
AAM defined free cash flow to be net cash provided by operating activities less CapEx, net of proceeds from the sale of property, plant and equipment and government grants relating to the purchase of property, plant and equipment.
Net cash provided by operating activities for the full year 2014 was $318.4 million.
Capital expenditures, net of proceeds from the sale of property, plant and equipment and the government grants for the year was $195.3 million.
Reflecting the impact of this activity, AAM generated positive free cash flow of $123 million for the year 2014, nicely higher than our target of $100 million for the year.
Let's now address the pension liability.
As of December 31, 2014, AAM's unfunded pension liability was measured at $95 million.
Of this total, approximately $47 million relates to the circ, which is by design and unfunded benefit.
That means the real unfunded pension liability grew from approximately $1 million at 2013 year-end to $48 million at the end of 2014.
As you probably know, 2014 was a volatile year for pension accounting.
The discount rate moved to significantly lower during the year and a new mortality table was adopted by the Society of Actuaries.
Both of these changes work to increase the actuarial measurement of pension obligations in 2014.
That was true for us and, as far as we know, true for most companies that have such obligations.
In our case, two other dynamics serve to offset the unfavorable impact of these changes in actuarial assumptions.
First, as we have already said, AAM improved the funded status of our plan by terminating approximately $131 million of US pension obligations that related to 3,335 eligible former associates for total cash payment of approximately $104 million.
These payments were made in a voluntary onetime lump sum program, which we have referred to as the pension payout offer.
The second issue that helped to mitigate the effect of lower discount rates and the change in the mortality table was the fact that our investment returns in the master pension trust were much higher than assumed in previous actuarial evaluations.
For the year 2014, our investment returns exceeded 10%.
The higher investment returns were driven by our liability driven investment strategy, or LDI, that we have adopted for the pension assets, through which we have hedged approximately 40% of the change in discount rates through investment in long dated bonds.
This asset allocation strategy did exactly what it was designed to do in 2014.
The net effect of all this pension activity was that our unfunded obligation GAAPed out to be approximately 7% of our total liabilities or, again, $48 million at year-end 2014, as compared to a near fully funded position at 2013 year-end.
And, just to be clear, what I just said relates to the qualified plans.
The total unfunded liability in accordance with GAAP is higher with the addition of the circ.
The pension payout offer resulted in a non-cash charge of $35.5 million in the fourth quarter of 2014.
This charge related to the accelerated recognition of certain deferred losses previously recorded as a component of accumulated other comprehensive income.
The income statement geography, quote-unquote, of this charge was as follows.
$31.2 million was recorded in cost of goods sold.
The remaining $4.3 million was included in SG&A for the fourth quarter.
Let me now address a couple key credit metrics, and then we will move on from there.
AAM's EBITDA leverage or the ratio of EBITDA to net debt was approximately 2.5 times at 2014 year-end.
AAM's EBIT coverage or the ratio of EBIT to net interest expense was 3.2 times at 2014 year-end.
The EBITDA leverage ratio and the EBIT interest coverage ratio were both calculated on an adjusted basis.
One final note on the balance sheet.
We ended 2014 with available liquidity in excess of $800 million, consisting of available cash and borrowing capacity on our global credit facilities.
So before we move to the Q&A, let me just say this about our 2015 guidance.
As David said, we are reaffirming the earnings and cash flow guidance we previously announced in January for 2015, as well as the targets we established for 2016 and 2017.
The key guidance targets for 2015 are full-year sales of approximately $4 billion to $4.1 billion, EBITDA in the range of $550 million to $575 million.
This would translate to an EBITDA margin of 13.75% to 14% of sales, and free cash flow in the range of $175 million to $200 million.
From a cadence perspective, the first quarter is off to a good start.
We expect modest sequential sales growth in the first quarter of 2015, followed by a seasonally higher level of sales in the second and third quarters.
As you may already know, some of the plants or customers' facilities that we support were down for some maintenance time around year-end, extending into the first few weeks of January, and so this is why we expect only modest sequential sales growth in the first quarter of 2015.
Let me say again that none of the accounting and reporting issues we discussed earlier that relate to the restated 10-Q for the third quarter of 2014 affects our earnings and cash flow guidance for 2015.
