The Auto Channel: North America | Europe
Magna Announces Second Quarter and Year to Date Results
AURORA, Canada, August 8 -- Magna International Inc. (TSX: MG.A, MG.B; NYSE: MGA) today reported financial results for the second quarter and six months ended June 30, 2006.
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2006 2005 2006 2005
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Sales US$ 6,369 US$ 5,858 US$12,388 US$11,576
Operating income US$ 286 US$ 323 US$ 595 US$ 577
Net income US$ 193 US$ 225 US$ 405 US$ 397
Diluted earnings per share US$ 1.75 US$ 2.06 US$ 3.66 US$ 3.73
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All results are reported in millions of U.S. dollars,
except per share figures.
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THREE MONTHS ENDED JUNE 30, 2006
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We posted record sales of US$6.4 billion for the second quarter ended June 30, 2006, an increase of 9% over the second quarter of 2005. The higher sales level in the second quarter of 2006 reflects increases of 12% in North American average dollar content per vehicle and 10% in European average dollar content per vehicle, each over the comparable quarter in 2005. During the second quarter of 2006, North American vehicle production was relatively unchanged while European vehicle production declined 1%, each in comparison to the second quarter of 2005.
Complete vehicle assembly sales increased 2% to US$1.075 billion for the second quarter of 2006 compared to US$1.054 billion for the second quarter of 2005 and complete vehicle assembly volumes increased 2% for the second quarter of 2006 compared to the second quarter of 2005.
Our operating income was US$286 million for the second quarter ended June 30, 2006 compared to US$323 million for the second quarter ended June 30, 2005, and we earned net income for the second quarter of 2006 of US$193 million compared to US$225 million for the second quarter of 2005.
Diluted earnings per share were US$1.75 for the second quarter ended June 30, 2006 compared to US$2.06 for the second quarter ended June 30, 2005.
During the second quarter ended June 30, 2006, we generated cash from operations before changes in non-cash operating assets and liabilities of US$415 million, and invested US$141 million in non-cash operating assets and liabilities. Total investment activities for the second quarter of 2006 were US$222 million, including US$179 million in fixed asset additions and a US$43 million increase in investments and other assets.
SIX MONTHS ENDED JUNE 30, 2006
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We posted record sales of US$12.4 billion for the six months ended June 30, 2006, an increase of 7% over the six months ended June 30, 2005. The higher sales level for the first six months of 2006 reflects increases of 9 % in North American average dollar content per vehicle and 8% in European average dollar content per vehicle, each over the comparable six-month period in 2005. During the six months ended June 30, 2006, North American vehicle production increased 2%, while European vehicle production declined 2%, each in comparison to the six months ended June 30, 2005.
Complete vehicle assembly volumes increased 16% for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. However , as a result of the weakening of the euro against the U.S. dollar and a slight decline in assembly volumes for vehicles accounted for on a full- cost basis, complete vehicle assembly sales declined 3% or US$65 million to US$2.115 billion for the first six months of 2006 compared to US$2.180 billion for the first six months of 2005.
Our operating income was US$595 million for the six months ended June 30, 2006 compared to US$577 million for the six months ended June 30, 2005, and we earned net income of US$405 million for the first six months of 2006 compared to US$397 million for the first six months of 2005.
Diluted earnings per share were US$3.66 for the six months ended June 30, 2006 compared to US$3.73 for the six months ended June 30, 2005.
During the six months ended June 30, 2006, we generated cash from operations before changes in non-cash operating assets and liabilities of US$842 million, and invested US$366 million in non-cash operating assets and liabilities. Total investment activities for the first six months of 2006 were US$601 million, including US$346 million in fixed asset additions , US$203 million to purchase subsidiaries, and a US$52 million increase in investments and other assets.
Don Walker, our co-Chief Executive Officer commented: "Our strong sales growth in the second quarter was achieved as a result of our recent investments in new facilities, new programs and acquisitions. However, ourresults continue to be impacted by a number of industry challenges, including declining production volumes on certain key vehicle programs, ongoing price pressures from our customers and high commodity costs. We remainfocused on developing innovative new products, supporting our customers' global vehicle programs and achieving manufacturing excellence."
A more detailed discussion of our consolidated financial results for the second quarter and six months ended June 30, 2006 is contained in the Management's Discussion and Analysis of Results of Operations and Financial Position and the unaudited interim consolidated financial statements and notes thereto, which are attached to this Press Release.
OTHER MATTERS
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Our Board of Directors today declared a quarterly dividend with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares for the quarter ended June 30, 2006. The dividend of U.S. US$0.38 per share is payable on September 15, 2006 to shareholders of record on August 31, 2006.
We are the most diversified automotive supplier in the world. We design , develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks in North America, Europe, Asia and South America. Our capabilities include the design, engineering, testing and manufacture of automotive interior systems ; seating systems; closure systems; metal body systems; vision and engineered glass systems; electronic systems; plastic body, lighting and exterior trim systems; various powertrain and drivetrain systems; retractable hard top and soft top roof systems; as well as complete vehicle engineering and assembly.
We have approximately 84,000 employees in 228 manufacturing operations and 64 product development and engineering centres in 23 countries.
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For further information about Magna, please see our website at
www.magna.com. Copies of financial data and other publicly filed
documents are available through the internet on the Canadian Securities
Administrators' System for Electronic Document Analysis and Retrieval
(SEDAR) which can be accessed at www.sedar.com and on the United States
Securities and Exchange Commission's Electronic Data Gathering, Analysis
and Retrieval System (EDGAR) which can be accessed at www.sec.gov.
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MAGNA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and
Financial Position
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All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular amounts are in millions of U.S. dollars, except per share figures and average dollar content per vehicle, which are in U.S. dollars, unless otherwise noted. When we use the terms "we", "us", "our" or "Magna", we are referring to Magna International Inc. and its subsidiaries and jointly controlled entities, unless the context otherwise requires.
This MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the three months and six months ended June 30, 2006 included in this Press Release, and the audited consolidated financial statements and MD&A for the year ended December 31, 2005 included in our 2005 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the three months and six months ended June 30, 2006 and the audited consolidated financial statements for the year ended December 31, 2005 are both prepared in accordance with Canadian generally accepted accounting principles.
This MD&A has been prepared as at August 8, 2006.
OVERVIEW
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We are a leading global supplier of technologically advanced automotive systems, assemblies, modules and components. We follow a corporate policy of functional and operational decentralization. We conduct our operations through divisions, each of which is an autonomous business unit operating within pre-determined guidelines. As at June 30, 2006, we had 228 manufacturing divisions and 64 product development and engineering centres in 23 countries. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles for sale to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia and South America. Our product capabilities span a number of major automotive areas including: interiors; seating; closures; metal body systems; vision and engineered glass systems; electronics; plastic body, lighting and exterior trim systems; various powertrain and drivetrain systems; retractable hard top and soft top roof systems; and complete vehicle engineering and assembly.
During 2005, we completed the privatizations of our former public subsidiaries: Tesma International Inc. ("Tesma"); Decoma International Inc. ("Decoma"); and Intier Automotive Inc. ("Intier") (the "Privatizations"). The Privatizations have allowed us to improve our strategic positioning, particularly with respect to the development of vehicle modules that cross our traditional product lines, and to better exploit our various competencies, particularly our complete vehicle expertise.
