FY 2006 Fourth Quarter Earnings Conference Calllibrary.corporate-ir.net/library/12/122/122961/items/221485/ARM_Q... · FY 2006 Fourth Quarter Earnings Conference Call November 14,

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FY 2006 Fourth Quarter Earnings Conference CallNovember 14, 2006

FY 2006 Fourth Quarter Earnings Conference Call

Chip McClure, Chairman, CEO & President Jim Donlon, Senior Vice President & CFO

November 14, 2006

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Forward-Looking StatementsThis presentation contains statements relating to future results of the company (including certain projections and business trends) that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,”“anticipate,” “estimate,” “should,” “are likely to be,” “will” and similar expressions. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to global economic and market cycles and conditions; the demand for commercial, specialty and light vehicles for which the company supplies products; risks inherent in operating abroad (including foreign currency exchange rates and potential disruption of production and supply due to terrorist attacks or acts of aggression); availability and cost of raw materials, including steel; OEM program delays; demand for and market acceptance of new and existing products; successful development of new products; reliance on major OEM customers; labor relations of the company, its suppliers and customers, including potential disruptions in supply of parts to our facilities or demand for our products due to work stoppages; the financial condition of the company’s suppliers and customers, including potential bankruptcies; possible adverse effects of any future suspension of normal trade credit terms by our suppliers; potential difficulties competing with companies that have avoided their existing contracts in bankruptcy and reorganization proceedings; successful integration of acquired or merged businesses; the ability to achieve the expected annual savings and synergies from past and future business combinations and the ability to achieve the expected benefits of restructuring actions; success and timing of potential divestitures; potential impairment of long-lived assets, including goodwill; competitive product and pricing pressures; the amount of the company’s debt; the ability of the company to continue to comply with covenants in its financing agreements; the ability of the company to access capital markets; credit ratings of the company’s debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental or asbestos-related matters; rising costs of pension and other post-retirement benefits and possible changes in pension and other accounting rules; as well as other risks and uncertainties, including but not limited to those detailed herein and from time to time in other filings of the company with the SEC. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

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Highlights• Met guidance with fourth-quarter EPS of $0.40

before special items• Favorable tax items of $0.53 per share are excluded from

this number• Delivered full-year 2006 EPS of $1.78, achieving the

upper end of the guidance range• Includes $0.06 benefit of reclassifying LVA Venezuela to

continuing ops.• Produced full-year free cash flow of $284 million,

exceeding the guidance range of $200-225 million• Includes $116 million from non-recourse sales of

receivables largely included in the previous guidance

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Highlights – continued• Projecting 2007 EPS in the range of $1.15 to $1.25

from continuing operations before special items• Announcing a major new profit improvement

initiative• Established six new facilities and joint ventures in

emerging markets in 2006• Reduced net debt by $103 million in the quarter and

$501 million during the fiscal year• Completed most of the previously-announced

restructuring within spending projections and with greater savings than forecasted

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2005 Restructuring Program Update

• Goals of this program have been achieved• Benefits to date have offset negative effect of raw materials prices,

production volumes and customer pricing• Incremental benefits in 2007 will offset stainless steel pricing

• Goals of this program have been achieved• Benefits to date have offset negative effect of raw materials prices,

production volumes and customer pricing• Incremental benefits in 2007 will offset stainless steel pricing

$60-65$50$50-60Run-rate annual benefits

$105$99$110Cash Restructuring

$132$127$135Restructuring Costs

UpdateProgram to Date

Original Estimate($ million)

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Emissions Technologies Restructuring

New Business Unit for 2007

Emissions Technologies

58%

Undercarriage Systems

17%

Aperture Systems

25%

LVS Sales2006

Commercial Vehicle

Emissions1%

Undercarriage and Drivetrain

Systems91%

Specialty Products

8%

CVS Sales2006

EmissionsTechnologies

BusinessUnit

• $50 million additional restructuring

• $310 million impairment

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Performance Plus Profit Improvement Initiative

AftermarketProductGrowthER&DOverheadManufacturingMaterials

Revenue EnhancementCost ImprovementsCommercial ExcellenceOperational Excellence

• Three teams addressing operational performance• Three teams focusing on ways to grow the business• More details at Analyst Day on December 7 in New

York

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$39 millionSoldCVS Off-Highway Brakes