We are on track to deliver that guidance and those targets, and remain just as confident as ever in our ability to make it happen.
Thank you for your time and participate in participation this morning.
I am going to stop here and turn the call over to Chris so we can do the Q&A.
Christopher Son - Director of IR, Corporate Communications, and Marketing
Great.
Thanks, Mike, and thanks, David.
We have reserved some time to take some questions.
Based on time, I would like to try to limit to two per question.
At this time I will turn it back over to Laura so she can prompt the Q&A.
Operator
(Operator Instructions) Rod Lache, Deutsche Bank.
Rod Lache - Analyst
I have a couple things.
One is, you guys have been very transparent with variances that affected your P&L in the past.
And I appreciate that there was no impact on the cash flow from all of this.
But, I'm curious about Q3.
Was senior management aware of the accrual adjustments that you made for the quarter?
Mike Simonte - EVP and CFO
Rod, this is Mike.
Yes, we were aware of the accounting to reduce the accrual during the course of 2014 and, of course, that was particularly true in the third quarter.
And I think what we tried to communicate this morning is that one of our locations, as it turns out, based on a review of the documentation, inadvertently overstated the accruals and understated income in prior periods.
Now, plant finance thought that these accruals were needed and appropriate to cover items such as open requisitions for plant maintenance and service projects and, Rod, also, customer chargebacks for quality issues at premium freight.
Some of these issues, particularly the customer chargebacks, can age for a while until they can be resolved by mutual agreement.
And, as you know, we cleaned up quite a bit of our operating situation and also the commercial impacts with our customers in 2014.
We got our Mexican operations back to a six-day schedule.
We cleaned up all of our past dues and we had a very good year, as David mentioned, from a quality standpoint.
In this case, the accounting documentation that our plant finance team relied on to support the accruals and, more importantly, to support matching of the accruals to activity that we were experiencing in 2014, this documentation was not properly prepared, and certainly not maintained over time properly.
So when the auditors reviewed how the 2014 activity was matched to the accruals, the documentation didn't hold up.
And that was true even though we had activity passing through our financial statements this year, as we will for any year, that relates to the resolution of estimates and other contingencies and, of course, other projects that may have been started in a prior year.
So Rod, listen, it is our job to get this right.
We thought this activity was being matched up in the normal course of business.
We know how to do this right.
We failed to do so here in the third quarter.
And so we are communicating as openly and transparently as we can about the thing today, to make sure that you understand what happened, you understand that we take it very seriously to get this stuff right.
We have made the appropriate adjustments and we will continue to make full and transparent disclosure of the issues that caused our income statement to be affected or, for that matter, any other financial statement, to be affected by unusual items each quarter.
Rod Lache - Analyst
Right.
It just seems like the margin obviously in Q3 was boosted by maybe 80 basis points.
And, if that was something that was evident, it is unusual that it wouldn't have been called out, I guess is the issue.
But, maybe there were other factors that were offsetting that as well within the P&L.
Mike Simonte - EVP and CFO
Yes.
As I said, Rod, we felt that, in the normal course of business, our plant finance team was doing the right thing to match up the accruals to other activity.
That proved to not be true.
The documentation did not support that.
So those adjustments were made in error in the third quarter and they had to be revised.
Rod Lache - Analyst
Okay.
And, also, just two real housekeeping things; one is the level of K-2 production that is incorporated into your guidance.
Can you just remind us, is that in the 1.2 million to 1.25 million unit range?
Do you see any potential for upside to that and in 2015 or 2016?
Or is that kind of the peak that you are prepared to produce for?
And, secondly, how should we be thinking about the tax rate over the longer term?
I think you have said in the past that it would remain at this level for a bit.
But, ultimately, if you bring cash back to the US from Luxembourg for dividends or acquisitions, how would that affect the tax rate?
David Dauch - Chairman, President and CEO
Rod, this is David Dauch.
I will cover the K2XX production.
Mike can cover the tax rate issue.
But we are probably in 1.2 million units from a K2XX standpoint.
Our capacity is aligned with our customer in that respect.
As Mike covered with you, we obviously readjusted our operations and moved from a seven-day operation to a five- and six-day operation.