Our success is primarily dependent upon the levels of North American and European car and light truck production by our customers. OEM production volumes in different regions may be impacted by factors which may vary from one region to the next, including general economic conditions , interest rates, fuel prices and availability, infrastructure, legislative changes, environmental emission and safety issues, and labour and/or trade relations.
Given these differences between the regions in which we operate, our operations are segmented on a geographic basis between North America, Europe, and Rest of World (primarily Asia and South America). A co-Chief Executive Officer heads management in each of our two primary markets, North America and Europe. The role of the North American and European management teams is to manage our interests to ensure a coordinated effort across our different product capabilities. In addition to maintaining key customer, supplier and government contacts in their respective markets, our regional management teams centrally manage key aspects of our operations while permitting our divisions enough flexibility through our decentralized structure to foster an entrepreneurial environment.
HIGHLIGHTS
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During the second quarter of 2006, we continued with restructuring and rationalization activities that we consider necessary to further bolster our competitiveness and to position ourselves for the future. Excluding the impact of these and other unusual items, we reported solid financial results for the second quarter of 2006, including record sales of US$6.4 billion. The higher sales level was achieved as a result of increases in our North American and European average dollar content per vehicle. In North America, vehicle production was unchanged at 4.1 million units, while our average dollar content per vehicle increased 12% to US$784, both as compared to the second quarter of 2005. In Europe, vehicle production declined 1% to 4.2 million units, while our average dollar content per vehicle increased 10% to US$340, both as compared to the second quarter of 2005.
Operating income for the second quarter of 2006 decreased 11% to US$286 million from US$323 million for the second quarter of 2005. Excluding the unusual items recorded in the second quarters of 2006 and 2005 (see "Unusual Items" below), operating income for the second quarter of 2006 increased US$25 million or 8%. The increase in operating income excluding unusual items was primarily due to additional margins earned on the launch of new programs during or subsequent to the second quarter of 2005, additional margins earned on increased vehicle production on certain of our programs, productivity and efficiency improvements at certain underperforming facilities and the acquisition of CTS Fahrzeug-Dachsysteme GmbH, Bietingheim-Bissingen ("CTS") in February 2006. These factors were partially offset by productivity and other inefficiencies at certain facilities in Europe, particularly at certain interior systems facilities, lower vehicle production volumes on certain programs, and incremental customer price concessions.
Net income for the second quarter of 2006 decreased 14% or US$32 million to US$193 million from US$225 million for the second quarter of 2005. Excluding the unusual items recorded in the second quarters of 2006 and 2005 (see "Unusual Items" below), net income for the second quarter of 2006 increased 3% or US$7 million. The increase in net income excluding unusual items was primarily a result of the increase in operating income (excluding unusual items) partially offset by higher income taxes.
Diluted earnings per share for the second quarter of 2006 decreased 15% or US$0.31 to US$1.75 from US$2.06 for the second quarter of 2005. Excluding the unusual items recorded in the second quarters of 2006 and 2005 (see "Unusual Items" below), diluted earnings per share increased 2% or US$0.03 as a result of the increase in net income (excluding unusual items) partially offset by an increase in the weighted average number of diluted shares outstanding during the second quarter of 2006, primarily as a result of the Class A Subordinate Voting Shares issued on completion of the Privatizations.
Other recent highlights include the following:
- In May, six of our operating divisions won Ford Motor Company World
Excellence Awards for exemplary performance during 2005. The six
awards were the most given to any one supplier, out of a total of
60 World Excellence Awards presented to Ford's suppliers globally.
- In June, our Magna Steyr unit was awarded a J.D. Power Gold Plant
Quality Award in Europe for our vehicle assembly facility in Graz,
Austria. It is the first time this award has been given to an
automotive supplier. The award recognizes that our Graz facility
produces vehicles with the fewest number of defects as compared to
other European assembly facilities. This is a remarkable achievement
considering the complexity involved in building eight different
vehicles, for three different customers, at one vehicle assembly
location.
- In April, we acquired a 32% equity interest in Shin Young Metal Ind.
Co. ("Shin Young"), a Korean-based supplier of major stampings, welded
assemblies and tooling. Shin Young operates five manufacturing
facilities in Korea, and is a Tier 1 supplier to Hyundai. Hyundai and
Shin Young also jointly own a facility in Alabama. We anticipate that
this investment may provide us opportunities for new business, in
Korea and elsewhere in the world, as Hyundai continues to expand
globally.
Unusual Items
During the three months and six months ended June 30, 2006 and 2005, we
recorded certain unusual items as follows:
2006 2005
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Diluted Diluted
Earn- Earn-
ings Operat- ings
Operating Net per ing Net per
Income Income Share Income Income Share
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Second Quarter
Restructuring
charges(1) US$(25) US$(18) US$(0.16) US$ (9) US$ (7) US$(0.07)
Impairment
charges(1) - - - (5) (5) (0.05)
Sale of
facilities(2) (17) (15) (0.14) 16 10 0.09
Foreign currency
gain(3) - - - 18 18 0.16
Future tax
recovery(3) - 10 0.09 - - -
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Total second quarter
unusual items (42) (23) (0.21) 20 16 0.13
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First Quarter
Restructuring
charges(1) (10) (9) (0.08) (5) (4) (0.04)
Charges associated
with MG Rover(4) - - - (15) (13) (0.13)
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Total first quarter
unusual items (10) (9) (0.08) (20) (17) (0.17)
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Total year to date
unusual items US$(52) US$(32) US$(0.29) US$ - US$ (1) US$(0.04)
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(1) Restructuring and Impairment Charges
(a) For the six months ended June 30, 2006
During the first quarter of 2006, we incurred restructuring and
rationalization charges of US$10 million related to activities
that were initiated in 2005. Specifically, in January 2006, we
reached an agreement with the workers' council at a facility in
Belgium that covers non-contractual termination benefits for
employees at this facility. As a result, we recorded the
US$8 million cost of this agreement in the first quarter of
2006.
During the second quarter of 2006, we incurred restructuring
and rationalization charges of US$25 million. Specifically, in
June, we recorded a US$17 million charge as a result of an
agreement we reached with employees related to rightsizing a
facility in the United States. In addition, we incurred
additional restructuring and rationalization charges of
US$4 million related to two facilities in North America and
US$4 million related to two facilities in Europe.
In addition, we expect to incur additional restructuring and
rationalization charges during the balance of 2006 in the range
of US$5 million to US$10 million related to activities that
were initiated in 2005.
(b) For the six months ended June 30, 2005
During the first quarter of 2005 we incurred rationalization
charges of US$4 million related to a facility in North America
and we also expensed previously capitalized bank facility fees
as a result of the cancellation of Decoma's term credit
facility.
During the second quarter of 2005, we incurred restructuring
and impairment charges totalling US$14 million related
substantially to three European facilities.
(2) Sale of Facilities
During the second quarter of 2006, we entered into agreements for the
sale of two underperforming powertrain facilities. As a result, we
incurred losses on disposition of the facilities of US$12 million and
US$5 million in Europe and North America, respectively. During the
second quarter of 2005, we recorded a US$16 million gain on sale of a
non-core seat component facility in North America.
(3) Other Unusual Items
During the second quarter of 2006 we also recorded a US$10 million
future income tax recovery as a result of a reduction in future
income tax rates in Canada. During the second quarter of 2005, we
recorded an US$18 million foreign currency gain on the repatriation
of funds from Europe.