$ 227millionTotal Light Vehicle Aftermarket

Other Divestitures

Light Vehicle Aftermarket

N/AEvaluatingLVS MSSC suspension JV

SoldEquity share in Purolator India

In ProcessN.A. Ride Control

SoldS. Africa Ride Control

SoldN.A. Purolator filtersSoldN.A. Exhaust

In ProcessLVA Europe

SoldN.A. Motion Control

ProceedsStatus

Divestiture Status

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Diverse Customer Base

Minimizes Reliance on Any Single Customer

Commercial Vehicle Customers Light Vehicle CustomersDaimlerChrysler

10%

General Motors9%

Volkswagen10%

Ford 7%

Asian Based OEMs 3%

BMW 2%Fiat 3%

Other LVS 9%

Other CVS15%

Fiat 2%

Asian Based OEMs 3%

Ford 3%

Volkswagen 1%General Motors 1%

PACCAR 2%

International 3%

Volvo 9%

DaimlerChrysler8%

47% Commercial

Vehicle

53% Light

Vehicle

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Geographic/Customer Mix of 2006 Sales

South America*

6%

Asia and Asian-based OEMs *

9%

North America47%

Europe and European-

based OEMs *38%

Consolidated Revenue

* Includes local operations of companies headquartered in North America

+ Non-Consolidated Joint Ventures

South America*

7%

Asia and Asian-based OEMs *

16%

North America44%

Europe and European-

based OEMs *33%

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Top 15 Light Vehicle Platforms

Avensis, CorollaToyota 296NTown and Country, CaravanDCX RS/RTSanta Fe, SonataHyundai NF/CM

Megane, ScenicRenault CRamDodge DR-DEFocus, C-MAX, Volvo S40/V50Ford C1

SuperDuty F-SeriesFord P131Fiesta, European FusionFord B2E-ClassMercedes W211TouaregVW PL71CromaFiat 194Polo, Ibiza, Audi A2, Skoda FabiaVW PQ24/25Golf, Touran, Audi A1, Skoda OctaviaVW PQ34/35Vectra, ZaphiraOpel Epsilon/3000Silverado, Sierra, Tahoe, SuburbanGMT 800/900

Key VehiclesPlatform

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Top 15 Vehicle Platforms

TouaregVW PL71CromaFiat 194

Golf, Touran, Audi A1, Skoda OctaviaVW PQ34/35VT, VN, Pinnacle, VisionMack/Volvo Class 8

Premium, MagnumRenault Trucks HD

Coronado, Century S/T, ColumbiaFreightliner Class 8FH, FH16Volvo Trucks HD

SuperDuty F-SeriesFord P1314000 Series, CF SeriesInternational MDFiesta, European FusionFord B2E-ClassMercedes W211

Polo, Ibiza, Audi A2, Skoda FabiaVW PQ24/25ProStar, 8000 Series, 9000 SeriesInternational Class 8

Vectra, ZaphiraOpel Epsilon/3000

Silverado, Sierra, Tahoe, SuburbanGMT 800/900

Key VehiclesPlatform

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Full Year Income Statement from Continuing Operations – Before Special Items (1)

(1) See Appendix – “Non-GAAP Financial Information”

3%$ 0.05$ 1.73$ 1.78Continuing OperationsDILUTED EARNINGS PER SHARE

3%4121$ 125Income from Continuing Operations(8)(6)(14)Minority Interests

26%12(47)(35)Provision for Income Taxes0%-174174INCOME BEFORE INCOME TAXES

-1%(1)(123)(124)Interest Expense, Net and Other29%82836Equity in Earnings of Affiliates-3%(7)269262OPERATING INCOME0%-(2)(2)Other Expense

16(16)-Restructuring Costs0%(1)(376)(377)SG&A

-3%(22)663641GROSS MARGIN-4%(344)(8,210)(8,554)Cost of Sales4%$ 322$ 8,873$ 9,195Sales

%$Better/(Worse)20052006

Twelve Months Ended September 30(in millions, except per share amounts)

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Fourth Quarter Income Statement from Continuing Operations – Before Special Items (1)