If GM schedules the ability -- or any increase above that 1.2 million, we will have some ability to support that moving forward.
Mike Simonte - EVP and CFO
And, Rod, just to be clear, mechanically, the guidance range that we provided, the low-end of the range, the $4 billion in sales is aligned with the 1.2 million unit production assumption for K2XX.
And somewhere between 1.225 million and 1.250 million is aligned with the upper end of the range.
What our assumption is, Rod, is that if market conditions allow General Motors to build more than 1.2 million units -- of course, sell more than 1.2 million units, that some of the other programs we support may also be favorably impacted.
And so that is why it is not only the case K2XX that drives the difference between the high end and the low end of the range.
As it relates to the tax issue, Rod, we expect our tax provision rate over the next couple, three years and perhaps a little bit longer than that to be similar to that which we experienced today in this range of 15% and 20%.
Now, a couple of bits of color here; of course, all this is based on current tax laws.
There have been some initiatives that President Obama has talked about as well as initiatives affecting other countries in which we conduct our business that could have an impact on that.
But, at this point in time, it doesn't appear to be any significant momentum to change any of the key laws and regulations that cause us to believe that our tax rate [can] be controlled within this range.
Longer-term, it should increase.
Through the end of 2014, we have now soaked up the net operating losses that we incurred in the US in prior years.
But we still have a significant amount of credit capacity that can be utilized to reduce our tax obligations in the US in the future.
And, in our opinion, in fact, will be utilized.
That is why they are recognized as deferred tax assets.
We have a significant amount of what is referred to as previously taxed income that allows us to move material amounts of money from Luxembourg, if and when it is appropriate, to the US without disturbing this outcome.
So Rod, we do not really anticipate at this time that that is going to be a change for us in the near term.
Operator
Brian Johnson, Barclays.
Brian Johnson - Analyst
Want to talk a little bit about the longer-term EBITDA guidance.
In particular, there is a lot of uncertainty in Brazil and you have got a 13% to 14% EBITDA margin target through 2017.
Does that make any assumption one way or the other about where light vehicle and relevant commercial vehicle production is going in Brazil?
Mike Simonte - EVP and CFO
Hey, Brian.
This is Mike.
As it relates to Brazil, Brazil is a very important part of our business and we hope and expect it will be a growing part of our business.
But, as it relates to the next couple, three years, we expect our sales in Brazil to be relatively small in relation to the total business, probably less than 5%.
And so, while we are making certain assumptions regarding an ability to improve profitability and increase sales in that market through the launch of new business programs, one particular program in fact that will launch in 2016 and 2017, it is really -- it just doesn't move the needle too much.
And so I guess what I am saying is, our assumptions in Brazil really don't have a material impact on our ability to deliver those margins.
Brian Johnson - Analyst
Okay.
So that being said, are you assuming a material recovery in Brazil sales or just--?
Mike Simonte - EVP and CFO
No.
Brian Johnson - Analyst
Okay.
No.
Mike Simonte - EVP and CFO
I wouldn't regard our assumption as a material recovery, no.
Brian Johnson - Analyst
Okay.
So your -- all right, second question.
You talked a little bit about K2XX overall.
But, within that, it appears that the SUV sales are particularly strong, especially given the gas price environment.
Can you comment on if there is any way to increase the mix there, recognizing, of course, that is your customer's decision, and then again, how you think of that over the next couple of years?
David Dauch - Chairman, President and CEO
Brian, this is David.
As you said, the SUV sales were very strong right now.
As you know, they build them out of the Arlington facility and that facility has been running at its maximum capacity rate for some time now.
So unless GM has other assembly plant modifications to incorporate SUV into them, I don't see the SUV sales changing too much from what we experienced this past year.
Brian Johnson - Analyst
And if they were, you could support that, I assume?
David Dauch - Chairman, President and CEO
Yes, we could.
Brian Johnson - Analyst
Because, at one point, they did have a Janesville plant and part of [Solao] churning out turning SUV (multiple speakers)
David Dauch - Chairman, President and CEO
I mean, it really comes down to what the mix is.