(4) MG Rover
In April 2005, MG Rover Group Limited ("MG Rover") was placed into
administration, which is similar to Chapter 11 bankruptcy protection
in the United States (the "MG Rover situation"). As a result, we
recorded charges of US$15 million related to our MG Rover assets and
supplier obligations during the first quarter of 2005.
INDUSTRY TRENDS AND RISKS
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A number of trends have had a significant impact on the global automotive
industry in recent years, including:
- the growth of Asian-based OEMs in North America and Europe and
declining market share at certain of our customers in our traditional
markets;
- the growth of the automotive industry in China, Korea, India and other
Asian countries, as well as parts of eastern Europe, and the migration
of manufacturing to such lower cost countries;
- increased pressure by OEMs on automotive suppliers to reduce their
prices, including through retroactive price reductions, and bear
additional costs;
- increases in raw materials and commodity prices, such as steel and
resin, as well as energy prices;
- the deterioration of the financial condition of the automotive supply
base and certain OEMs;
- increased engineering capabilities required in order to be awarded new
business for more complex systems and modules;
- increased outsourcing of larger modules;
- increased prevalence of vehicles built off high-volume global vehicle
platforms; and
- increased customer and consumer demand for lighter vehicles,
additional safety features, improved comfort, convenience and space
optimization features, alternative fuel systems and advanced
electronics systems.
The following are some of the more significant risks that could affect
our ability to achieve our desired results:
- The global automotive industry is cyclical and consumer demand for
automobiles is sensitive to changes in certain economic and political
conditions, including interest rates, energy prices and international
conflicts (including acts of terrorism). Automotive sales and
production can also be affected by other factors, including labour
relations issues, regulatory requirements and trade agreements. In
North America, the industry is characterized by significant
overcapacity, fierce competition and significant pension and other
post employment benefit costs for the domestic automobile
manufacturers. In Europe, the market structure is relatively
fragmented with significant overcapacity. As a result of these
conditions, some of our customers are currently experiencing or may in
the future experience reduced consumer demand for their vehicles,
leading to declining vehicle production volumes. A reduction in
vehicle production volumes by any of our significant customers could
have a material adverse effect on our profitability.
- Rising healthcare, pension and other post-employment benefit costs
are having a significant adverse effect on the profitability and
competitiveness of a number of North American and European OEMs and
automotive component suppliers. Increased raw materials prices,
including steel and resins, and energy prices are also adversely
affecting OEMs and automotive component suppliers. Other economic
conditions, such as increased gas prices, have affected and could
further threaten sales of certain models, such as full-size sport
utility vehicles and light trucks. All of these conditions, coupled
with a continued decline in market share, could further threaten the
financial condition of some of our customers, putting additional
pressure on us to reduce our prices and exposing us to greater credit
risk. In the event that our customers are unable to satisfy their
financial obligations or seek protection from their creditors, we may
incur additional expenses as a result of such credit exposure, which
could have a material adverse effect on our profitability and
financial condition.
- Although we supply parts to all of the leading OEMs, a significant
majority of our sales are to four such customers, two of which are
rated as below investment grade by credit rating agencies. We are
attempting to further diversify our customer base, particularly to
increase our business with Asian based OEMs. A decline in overall
production volumes by any of our four largest customers could have an
adverse effect on our profitability, particularly if we are unable to
further diversify our customer base. Moreover, while we supply parts
for a wide variety of vehicles produced in North America and Europe,
we do not supply parts for all vehicles produced, nor is the number or
value of parts evenly distributed among the vehicles for which we do
supply parts. Shifts in market share among vehicles (including shifts
away from vehicles we assemble) or the early termination, loss,
renegotiation of the terms of, or delay in, the implementation of any
significant production or assembly contract could have an adverse
effect on our profitability.
- The competitive environment in the automotive industry has been
intensifying as our customers seek to take advantage of lower
operating costs in China, other countries in Asia and parts of Eastern
Europe. As a result, we are facing increased competition from
suppliers that have manufacturing operations in low cost countries.
While we continue to expand our manufacturing footprint with a view to
taking advantage of manufacturing opportunities in low cost countries,
we cannot guarantee that we will be able to fully realize such
opportunities. Additionally, the establishment of manufacturing
operations in emerging market countries carries its own risks,
including those relating to political and economic instability; trade,
customs and tax risks; currency exchange rates; currency controls;
insufficient infrastructure; and other risks associated with
conducting business internationally. The loss of any significant
production contract to a competitor in low cost countries or
significant costs and risks incurred to enter and carry on business in
these countries could have an adverse effect on our profitability.
- Prices for key commodities used in our parts production, particularly
steel and resin, remain at elevated levels with the possibility of
future increases in some commodities. We expect steel prices will
remain at elevated levels in 2006 compared to levels earlier this
decade. Approximately half of our steel is acquired through resale
programs operated by the automobile manufacturers, which do not expose
us to steel price increases, and the balance is acquired through spot,
short-term and long-term contracts. However, a steel supplier has
challenged its long-term agreements with us for certain steel products
while steel prices were rising and, to the extent that it successfully
disputes, terminates or otherwise refuses to honour its contracts, our
exposure to steel price increases will increase to the extent that
steel prices remain at elevated levels. We also sell scrap steel,
which is generated through our parts production process, and the
revenues from these sales have reduced some of our exposure to steel
price increases in the past. However, if scrap steel prices decline,
while steel prices remain high, our ability to reduce our exposure to
steel price increases will diminish. To the extent we are unable to
fully mitigate our exposure to increased commodity prices through
hedging strategies, by engineering products with reduced steel, resin
or other commodity content, or by passing additional steel and resin
costs to our customers, such additional commodity costs could have a
material adverse effect on our profitability.
- We rely on a number of suppliers to supply us with a wide range of
components required in connection with our business. Economic
conditions, intense pricing pressures, increased commodity prices and
a number of other factors have left many automotive suppliers in
varying degrees of financial distress. The continued financial
distress or the insolvency or bankruptcy of one of our major suppliers
could disrupt the supply of components to us from these suppliers,
possibly resulting in a temporary disruption in the supply of products
by us to our customers. Additionally, the financial distress or the
insolvency or bankruptcy of a significant supplier to one of our
customers could disrupt the supply of products to such customer,
resulting in a reduction in production by our customer. Such a
reduction in our customer's production could negatively impact our
production, resulting in unrecoverable losses. Any prolonged
disruption in the supply of critical components by our suppliers or
suppliers to one of our customers, the inability to re-source
production of a critical component from a financially distressed
automotive components sub-supplier, or any temporary shut-down of one
of our production lines or the production lines of our customers,
could have a material adverse effect on our profitability.
Additionally, the insolvency, bankruptcy or financial restructuring of
any of our critical suppliers could result in us incurring
unrecoverable costs related to the financial work-out of such
suppliers and/or increased exposure for product liability, warranty or
recall costs relating to the components supplied by such suppliers to
the extent such suppliers are not able to assume responsibility for
such amounts, which could have an adverse effect on our profitability.