-9%$ (0.04)$ 0.44$ 0.40Continuing OperationsDILUTED EARNINGS PER SHARE

-10%(3)31$ 28Income from Continuing Operations(2)-(2)Minority Interests

40%4(10)(6)Provision for Income Taxes-12%(5)4136INCOME BEFORE INCOME TAXES15%5(34)(29)Interest Expense, Net and Other38%3811Equity in Earnings of Affiliates

-19%(13)6754OPERATING INCOME1(1)-Other Expense3(3)-Restructuring Costs

8%7(88)(81)SG&A-15%(24)159135GROSS MARGIN

-9%(173)(1,965)(2,138)Cost of Sales7%$ 149$ 2,124$ 2,273Sales

%$Better/(Worse)

20052006

Three Months Ended September 30(in millions, except per share amounts)

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Segment Operating Income –Before Special Items (1)


(0.2) pts3.0%2.8%(0.8) pts3.2%2.4%Total Operating Margins(0.2) pts3.1%2.9%(0.7) pts3.2%2.5%Segment Operating Income

- pts5.2%5.2%(0.5) pts5.2%4.7%Commercial Vehicle Systems(0.3) pts1.3%1.0%(1.2) pts1.5%0.3%Light Vehicle Systems

Operating Margins-3%(7)269262-19%(13)6754Operating Income

(3)(4)(7)-(2)(2)Unallocated Corporate Costs-1%(4)273269-19%(13)6956Segment Operating Income4%92122212%15253Commercial Vehicle Systems

-21%$ (13)$ 61$ 48-82%$ (14)$ 17$ 3 Light Vehicle SystemsOperating Income

%$%$Better/(Worse)

20052006Better/(Worse)

20052006

Twelve Months Ended September 30Quarter Ended September 30(in millions)

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61%59%

63%

2003 2004 2005 2006

$561

$469

$659

2003 2004 2005 2006

$299

$948

$696

2003 2004 2005 2006

$1,648

$1,356 $1,383

2003 2004 2005 2006

Debt-to-capitalization ratio

Unfunded pension liability(millions)

Term debt due within 5 years(millions)

Net debt(millions)

Balance Sheet Strengthening

$882 55%

$93$409

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Pension and Retiree HealthcarePension• Unfunded status of $409 million as of June 30, 2006 measurement date,

compared to $659 million a year ago• Expense of $76 million in 2007, down $19 million from 2006• Planned funding of $134 million in 2007, compared to $59 million in 2006• Discount rate currently at 6.6% for U.S. plans, with long-term return assumption

of 8.5%• Actual returns for 2006 were 11%

Retiree Healthcare• Expense of $57 million in 2007, compared to $47 million in 2006• Continuing appeal and negotiation of previously proposed retiree healthcare

cost sharing• Current net OPEB liability is $600 million vs. $455 million last year

New Accounting Standard• Plan to adopt SFAS 158 in 2008

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CY 2005 CY 2006 CY 2007

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

78 89 92 93 85 55 45 50 50

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FY 2006 FY 2007 FY 2008

235

200(Thousands of vehicles)

North America Class 8 TruckVolume Forecast

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CY 2005 CY 2006 CY 2007

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

111 116 114 98 109 111 107 92 107

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FY 2006 FY 2007 FY 2008

419

417(Thousands of vehicles)

Western Europe Medium & Heavy Truck Volume Forecast

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FY 2007 Outlook – Continuing Operations Before Special Items

$ 125$ 75$ 284Free Cash Flow

$ 1.25$ 1.15$ 1.78Diluted Earnings Per Share

$ 89$ 82$ 125Income from Continuing Operations

24.0%21.0%20.0%Effect Tax Rate

(112)$ (105)$ (124)Interest Expense

2.4%2.2%2.8%Operating Margin

$ 8,900$ 8,700$ 9,195Sales

FY 2007Full Year Outlook (1)

FY 2006Full Year

(1) Outlook does not include the impact of any future acquisitions or divestitures, or the impact of additional restructuring actions

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Fiscal Year 2007 Outlook

(1) Excluding gains or losses on divestitures, restructuring costs, and other special items

(0.25) - (0.35)Higher Net Steel Costs

Volume$(0.45) - $(0.60)North American Class 8 Downturn

(0.15) - (0.20)Q1Big Three Production Cuts(0.30) - (0.45)Other Volume Mix

$1.15 - $1.25FY 2007 Guidance Range*

0.40 - 0.50All Other Improvements0.05 - 0.10Lower Pension and Retiree Medical Expense0.25 - 0.30Restructuring Savings