It goes back to the earlier question that Rod had in regards to the 1.2 million units that we planned for or up to 1.225 million.
It is just a matter of what they want that mix to be between SUVs and pickups.
And then, we obviously would work with General Motors to support those things.
Brian Johnson - Analyst
Okay.
Thanks.
Operator
Itay Michaeli, Citi.
Itay Michaeli - Analyst
Just want, on the 2015 outlook, Mike, hoping to get a little bit more detail on the split between the gross margin and SG&A.
It sounds like you are running now comfortably north of 15% on the gross margin side, which kind of suggests maybe you could be at the higher end of your EBITDA margin range even with some growth in SG&A, but hoping you could maybe talk a little bit about what we should look for in those two items.
Mike Simonte - EVP and CFO
So I think you have got it right, generally speaking, with respect to the trend in gross profit.
We expect a good amount of stability, based on the assumptions we have made for 2015 as it compares to 2014.
We do expect higher production volumes in some of the key North American light truck programs.
That will translate to a little bit higher operating leverage, a little bit higher capacity utilization, but not so high that we feel we're going to have cost overruns to meet it, particularly not with -- or this is particularly true because we have made adjustments to our capacity, particularly in component-making operations that we discussed with you and others over time.
As it relates to SG&A, we don't expect SG&A to creep too much, certainly not as a percentage of sales.
On a dollar basis, it will grow.
It definitely will grow, as we discussed back in January.
But as a percentage of sales, it should be around 7% or a little bit lower.
And so that is going to allow us to, again, see a little bit of profit support from the mix of those two items.
Itay Michaeli - Analyst
That is very helpful.
And then, just going back to Brazil for a moment.
Can you just update us on where gross profitability ended up in 2014, and then what you are baking in, in your guidance for this year?
Mike Simonte - EVP and CFO
Yes.
We had -- earlier in the year we had communicated our target of increasing the gross profit margins to approximately 10%.
That was before we became aware of further reductions in production plans for our two major programs in that market.
We ended the year positive.
We are little bit less than a 5% gross margin when all is said and done.
Our team did a great job.
The sales were about $50 million light compared to our budget, but they still managed to maintain a positive gross margin by taking quick and decisive action to reduce the fixed cost structure, and variable costs, for that matter.
We continue to target a 10% level of gross profit performance in 2015.
We are little bit light of that in our current plan, so we are working to find ways to improve that.
And, longer-term, we should be able to raise it even further as we improve capacity utilization, not just of the actual physical plant, but also the entire team working in Brazil.
We have got some specific projects in the backlog and some other things we are looking at that can allow that business to earn a better margin.
So I hope that is helpful with respect to Brazil at this time.
Itay Michaeli - Analyst
Yes.
Absolutely.
That is very helpful.
Thanks so much, Mike.
I'll pass it on.
Operator
Ryan Brinkman, JPMorgan.
Ryan Brinkman - Analyst
I understand that your backlog has a high degree of passenger car and crossover content, but given that your sales in recent quarters have been benefiting from the stronger mix of full-size pickups and SUVs, and full-size pickups and SUVs do comprise some portion of your backlog, does that, then, create upward pressure on your backlog?
David Dauch - Chairman, President and CEO
I don't know if I would call it upward pressure.
I mean, we have obviously realized some great success with our current customers with the full-size truck and SUV platforms, especially GM and Chrysler or FTA.
We have increased our content per vehicle as it relates to our performance with them.
We had guided before that we were working towards parity, and by mid-decade with respect to GM and non-GM sales.
Obviously that is going to be throttled down a little bit now where I think not GM sales and be more in the 40% to 45% range than the parity that we had talked about before.
But, in regards to the backlog, I mean, again, our technology in the crossover and passenger car market is being received extremely favorably.
We talked to you about the $500 million of sales that we expect by the 2017 period of time, just on our disconnecting all-wheel-drive technology.
We are working with a number of other customers right now that in that disconnecting all-wheel-drive or EcoTrac.
And we are also working on some of our latest technology associated with EAM, which you are familiar with, in the hybrid electric, plug-in hybrid electric and battery electric type applications.
So again, we are quoting over $1 billion of sales opportunity, and quoted in emerging.