- We have entered into, and will continue to enter into, long-term
supply arrangements with our customers which provide for, among other
things, price concessions over the supply term. To date, these
concessions have been fully or partially offset by cost reductions
arising principally from product and process improvements and price
reductions from our suppliers. However, the competitive automotive
industry environment in North America, Europe and Asia has caused
these pricing pressures to intensify. Some of our customers have
demanded, and in light of challenging automotive industry conditions
may continue to demand, additional price concessions and/or
retroactive price reductions. We may not be successful in offsetting
all of these price concessions or reductions through improved
operating efficiencies, reduced expenditures or reduced prices from
our suppliers. To the extent that we are not able to offset price
concessions through cost reductions or improved operating
efficiencies, such concessions could have a material adverse effect on
our profitability.
- We continue to be pressured to absorb costs related to product design,
engineering and tooling, as well as other items previously paid for
directly by OEMs. In particular, some OEMs have requested that we pay
for design, engineering and tooling costs that are incurred up to the
start of production and recover these costs through amortization in
the piece price of the applicable component. Some of these costs
cannot be capitalized, which could adversely affect our profitability
until the programs in respect of which they have been incurred are
launched. In addition, since our contracts generally do not include
any guaranteed minimum purchase requirements, if estimated production
volumes are not achieved, these costs may not be fully recovered,
which could have an adverse effect on our profitability.
- Our customers continue to demand that we bear the cost of the repair
and replacement of defective products which are either covered under
their warranty or are the subject of a recall by them. If our products
are, or are alleged to be, defective, we may be required to
participate in a recall of those products, particularly if the actual
or alleged defect relates to vehicle safety. Warranty provisions are
established based on our best estimate of the amounts necessary to
settle existing or probable claims on product defect issues. Recall
costs are costs incurred when government regulators and/or our
customers decide to recall a product due to a known or suspected
performance issue, and we are required to participate either
voluntarily or involuntarily. Costs typically include the cost of the
product being replaced, the customer's cost of the recall and labour
to remove and replace the defective part. We continue to experience
increased customer pressure to assume greater warranty responsibility.
Currently, under most customer agreements, we only account for
existing or probable claims. Under certain complete vehicle
engineering and assembly contracts, we record an estimate of future
warranty-related costs based on the terms of the specific customer
agreements, and the specific customer's warranty experience. The
obligation to repair or replace such products could have a material
adverse effect on our profitability and financial condition if the
actual costs are materially different from such estimates.
- Contracts from our customers consist of blanket purchase orders which
generally provide for the supply of a customer's annual requirements
for a particular vehicle, instead of a specified quantity of products.
These blanket purchase orders can be terminated by a customer at any
time and, if terminated, could result in us incurring various pre-
production, engineering and other costs which we may not recover from
our customer and which could have an adverse effect on our
profitability.
- We are also subject to the risk of exposure to product liability
claims in the event that the failure of our products results in bodily
injury and/or property damage. Currently, we have bodily injury
coverage under insurance policies. This coverage will continue until
September 2006 and is subject to renewal on an annual basis. A
successful claim against us in excess of our available insurance
coverage could have an adverse effect on our profitability and
financial condition.
- Although our financial results are reported in U.S. dollars, a
significant portion of our sales and operating costs are realized in
Canadian dollars, euros, British pounds and other currencies. Our
profitability is affected by movements of the U.S. dollar against the
Canadian dollar, the euro, the British pound and other currencies in
which we generate revenues and incur expenses. However, as a result of
hedging programs employed by us, primarily in Canada, foreign currency
transactions are not fully impacted by the recent movements in
exchange rates. We record foreign currency transactions at the hedged
rate where applicable. Despite these measures, significant long-term
fluctuations in relative currency values, in particular a significant
change in the relative values of the U.S. dollar, Canadian dollar,
euro or British pound, could have an adverse effect on our
profitability and financial condition.
- In response to the increasingly competitive automotive industry
conditions, we may further rationalize some of our production
facilities. In the course of such rationalization, we will incur
further costs related to plant closings, relocations and employee
severance costs. Such costs could have an adverse effect on our
short-term profitability. In addition, we are working to turn around
financially underperforming divisions, however, there is no guarantee
that we will be successful in doing so with respect to some or all
such divisions.
- We recorded significant impairment charges in 2005 and may do so in
2006 and in the future. Goodwill must be tested for impairment
annually, or more frequently when an event occurs that more likely
than not reduces the fair value of a reporting unit below its carrying
value. We also evaluate fixed assets and other long-lived assets for
impairment whenever indicators of impairment exist. The bankruptcy of
a significant customer or the early termination, loss, renegotiation
of the terms of, or delay in the implementation of any significant
production contract could be indicators of impairment. In addition, to
the extent that forward-looking assumptions regarding the impact of
improvement plans on current operations, in-sourcing and other new
business opportunities, program price and cost assumptions on current
and future business, the timing of new program launches and future
forecasted production volumes are not met, any resulting impairment
loss could have a material adverse effect on our profitability.
- From time to time, we may be contingently liable for contractual and
other claims with customers, suppliers and former employees. On an
ongoing basis, we attempt to assess the likelihood of any adverse
judgements or outcomes to these claims, although it is difficult to
predict final outcomes with any degree of certainty. At this time, we
do not believe that any of the claims which we are party to will have
a material adverse effect on our financial position, however, we
cannot provide any assurance to this effect.
RESULTS OF OPERATIONS
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Average Foreign Exchange
For the three months For the six months
ended June 30, ended June 30,
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2006 2005 Change 2006 2005 Change
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1 Canadian dollar equals
U.S. dollars 0.892 0.803 + 11% 0.879 0.810 + 9%
1 euro equals U.S. dollars 1.259 1.255 - 1.231 1.283 - 4%
1 British pound equals
U.S. dollars 1.832 1.850 - 1% 1.792 1.871 - 4%
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The preceding table reflects the average foreign exchange rates between the most common currencies in which we conduct business and our U.S. dollar reporting currency. The significant changes in these foreign exchange rates for the three months and six months ended June 30, 2006 impacted the reported U.S. dollar amounts of our sales, expenses and income.
The results of operations whose functional currency is not the U.S. dollar are translated into U.S. dollars using the average exchange rates in the table above for the relevant period. Throughout this MD&A, reference is made to the impact of translation of foreign operations on reported U.S. dollar amounts where relevant.
Our results can also be affected by the impact of movements in exchange rates on foreign currency transactions (such as raw material purchases or sales denominated in foreign currencies). However, as a result of hedging programs employed by us, primarily in Canada, foreign currency transactions in the current period have not been fully impacted by the recent movements in exchange rates. We record foreign currency transactions at the hedged rate where applicable.
Finally, holding gains and losses on foreign currency denominated monetary items, which are recorded in selling, general and administrative expenses, impact reported results.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 2006
-------------------------------------------------------------------------
Sales
For the three months
ended June 30,
---------------------
2006 2005 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 4.145 4.126 -
Europe 4.223 4.269 - 1%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America US$ 784 US$702 + 12%
Europe US$ 340 US$310 + 10%
-------------------------------------------------------------------------
Sales
External Production
North America US$3,251 US$2,895 + 12%
Europe 1,437 1,325 + 8%
Rest of World 67 43 + 56%
Complete Vehicle Assembly 1,075 1,054 + 2%
Tooling, Engineering and Other 539 541 -
-------------------------------------------------------------------------
Total Sales US$6,369 US$5,858 + 9%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total sales reached a record level in the second quarter of 2006,
increasing 9% or US$511 million to US$6.4 billion compared to US$5.9 billion
for the second quarter of 2005.