$1.78FY 2006 ResultEstimated EPS (1)

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FY 2007 First Quarter Metrics

21-24%Tax Rate

$27-29 millionInterest Expense

(7)%YOY Production Change for Top 15 Platforms

Outlook

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Appendix

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Use of Non-GAAP Financial InformationIn addition to the results reported in accordance with accounting principles generally accepted in the United States (“GAAP”) included throughout this presentation, the Company has provided information regarding income from continuing operations, diluted earnings per share and segment operating income and margins before special items, which are non-GAAP financial measures. These non-GAAP measures are defined as reported income or loss from continuing operations, reported diluted earnings or loss per share from continuing operations and segment operating income or loss plus or minus special items. Other non-GAAP financial measures include “net debt” and “free cash flow”. Net debt is defined as total debt less the fair value adjustment of notes due to interest rate swaps, less cash. Free cash flow represents net cash provided by operating activities less capital expenditures.

Management believes that the non-GAAP financial measures used in this presentation are useful to both management and investors in their analysis of the Company’s financial position and results of operations. In particular, management believes that net debt is an important indicator of the Company’s overall leverage and free cash flow is useful in analyzing the Company’s ability to service and repay its debt. Further, management uses these non-GAAP measures for planning and forecasting in future periods.

These non-GAAP measures should not be considered a substitute for the reported results prepared in accordance with GAAP. Neither net debt nor free cash flow should be considered substitutes for debt, cash provided by operating activities or other balance sheet or cash flow statement data prepared in accordance with GAAP or as a measure of financial position or liquidity. In addition, the calculation of free cash flow does not reflect cash used to service debt and thus, does not reflect funds available for investment or other discretionary uses. These non-GAAP financial measures, as determined and presented by the Company, may not be comparable to related or similarly titled measures reported by other companies.

Set forth on the following slides are reconciliations of these non-GAAP financial measures, if applicable, to the most directly comparable financial measures calculated and presented in accordance with GAAP.

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Non-GAAP Financial Information –Full Year FY 2006 Results Before Special Items

(in millions, except per share amounts) Twelve Months Environmental, BeforeReported Goodwill Gains on Tilbury Work Severance Retiree Debt Taxes, Special Items09/30/06 Impairment Divestitures Restructuring Stoppage and Other Medical Extinguishment Other 09/30/06

Sales 9,195$ -$ -$ -$ -$ -$ -$ -$ -$ 9,195$ Gross Margin 588 - - - 45 3 5 - - 641 Operating Income (Loss) (119) 310 (28) 37 45 12 5 - - 262 Income (Loss) From Continuing Operations (174) 310 (17) 23 28 8 3 6 (62) 125

Diluted Earnings (Loss) Per ShareContinuing Operations (2.51)$ 4.42$ (0.24)$ 0.33$ 0.40$ 0.11$ 0.04$ 0.08$ (0.85)$ 1.78$

Operating Income (Loss)Light Vehicle Systems (291)$ 310$ (5)$ 31$ -$ 3$ -$ -$ -$ 48$ Commercial Vehicle Systems 185 - (23) 6 45 3 5 - - 221

Segment Operating Income (Loss) (106) 310 (28) 37 45 6 5 - - 269 Unallocated Corporate Costs (13) - - - - 6 - - - (7)

Total Operating Income (Loss) (119)$ 310$ (28)$ 37$ 45$ 12$ 5$ -$ -$ 262$

Operating Margins LVS -5.9% 1.0%CVS 4.3% 5.2%Segment Operating Margin -1.2% 2.9%

Total Operating Margins -1.3% 2.8%

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Non-GAAP Financial Information –Full Year FY 2005 Results before Special Items

(in millions, except per share amounts) Twelve Months BeforeReported Customer Debt Special Items09/30/05 Environmental Bankruptcies Restructuring Exchange Taxes 09/30/05

Sales 8,873$ -$ -$ -$ -$ -$ 8,873$ Gross Margin 659 - 4 - - - 663

Operating Income 184 6 9 70 - - 269

Income From Continuing Operations 63 4 6 43 3 2 121

Diluted Earnings Per ShareContinuing Operations 0.90$ 0.06$ 0.09$ 0.62$ 0.04$ 0.02$ 1.73$