And we will hit our normal hit rate in line with what we -- the sales filter and the guidance that we put forward to you in the past.
So what most of what we are working on right now is 2017 and beyond as it relates to most of the driveline type programs.
So what we have guided you on The Street in regards to the backlog of $825 million with the cadence being $300 million, $200 million and $325 million, I don't think -- see a lot of change in the first two years, but you possibly could see some change in 2017 and beyond.
Ryan Brinkman - Analyst
Okay.
Great.
And, you know, there were some questions earlier on Brazil.
Can you just give us an update on your operations in Thailand, what you're seeing there both from an operating and a foreign currency perspective?
And then, I think you are trying to repurpose some capacity there toward new programs with non-GM customers.
Any progress report along those lines?
Thanks.
David Dauch - Chairman, President and CEO
Yes.
You know, Thailand obviously got caught up in the political pool last year and started to show some improvements towards the end of the year.
It is still not where we ultimately desire it to be, and we have had to adjust our installed capacity and capability there, just like we have done in Brazil, as Mike indicated.
We do have another customer coming on board, as I mentioned to you, that being Ford Motor Company for an Asian SUV program.
So we will repurpose some of that capacity for that.
But, overall, we feel that we are in a solid position in regards to supporting the market there, where it is today, and also some upside to that market moving forward.
Mike, do you want to mention anything on that exchange rate at all?
Mike Simonte - EVP and CFO
No, I mean, to the extent that the US dollar is stronger than our translated sales in that market will be a little bit lower.
When we spoke to you and others in Detroit in January, we talked about maybe a $25 million to $30 million headwind we estimate relative to our sales expectations.
But, I think, actually, Ryan, something that relates to your first question is helpful in this regard, too, because most of the high dollar impact, new business awards that we are launching in the passenger car crossover vehicle area are concentrated in North America and China.
And these are two markets that are very favorably impacted by the trend towards crossovers and particularly all-wheel-drive crossovers.
And so, underlying the positive comments that David made about our ability to participate in that trend is the fact that we actually are, in fact, benefiting from that trend.
Our capacity levels for some of the major programs, including EcoTrac, we are talking actively about increasing capacity to meet demand in those programs.
So I think there is some upward bias relative to that.
And, of course, that should offset any weakness we see related to currency translation.
Operator
Joe Spak, RBC Capital Markets.
Joe Spak - Analyst
Mike, thanks again for all the detail.
I just wanted to quickly go back to cash taxes.
I believe in the past you said you are currently in the mid-single digits, and I guess I just wanted to confirm that, given with all the detail you provided today.
And then, more importantly, I think you said that sort of should eventually creep a little bit higher to maybe 10% or so in the next couple of years.
Is there any color you can provide as to what you would expect now for 2015?
Mike Simonte - EVP and CFO
Yes, Joe.
You are right on in terms of your memory of the cash tax provision rate.
In 2014, we paid approximately $11 million of income taxes, so that translates to a little bit less than 10% cash tax provision rate.
The cash tax with provision rate should continue to be lower than our book tax provision rate.
There is one qualification with that.
As we settle audits, and we talked about earlier in this call the increase to the reserve for uncertain tax positions, as it is referred to in tax literature, there are going to be some lumpy payments that come through every once in a while.
I think last year we had roughly $5 million of this activity that increased our cash tax provision rate above and beyond the normal run rate of activity we are experiencing.
So, subject to that, we would expect the cash tax provision rate to be, over time, lower than our book tax provision rate.
That continues to be true, yes.
Joe Spak - Analyst
Okay.
Thanks.
And then, anything on steel or SBQ?
And I know there is some index in there, but what are you guys -- how are you guys thinking about the commodity landscape as you look forward to 2015?
David Dauch - Chairman, President and CEO
Steel has settled down for us personally and there is still a tight supply in the marketplace with respect to SBQ type steel.
There was additional capacity that was brought on board.
But, because of the accelerating SAAR and build requirements, they have eaten up a lot of that.
Because of the amount of SBQ steel that we buy, we have a lot of -- we have very positive relationships with the mills and we get priority with respect to that.