External Production Sales - North America
External production sales in North America increased 12% or US$356
million to US$3.3 billion for the second quarter of 2006 compared to US$2.9
billion for the second quarter of 2005. This increase in production sales
reflects a 12% increase in our North American average dollar content per
vehicle as North American vehicle production volumes for the second quarter
of 2006 remained relatively consistent with vehicle production volumes for
the second quarter of 2005.
Our average dollar content per vehicle grew by 12% or US$82 to US$784 for
the second quarter of 2006 compared to US$702 for the second quarter of 2005,
primarily as a result of:
- the launch of new programs during or subsequent to the second quarter
of 2005, including:
- General Motors' ("GM") new full-size SUVs;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the Chevrolet HHR;
- the Chevrolet Impala;
- the Ford Explorer and Mercury Mountaineer;
- the Dodge Charger; and
- the Pontiac Torrent;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar;
- increased production and/or content on certain programs, including the
Mercedes M-Class; and
- the acquisition of CTS in February 2006.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Cadillac STS;
- the Jeep Grand Cherokee;
- the Chrysler Pacifica; and
- the Mazda Tribute and Ford Escape;
- programs that ended production during or subsequent to the second
quarter of 2005; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 8% or US$112 million to
US$1.4 billion for the second quarter of 2006 compared to US$1.3 billion
for the second quarter of 2005. This increase in production sales reflects
a 10% increase in our European average dollar content per vehicle partially
offset by a 1% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 10% or US$30 to US$340
for the second quarter of 2006 compared to US$310 for the second quarter of
2005, primarily as a result of:
- acquisitions during or subsequent to the second quarter of 2005,
including the acquisition of CTS in February 2006;
- the launch of new programs during or subsequent to the second quarter
of 2005, including:
- the Honda Civic; and
- the Peugeot 207; and
- increased production and/or content on certain programs, including the
Mercedes B-Class.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Mercedes A-Class;
- the Mercedes C-Class; and
- the Chrysler Voyager and Grand Voyager;
- programs that ended production during or subsequent to the second
quarter of 2005; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 56% or US$24
million to US$67 million for the second quarter of 2006 compared to US$43
million for the second quarter of 2005. The increase in production sales is
primarily a result of:
- increased production sales at existing facilities in China;
- increased production sales at our powertrain facilities in Korea;
- an increase in reported U.S. dollar sales due to the strengthening of
the Korean won and Chinese Renminbi, each against the U.S. dollar;
- the ramp-up of production at new facilities in China; and
- increased production sales at a closure systems facility in Brazil.
These factors were partially offset by the closure of an exterior
systems facility in Brazil and an engineered glass systems facility in
Malaysia during or subsequent to the second quarter of 2005.
Complete Vehicle Assembly Sales
The terms of our various vehicle assembly contracts differ with respect
to the ownership of components and supplies related to the assembly process
and the method of determining the selling price to the OEM customer. Under
certain contracts we are acting as principal, and purchased components and
systems in assembled vehicles are included in our inventory and cost of
sales. These costs are reflected on a full-cost basis in the selling price
of the final assembled vehicle to the OEM customer. Other contracts provide
that third party components and systems are held on consignment by us, and
the selling price to the OEM customer reflects a value-added assembly fee
only.
Production levels of the various vehicles assembled by us have an
impact on the level of our sales and profitability. In addition, the
relative proportion of programs accounted for on a full-cost basis and
programs accounted for on a value-added basis also impacts our level of
sales and operating margin percentage, but may not necessarily affect our
overall level of profitability. Assuming no change in total vehicles
assembled, a relative increase in the assembly of vehicles accounted for on
a full-cost basis has the effect of increasing the level of total sales,
however, because purchased components are included in cost of sales,
profitability as a percentage of total sales is reduced. Conversely, a
relative increase in the assembly of vehicles accounted for on a value-
added basis has the effect of reducing the level of total sales and
increasing profitability as a percentage of total sales.
For the three months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales US$ 1,075 US$ 1,054 + 2%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes
(Units)
Full-Costed: 39,602 39,526 -
BMW X3, Mercedes E-Class and
G-Class, and Saab 9(3) Convertible
Value-Added: 23,101 22,078 + 5%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep
Commander
-------------------------------------------------------------------------
62,703 61,604 + 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly volumes increased 2% or 1,099 units to 62,703
units for the second quarter of 2006 compared to 61,604 units for the
second quarter of 2005. Complete vehicle assembly sales increased 2% or US$
21 million to US$1.075 billion for the second quarter of 2006 compared to
US$1.054 billion for the second quarter of 2005. The increase in complete
vehicle assembly sales is primarily the result of the launch of new
programs during or subsequent to the second quarter of 2005, including the
Chrysler 300 in the second quarter of 2005 and the Jeep Commander in the
first quarter of 2006.
Tooling, Engineering and Other
Tooling, engineering and other sales were US$539 million for the second
quarter of 2006, which amount was relatively unchanged from the tooling,
engineering and other sales for the second quarter of 2005 of US$541 million.
In the second quarter of 2006, the major programs for which we recorded
tooling, engineering and other sales were:
- GM's next generation full-size pickups and SUVs;
- the MINI Cooper;
- the BMW Z4;
- the Freightliner P-Class;
- the Ford Edge;
- the BMW 3-Series; and
- the Suzuki XL7.
In the second quarter of 2005, the major programs for which we recorded
tooling, engineering and other sales were:
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the MINI Cooper;
- the Mercedes M-Class; and
- the Hummer H3.
In addition, tooling, engineering and other sales benefited from the
strengthening of the Canadian dollar against the U.S. dollar.
Gross Margin
Gross margin increased US$54 million to US$847 million for the second
quarter of 2006 compared to US$793 million for the second quarter of 2005.
Gross margin as a percentage of total sales decreased to 13.3% for the
second quarter of 2006 compared to 13.5% for the second quarter of 2005. In
the second quarter of 2006, the unusual items discussed in the "Highlights"
section above negatively impacted gross margin and gross margin as a
percentage of total sales by US$17 million and 0.3%, respectively.
Excluding these unusual items, the 0.1% increase in gross margin as a
percent of sales was primarily a result of:
- productivity and efficiency improvements at certain divisions;
- price reductions from our suppliers; and
- incremental gross margin earned on program launches and production
volume increases on certain programs.
These factors were partially offset by:
- inefficiencies at certain underperforming facilities, particularly at
certain of our European interior systems facilities;
- costs incurred in preparation for programs that launched during 2006
or for programs that will be launching;
- a decrease in production volumes for certain programs; and
- incremental customer price concessions.
Depreciation and Amortization
Depreciation and amortization costs increased 16% or US$28 million to
US$201 million for the second quarter of 2006 compared to US$173 million
for the second quarter of 2005. The increase in depreciation and
amortization was primarily as a result of:
- an increase in assets employed in the business to support future
growth;
- depreciation and amortization of assets related to the acquisition of
CTS;
- depreciation and amortization of assets at new facilities that
launched during or subsequent to the second quarter of 2005; and
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar against the U.S. dollar.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales increased to 5.8% for the second
quarter of 2006 compared to 5.0% for the second quarter of 2005. SG&A
expenses increased 26% or US$75 million to US$367 million for the second
quarter of 2006 compared to US$292 million for the second quarter of 2005.