Operating Income Light Vehicle Systems 1$ -$ 9$ 51$ -$ -$ 61$ Commercial Vehicle Systems 193 - - 19 - - 212

Segment Operating Income 194 - 9 70 - - 273 Unallocated Corporate Costs (10) 6 - - - - (4)

Total Operating Income 184$ 6$ 9$ 70$ -$ -$ 269$

Operating MarginsLVS 0.0% 1.3%CVS 4.8% 5.2%Total Operating Margins 2.1% 3.0%

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Non-GAAP Financial Information –Fourth Quarter FY 2006 Results Before Special Items

(in millions, except per share amounts) 3 Months Environmental, BeforeReported Goodwill Severance Retiree Taxes, Special Items09/30/06 Impairment Restructuring and Other Medical Other 09/30/06

Sales 2,273$ -$ -$ -$ -$ -$ 2,273$ Gross Margin 127 - - 3 5 - 135 Operating Income (288) 310 18 9 5 - 54 Income From Continuing Operations (261) 310 11 6 3 (41) 28

Diluted Earnings Per ShareContinuing Operations (3.76)$ 4.40$ 0.16$ 0.09$ 0.04$ (0.53)$ 0.40$

Operating Income Light Vehicle Systems (325)$ 310$ 15$ 3$ -$ -$ 3$ Commercial Vehicle Systems 42 - 3 3 5 - 53

Segment Operating Income (283) 310 18 6 5 - 56 Unallocated Corporate Costs (5) - - 3 - - (2)

Total Operating Income (288)$ 310$ 18$ 9$ 5$ -$ 54$

Operating MarginsLVS -28.2% 0.3%CVS 3.8% 4.7%Segment Operating Margin -12.5% 2.5%

Total Operating Margins -12.7% 2.4%

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Non-GAAP Financial Information –Fourth Quarter FY 2005 Results before Special Items

(in millions, except per share amounts) 3 Months BeforeReported Debt Special Items09/30/05 Exchange Restructuring Tax 09/30/05

Sales 2,124$ -$ -$ -$ 2,124$ Gross Margin 159 - - - 159

Operating Income 49 - 18 - 67

Income From Continuing Operations 18 3 11 (1) 31

Diluted Earnings Per ShareContinuing Operations 0.26$ 0.04$ 0.16$ (0.02)$ 0.44$

Operating Income Light Vehicle Systems 4$ -$ 13$ -$ 17$ Commercial Vehicle Systems 47 - 5 - 52

Segment Operating Income 51 - 18 - 69 Unallocated Corporate Costs (2) - - - (2)

Total Operating Income 49$ -$ 18$ -$ 67$

Operating MarginsLVS 0.4% 1.5%CVS 4.7% 5.2%Total Operating Margins 2.3% 3.2%

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Non-GAAP Financial Information – Net Debt

(in millions)

09/30/06 06/30/06 03/31/06 12/31/05 09/30/05

Short-term debt 56$ 65$ 217$ 106$ 136$

Long-term debt 1,184 1,288 1,146 1,438 1,451

Total Debt 1,240 1,353 1,363 1,544 1,587

Less: Cash (350) (365) (236) (302) (187)

Less: Fair value adjustment of notes (8) (3) (7) (14) (17)

Net Debt 882$ 985$ 1,120$ 1,228$ 1,383$

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Non-GAAP Financial Information –Free Cash Flow

(in millions)

09/30/06 09/30/05

Cash Provided By (Used For) Operating Activities 440$ (32)$

Changes in U.S. Accounts Receivable Securitization - 32

Less: Capital expenditures (156) (156)

Free Cash Flow 284$ (156)$

Twelve Months Ended September 30,

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Other Balance Sheet Measures

(in millions)09/30/06 06/30/06 03/31/06 12/31/05 09/30/05

Minority Interests 65 67 63 69 66

Equity 944 1,132 1,022 877 875

Total Debt to Capital 55% 53% 56% 62% 63%

Working Capital 146 248 338 208 315

Working Capital % of Sales (1) 2.2% 2.9% 2.9% 3.1% 4.2%

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FY 2006 Fourth Quarter Earnings Conference Calllibrary.corporate-ir.net/library/12/122/122961/items/221485/ARM_Q... · FY 2006 Fourth Quarter Earnings Conference Call November 14,