But we have got proper capacity put in place to support what we consider to be the proper vehicle production for 2015 and beyond, and obviously we will keep an eye on that moving forward.
But, we don't see any issues with respect to our suppliers on SBQ, although the industry is tight from a capacity standpoint.
Operator
Brett Hoselton, KeyBanc.
Brett Hoselton - Analyst
Wanted to talk a little bit about the longer-term outlook can, I guess, first simple question is, as we think about the 13% to 14% margin rate range that you are guiding towards through 2017, Mike, what is the primary one or two factors that might drive it to the higher end of that range versus the lower end of that range?
Mike Simonte - EVP and CFO
Yes.
Brett, look, the most important determinant of our profitability is capacity utilization.
So you know in making any budget or projection of future revenue, and of course our financial results, we have to make estimates about how much production and ultimately sales we are going to experience from those programs.
So what we have done in our estimation is range that activity.
And so we think, if production levels stay near to those levels we enjoy today and are planning for 2015, then the margin performance for those two years should be relatively similar to that which we are guiding for 2015.
If we experience pullback, either because the market demand for the products we support is lower, maybe our customers could lose some market share, there are any number of reasons why that may happen.
But we have estimated that we could have lower production in that time period and, therefore, may have some pressure in our margins.
So that is, by far and away, the issue that we think about what we are setting that range.
Brett Hoselton - Analyst
Okay.
Thank you.
And then, secondly, as I think about your sales outlook, greater than 5%, looking at your new business backlog and the production outlook and so forth, it seems like a revenue growth rate is kind of 5% to 10% would be kind of some reasonable boundaries, depending on where production goes and so forth.
But my question here is that every once in a while you talk about the possibility of making an acquisition.
And it seems as though you have the ability to grow your revenue organically at a pretty good clip, and you are kind of balancing that versus debt paydown.
But, again, every once in a while, there is this idea of making an acquisition or strategic acquisition seems to surface.
I guess my question is simply this.
What is the probability, in your mind, that you might actually make some sort of a strategic acquisition over the next year or two?
David Dauch - Chairman, President and CEO
Brett, this is David.
Again, we are going to keep everything in balance in regards to how we are properly growing this business.
And, clearly, the first thing that we are protecting is we are protecting the strength of our balance sheet and improving that balance sheet to even put us in a position to even contemplate looking at acquisitions going forward.
We have built this Company for the most part on organic growth over the years.
There is plenty of opportunity out there from our organic growth standpoint, like I mentioned to you earlier.
At the same time, that organic growth also has demand as it relates to CapEx.
And we have been really trying to throttle back our CapEx and manage our cash flow generation to the point that we had a positive inflection in cash flow performance this past year.
And we expect that cash flow performance to increase this year as we outline what the guidance of $175 million $200 million.
If the right opportunity presents itself from a strategic standpoint, or an inorganic standpoint, then clearly we are going to look at it.
But we have to keep that in balance with managing our balance sheet and managing our resource capability, not only financially, but also from a human capital standpoint.
But we feel that if the right opportunity presents itself within our core business or even outside as we look to expand our markets and our products and product portfolio, then we will do the right thing for our shareholders and stakeholders.
Brett Hoselton - Analyst
David, Mike, thank you very much, gentlemen.
Operator
John Murphy, Bank of America Merrill Lynch.
John Murphy - Analyst
One of the surprises in 2014 to the upside was the relatively strong free cash flow at $123 million, and it was $23 million higher than you guys were looking for in your original guidance last year.
I was just curious, if you could highlight what you think the high key drivers were there, because it wasn't really sales or EBITDA margins.
I'm just trying to understand what was the real driver there and what we might think about going forward in 2015.
Mike Simonte - EVP and CFO
Okay, John, I guess I would point out a couple things.
First of all, our sales grew by almost $500 million in calendar year 2014, and yet our inventory was reduced.
And so our plant management teams throughout the world did a very fine job normalizing inventory levels.
We had some excess inventory, at least from the eyes of a finance officer, in our operations to protect against day to day performance issues and also to protect the launch success.
And so that was a big driver.
And we did better.
Quite frankly, we did better than we expected on that front.
And we still have work to do in that area.