Excluding the unusual items discussed in the "Highlights" section above, SG
&A expenses increased by US$25 million primarily as a result of:
- increased spending as a result of the acquisition of CTS;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the Canadian dollar against the U.S. dollar;
- increased costs incurred at certain underperforming divisions in
Europe; and
- higher infrastructure costs to support the increase in sales levels,
including spending to support program launches.
These factors were partially offset by:
- reduced stock compensation expense; and
- lower incentive compensation.
Earnings before Interest and Taxes ("EBIT")(1)
For the three months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
North America US$ 249 US$ 219 + 14%
Europe 24 81 - 70%
Rest of World - 2 - 100%
Corporate and Other 10 23 - 57%
-------------------------------------------------------------------------
Total EBIT US$ 283 US$ 325 - 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the second quarters of 2006 and 2005 were the
following unusual items, which have been discussed in the "Highlights"
section above.
For the three months
ended June 30,
----------------------
2006 2005
-------------------------------------------------------------------------
North America
Restructuring charges US$ (21) US$ -
Sale of facilities (5) 16
-------------------------------------------------------------------------
(26) 16
-------------------------------------------------------------------------
Europe
Restructuring charges (4) (7)
Impairment charges - (5)
Sale of facility (12) -
-------------------------------------------------------------------------
(16) (12)
-------------------------------------------------------------------------
Corporate and Other
Restructuring charges - (2)
Foreign currency gain - 18
-------------------------------------------------------------------------
- 16
-------------------------------------------------------------------------
US$ (42) US$ 20
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) EBIT is defined as operating income as presented on our unaudited
consolidated financial statements before net interest (income)
expense.
North America
EBIT in North America increased 14% or US$30 million to US$249 million
for the second quarter of 2006 compared to US$219 million for the second
quarter of 2005. Excluding the North American unusual items discussed in
the "Highlights" section above, EBIT increased by US$72 million in North
America, primarily as a result of:
- margins earned on new programs that launched during or subsequent to
the second quarter of 2005;
- margins earned on increased production and/or content on certain
programs; and
- productivity and efficiency improvements at certain underperforming
divisions.
These factors were partially offset by:
- lower margins as a result of a decrease in production volumes for
certain programs;
- launch costs incurred at certain divisions;
- continued productivity and efficiency issues at certain
underperforming divisions;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Europe
EBIT in Europe decreased 70% or US$57 million to US$24 million for the
second quarter of 2006 compared to US$81 million for the second quarter of
2005. Excluding the European unusual items discussed in the "Highlights"
section above, EBIT decreased US$53 million in Europe, primarily as a
result of:
- operating and other inefficiencies at certain facilities, particularly
at certain of our interior systems facilities;
- lower margins as a result of the decrease in sales on certain
programs;
- launch costs incurred at new facilities and certain other facilities;
- costs incurred to develop and grow our electronics capabilities; and
- incremental customer price concessions.
These factors were partially offset by:
- margins earned on assembly and production programs that launched
during or subsequent to the second quarter of 2005;
- increased margins earned on higher volumes for other assembly
programs;
- lower affiliation fees paid to Corporate;
- productivity and efficiency improvements at certain underperforming
divisions; and
- the acquisition of CTS in February of 2006.
Rest of World
No EBIT was earned in the Rest of World for the second quarter of 2006,
a decrease of US$2 million from the second quarter of 2005.
The decrease in EBIT was primarily as a result of costs incurred at new
facilities, primarily in China, as we continue to pursue opportunities in
this growing market. Partially offsetting these costs was the additional
margin earned on the increased production sales discussed above.
Corporate and Other
Corporate and Other EBIT decreased 57% or US$13 million to US$10
million for the second quarter of 2006 compared to US$23 million for the
second quarter of 2005. Excluding the Corporate and Other unusual items
discussed in the "Highlights" section above, EBIT increased US$3 million,
primarily as a result of:
- a decrease in stock compensation expense;
- an increase in equity income earned on investments; and
- a decrease in incentive compensation as a result of the decrease in
Magna's consolidated earnings.
These factors were partially offset by:
- a decrease in affiliation fees earned from our divisions; and
- foreign exchange losses incurred during the second quarter of 2006.
Interest (Income) Expense, Net
During the second quarter of 2006, we earned net interest income of
US$3 million, compared to net interest expense of US$2 million for the
second quarter of 2005. The US$5 million positive variance is primarily as
a result of:
- a reduction in interest expense as a result of:
- the repayment in January 2006 of the second series of our senior
unsecured notes related to the acquisition of New Venture Gear
("NVG"); and
- the repayment of US$59 million of senior unsecured notes in
May 2006; and
- an increase in interest income earned.
Operating Income
Operating income decreased 11% or US$37 million to US$286 million for
the second quarter of 2006 compared to US$323 million for the second
quarter of 2005. Excluding unusual items discussed in the "Highlights"
section above, operating income increased 8% or US$25 million for the
second quarter of 2006. The increase in operating income (excluding unusual
items) was the result of the increase in EBIT (excluding unusual items)
combined with the positive variance in net interest (income) expense, both
as described above.
Income Taxes
Our effective income tax rate on operating income (excluding equity
income) increased to 33.0% for the second quarter of 2006 from 30.5% for
the second quarter of 2005. In the second quarters of 2006 and 2005, income
tax rates were impacted by the unusual items discussed in the "Highlights"
section above. Excluding the unusual items, our effective income tax rate
increased to 34.6% for the second quarter of 2006 compared to 31.2% for the
second quarter of 2005. The increase in the effective income tax rate is
the result of an increase in losses not benefited, primarily at certain
interior systems facilities in Europe, partially offset by a change in mix
of earnings, whereby proportionately more operating income (excluding
equity income) was earned in jurisdictions with lower income tax rates, and
a reduction in income tax rates in certain jurisdictions.
Net Income
Net income decreased by 14% or US$32 million to US$193 million for the
second quarter of 2006 compared to US$225 million for the second quarter of
2005. Excluding the US$39 million related to unusual items discussed in the
"Highlights" section above, net income increased US$7 million as a result
of the increase in operating income, partially offset by the increase in
income taxes, all as discussed above.
Earnings per Share
For the three months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share
Basic US$ 1.78 US$ 2.10 - 15%
Diluted US$ 1.75 US$ 2.06 - 15%
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares outstanding
(millions)
Basic 108.6 107.2 + 1%
Diluted 111.4 109.9 + 1%
-------------------------------------------------------------------------
Diluted earnings per share decreased 15% or US$0.31 to US$1.75 for the
second quarter of 2006 compared to US$2.06 for the second quarter of 2005.
Included in the US$0.31 decrease in diluted earnings per share is the net
decrease in diluted earnings per share of US$0.34 related to the unusual
items discussed in the "Highlights" section above.
Excluding the unusual items, diluted earnings per share increased US$0.
03 from the second quarter of 2005 to the second quarter of 2006 as a
result of the increase in net income (excluding unusual items) partially
offset by a 1% increase in the weighted average number of diluted shares
outstanding. The increase in the weighted average number of diluted shares
outstanding was a result of:
- approximately 1.2 million additional Class A Subordinate Voting Shares
that were included in the weighted average number of shares
outstanding as a result of the Privatizations; and
- 0.5 million additional Class A Subordinate Voting Shares that were
issued on the exercise of stock options during or subsequent to the
second quarter of 2005.
The increase in the weighted average number of shares outstanding was
partially offset by a lower average trading price for our Class A
Subordinate Voting Shares, which results in fewer options becoming dilutive.
Return on Funds Employed ("ROFE")(1)
An important financial ratio that we use across all of our operations
to measure return on investment is ROFE.
ROFE for the second quarter of 2006 was 16.9%, a decrease from 21.1%
for the second quarter of 2005. The unusual items discussed in the "
Highlights" section above negatively impacted ROFE in the second quarter of
2006 by 2.3% and positively impacted ROFE in the second quarter of 2005 by
1.3%.
Excluding these unusual items, the 0.6% decrease in ROFE can be
attributed to an increase in our average funds employed for the second
quarter of 2006 compared to the second quarter of 2005, partially offset by
the increase in EBIT (excluding unusual items) as discussed above. The
increase in our average funds employed was primarily as a result of:
- acquisitions completed during or subsequent to the second quarter of
2005, including CTS in February 2006;
- increased funds employed for new facilities associated with recent or
upcoming launches; and
- an increase in our average investment in non-cash operating assets and
liabilities.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
For the three months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Net income US$ 193 US$ 225
Items not involving current cash flows 222 180
-------------------------------------------------------------------------
415 405 US$ 10
Changes in non-cash operating assets
and liabilities (141) (272)
-------------------------------------------------------------------------
Cash provided from operating activities US$ 274 US$ 133 US$ 141
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash operating assets and
liabilities increased US$10 million to US$415 million for the second
quarter of 2006 compared to US$405 million for the second quarter of
2005. The increase in cash flow from operations was due to a US$42
million increase in items not involving current cash flows, partially
offset by a US$32 million decrease in net income (as discussed above).
-------------------------------------------------------------------------
(1) ROFE is defined as EBIT divided by the average funds employed for the
period. Funds employed is defined as long-term assets, excluding future
tax assets, plus non-cash operating assets and liabilities. Non-cash
operating assets and liabilities are defined as the sum of accounts
receivable, inventory, income taxes recoverable and prepaid assets less
the sum of accounts payable, accrued salaries and wages, other accrued
liabilities, income taxes payable and deferred revenues.
The increase in items not involving current cash flows was primarily a
result of:
- a US$28 million increase in depreciation and amortization; and
- a US$49 million increase in other non-cash charges, including:
- a US$17 million loss recorded on the sale of two underperforming
facilities in 2006 as discussed above;
- an US$18 million foreign currency gain on the repatriation of funds
from Europe in 2005; and
- a US$16 million gain recorded on the sale of a non-core seat
component facility in 2005.
These increases were partially offset by:
- a US$28 million decrease in future taxes and non-cash portion of
current taxes, including a US$10 million recovery as a result of a
reduction in future income tax rates in Canada in the second quarter
of 2006; and - a US$2 million increase in equity income.
Cash invested in non-cash operating assets and liabilities amounted to
US$141 million for 2006 which was comprised of the following sources (and
uses) of cash:
For the three months
ended June 30,
----------------------
2006 2005
-------------------------------------------------------------------------
Accounts receivable US$ (132) US$ (428)
Inventory - 13
Prepaid expenses and other (1) (5)
Accounts payable and other accrued liabilities (41) 134
Income taxes payable 36 12
Deferred revenues (3) 2
-------------------------------------------------------------------------
Changes in non-cash operating assets and
liabilities US$ (141) US$ (272)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in accounts receivable is primarily a result of an increase
in both production and tooling receivables.
Capital and Investment Spending
For the three months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Fixed assets US$ (179) US$ (205)
Investments and other assets (43) (22)
-------------------------------------------------------------------------
Fixed assets, investments and other
assets additions (222) (227)
Purchases of subsidiaries - (33)
Proceeds from disposals 7 43
-------------------------------------------------------------------------
Cash used in investing activities US$ (215) US$ (217) US$ 2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, investments and other assets additions
In the second quarter of 2006, we invested US$179 million in fixed
assets. While investments were made to refurbish or replace assets consumed
in the normal course of business and for productivity improvements, a large
portion of the investment in the second quarter of 2006 was for
manufacturing equipment for programs that launched during the second
quarter of 2006 or will be launching subsequent to the second quarter of
2006, including equipment for GM's next generation full-size pickups and
SUVs.
We invested US$43 million in investments and other assets in the second
quarter of 2006 primarily representing:
- the acquisition of a 32% equity interest in Shin Young Metal Ind. Co.,
a Korean-based supplier of major stampings, welded assemblies and
tooling to the automotive industry; and
- fully reimbursable planning and engineering costs relating to programs
that launched or will be launching during 2006.
Purchase of subsidiaries
The purchases of subsidiaries for the second quarter of 2005 includes
the US$50 million cash portion of the Intier privatization, which was
partially offset by a US$17 million cash adjustment received with respect
to the acquisition of NVG.
Proceeds from disposition
Proceeds from disposition for the second quarter of 2006 represents
normal course fixed and other asset disposals.
Proceeds from disposition for the second quarter of 2005 reflects
US$25 million received on the sale of a non-core seat component facility
and proceeds from normal course fixed and other asset disposals.
Financing
For the three months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Repayments of debt US$ (106) US$ (18)
Issues of debt 17 19
Issues of Class A Subordinate Voting
Shares 7 3
Cash dividends paid (41) (42)
-------------------------------------------------------------------------
Cash used in financing activities US$ (123) US$ (38) US$ (85)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The repayments of debt during the second quarter of 2006 included the
repayment of US$59 million in senior unsecured notes as well as a reduction
in bank indebtedness of US$47 million.
The increase in debt during the second quarter of 2006 relates
primarily to the issue of government debt and debt assumed on a sale-
leaseback transaction.
During the second quarter of 2006, we received cash proceeds of
US$7 million on the exercise of stock options for Class A Subordinate
Voting Shares compared to US$3 million during the second quarter of 2005.
Financing Resources
As at As at
June 30, December
2006 31, 2005 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness US$ 164 US$ 89
Long term debt due within one year 80 131
Long term debt 699 700
-------------------------------------------------------------------------
943 920
Shareholders' equity 7,127 6,565
-------------------------------------------------------------------------
Total capitalization US$ 8,070 US$ 7,485 US$ 585
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization increased by 8% or US$585 million to US$8.1 billion
at June 30, 2006 as compared to US$7.5 billion at December 31, 2005. The
increase in capitalization is a result of an increase in shareholders'
equity and liabilities of US$562 million and US$23 million, respectively.
The increase in shareholders' equity is primarily the result of:
- net income earned during the first six months of 2006 (as discussed
above);
- a US$225 million increase in the currency translation adjustment,
primarily as a result of the strengthening of the Canadian dollar
against the U.S. dollar between December 31, 2005 and June 30, 2006;
and
- Class A Subordinate Voting Shares issued on the exercise of stock
options.
The increases in equity were partially offset by:
- dividends paid during the first six months of 2006; and
- a US$6 million reduction of share capital related to the repurchase of
our Class A Subordinate Voting Shares which had been awarded on a
restricted basis to an executive.
The increase in liabilities is primarily a result of an increase in
bank indebtedness as a result of:
- the acquisition of CTS in February 2006; and
- an increase in reported U.S. dollar amounts as a result of the
strengthening of the Canadian dollar against the U.S. dollar.
These increases were partially offset by decreases in long-term debt as
a result of the repayment of:
- the second series of our senior unsecured notes related to the
acquisition of NVG in January 2006; and
- US$59 million of senior unsecured notes in May 2006.