We are still looking at ways to either reduce or minimize the growth of inventory as we continue to grow our business in calendar year 2015.
The other issue that must be mentioned in this context, there is all kinds of puts and takes that a business will encounter in any given year, but the other issue is that we did negotiate significant capacity management program with General Motors.
They paid us to increase capacity on the GM -- or the K2XX program, and so the net effect of that activity was different from what we expected.
And our CapEx -- our net capital spending in areas unrelated to the General Motors activity was a little bit less than we thought as well.
So when we look at the mix of those two items, we're going to spend all that money GM paid us.
Some of it is going to be paid in 2015 versus paid in 2014, but we are going to spend all that money.
The issue is that, when you look at the timeline timing of those activities and the leverage in our capital spending activity, we did a little bit better there than we had expect anticipated as well.
John Murphy - Analyst
Okay.
And just a second question as we look at EcoTrac and the big growth there, the $500 million in revenue that you are expecting in 2017, can you just give us a rough breakdown by region and customer there, just so we can understand where that is shaking out?
David Dauch - Chairman, President and CEO
Yes.
Clearly, EcoTrac was launched here in North America with FTA on the Jeep program, that being the Cherokee.
It has now expanded into the Chrysler 200 program.
And then it will expand into China as we mentioned to you.
So the EcoTrac and FTA is going to be the majority of that $500 million.
However, we do have a second customer coming on with that technology in that 2017 period of time.
That will be split between North America and China, but most of it being in North America.
Christopher Son - Director of IR, Corporate Communications, and Marketing
Thanks.
We have got time for one more question.
Operator
Ravi Shanker, Morgan Stanley.
Ravi Shanker - Analyst
A couple of questions.
One is your CPV has seen a very nice, I think, fairly consistent $130, $140 increase every quarter, year on year, in 2014.
Where do you think that goes in 2015 and what keeps that CPV going up?
Mike Simonte - EVP and CFO
This is Mike.
Our content per vehicle should be relatively similar in 2015 as where we end the year 2014.
As you know, the launch of the K2XX SUVs and the heavy duty portion of the pickup truck program was the main driver for that increase in content per vehicle on 2014 as compared to 2013.
Now, as we -- when we look at the first quarter of 2015, we do see the opportunity for content per vehicle to show a good amount of growth on a year-over-year basis.
But that is because the first quarter of 2014 was impacted by the launch -- the early days of launch for the SUV and the heavy duty portion of the K2XX program.
Once we get past that first quarter, though, we think there is relative stability in the CPV.
The positive drivers are a continued increase in four-wheel-drive penetration.
These are modest improvements.
But every time we sell an additional front axle, that drives additional content.
And then the offsetting impact, of course, are the price reductions that we will be passing back to our customers.
But, net-net, I don't see any material change in that content per vehicle.
There is going to be a little bit of pressure on that number to go down over time, but we hope to offset that from a P&L standpoint with productivity in our own cost structure.
Ravi Shanker - Analyst
Great.
And just lastly, in your long-term guidance, you're looking for 13% to 14% EBITDA margins.
I think in the past you have talked about margins normalizing at the 12% to 13% level.
So, is this an upgrade in your long-term margin assumption?
And what is driving that?
Mike Simonte - EVP and CFO
Well, Ravi, you are exactly accurate.
We think there is a possibility over time that our margins could be reduced to a level even lower than the 13% to 14% range.
If that happens, it will be because we have significantly improved the diversification of our business, and will become more representative of the revenue concentrations of many of our peer companies.
We are saying to you and to anybody else in this guidance for 2016 and 2017 that we don't anticipate that trend to be impacting that particular time period, because of the strength in the underlying North American light truck programs that we anticipate supporting.
So I wouldn't say it is an upgrade to our long-term guidance.
I would say that it is an upgrade to any expectation you may have had for the near-term potentially, but it is still consistent with our thought process about these issues.
Ravi Shanker - Analyst
Understood.
Thank you.
Christopher Son - Director of IR, Corporate Communications, and Marketing
Great.
Thank you Ravi.
We thank all of you who have participated on this call and appreciate your interest in AAM.
We look forward to talking with you in the future.
Operator
This concludes today's conference call.
You may now disconnect.