During the first six months of 2006, our cash resources decreased by US
$164 million to US$1.5 billion as a result of the cash used in investing
and financing activities, partially offset by the cash provided from
operating activities as discussed above. In addition to our cash resources,
we had term and operating lines of credit totalling US$2.0 billion, of
which US$1.7 billion was unused and available.
Maximum Number of Shares Issuable
The following table presents the maximum number of shares that would be
outstanding if all of the outstanding stock options and Subordinated
Debentures issued and outstanding at August 4, 2006 were exercised or
converted:
Class A Subordinate Voting and Class B Shares 109,596,409
Subordinated Debentures(i) 1,096,589
Stock options(ii) 4,375,243
-------------------------------------------------------------------------
115,068,241
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The above amounts include shares issuable if the holders of the
6.5% Convertible Subordinated Debentures exercise their conversion
option but exclude Class A Subordinate Voting Shares issuable, only
at our option, to settle interest and principal related to the 6.5%
Convertible Subordinated Debentures. The number of Class A
Subordinate Voting Shares issuable at our option is dependent on
the trading price of Class A Subordinate Voting Shares at the time
we elect to settle the 6.5% Convertible Subordinated Debenture
interest and principal with shares.
The above amounts also exclude Class A Subordinate Voting Shares
issuable, only at our option, to settle the 7.08% Subordinated
Debentures on redemption or maturity. The number of shares issuable
is dependent on the trading price of Class A Subordinate Voting
Shares at redemption or maturity of the 7.08% Subordinated
Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting provisions
and upon payment of the exercise price as may be determined from
time to time pursuant to our stock option plans.
Contractual Obligations and Off-Balance Sheet Financing
There have been no material changes with respect to the contractual
obligations requiring annual payments during the second quarter of 2006
that are outside the ordinary course of business. Refer to our MD&A
included in our 2005 Annual Report.
Long-term receivables in other assets are reflected net of outstanding
borrowings from a customer's finance subsidiary of US$50 million since we
have a legal right of set-off of the customer's long-term receivable
payable to us against such borrowings and intend to settle the related
amounts simultaneously.
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2006
-------------------------------------------------------------------------
Sales
For the six months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (millions of
units)
North America 8.275 8.090 + 2%
Europe 8.230 8.385 - 2%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America US$ 772 US$ 710 + 9%
Europe US$ 341 US$ 315 + 8%
-------------------------------------------------------------------------
Sales
External Production
North America US$ 6,386 US$ 5,742 + 11%
Europe 2,810 2,640 + 6%
Rest of World 122 76 + 61%
Complete Vehicle Assembly 2,115 2,180 - 3%
Tooling, Engineering and Other 955 938 + 2%
-------------------------------------------------------------------------
Total Sales US$12,388 US$11,576 + 7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
External Production Sales - North America
External production sales in North America increased 11% or US$644
million to US$6.4 billion for the six months ended June 30, 2006 compared
to US$5.7 billion for the six months ended June 30, 2005. This increase in
production sales reflects a 9% increase in our North American average
dollar content per vehicle combined with a 2% increase in North American
vehicle production volumes.
Our average dollar content per vehicle grew by 9% or US$62 to US$772
for the six months ended June 30, 2006 compared to US$710 for the six
months ended June 30, 2005, primarily as a result of:
- the launch of new programs during or subsequent to the six months
ended June 30, 2005, including:
- GM's new full-size SUVs;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the Chevrolet HHR;
- the Dodge Charger;
- the Ford Explorer and Mercury Mountaineer;
- the Chevrolet Impala;
- the Hummer H3; and
- the Pontiac Torrent;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar; and
- increased production and/or content on certain programs, including the
Mercedes M-Class.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Chevrolet Equinox;
- the Chrysler Pacifica;
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country;
- GM's full-size pickup trucks;
- the Jeep Grand Cherokee;
- the Cadillac STS; and
- the Mazda Tribute and Ford Escape;
- programs that ended production during or subsequent to the six months
ended June 30, 2005; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 6% or US$170 million to
US$2.8 billion for the six months ended June 30, 2006 compared to US$2.6
billion for the six months ended June 30, 2005. This increase in production
sales reflects an 8% increase in our European average dollar content per
vehicle partially offset by a 2% decline in European vehicle production
volumes.
Our average dollar content per vehicle grew by 8% or US$26 to US$341
for the six months ended June 30, 2006 compared to US$315 for the six
months ended June 30, 2005, primarily as a result of:
- acquisitions completed during or subsequent to the first six months of
2005, including CTS in February 2006;
- the launch of new programs during or subsequent to the first six
months of 2005, including:
- the Honda Civic;
- the Peugeot 207;
- the Mercedes S-Class; and
- the Volkswagen Passat; and
- increased production and/or content on certain programs, including the
Mercedes B-Class.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including the Mercedes A-Class and C-Class;
- a decrease in reported U.S. dollar sales primarily due to the
weakening of the euro and British pound against the U.S. dollar;
- programs that ended production during or subsequent to the six months
ended June 30, 2005, including production on all MG Rover programs as
a result of the MG Rover situation; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 61% or
US$46 million to US$122 million for the six months ended June 30, 2006
compared to US$76 million for the six months ended June 30, 2005. The
increase in production sales is primarily a result of:
- the ramp-up of production at new facilities in China;
- increased production sales at our powertrain facilities in Korea; and
- an increase in production sales at a closure systems facility in
Brazil.
Complete Vehicle Assembly Sales
For the six months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales US$ 2,115 US$ 2,180 - 3%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes
(Units)
Full-Costed: 78,949 79,312 -
BMW X3, Mercedes E-Class and
G-Class, and Saab 9(3) Convertible
Value-Added: 47,911 29,974 + 60%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep
Commander
-------------------------------------------------------------------------
126,860 109,286 + 16%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Although assembly volumes increased 16% or 17,574 units, complete
vehicle assembly sales decreased 3% or US$65 million to US$2.1 billion for
the six months ended June 30, 2006 compared to US$2.2 billion for the six
months ended June 30, 2005. The decrease in complete vehicle assembly sales
is primarily the result of:
- a decrease in reported U.S. dollar sales due to the weakening of the
euro against the U.S. dollar; and
- lower assembly volumes and/or content for certain vehicles accounted
for on a full-cost basis.
These factors were partially offset by the launch of the following
value-added assembly programs:
- the Jeep Commander in the first quarter of 2006;
- the Chrysler 300 in the second quarter of 2005; and
- the Jeep Grand Cherokee in the first quarter of 2005.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 2% or US$17 million to
US$955 million for the six months ended June 30, 2006 compared to US$938
million for the six months ended June 30, 2005.
In the six months ended June 30, 2006, the major programs for which we
recorded tooling, engineering and other sales were:
- GM's next generation full-size pickups and SUVs;
- the MINI Cooper;
- the BMW Z4;
- the BMW X5;
- the Freightliner P-Class;
- the Ford Edge;
- the Ford F-Series Super Duty pickup trucks;
- the BMW 3-Series; and
- the Suzuki XL7.
In the six months ended June 30, 2005, the major programs for which we
recorded tooling, engineering and other sales were:
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the MINI Cooper;
- the Mercedes M-Class;
- the Hummer H3; and
- the Jeep Grand Cherokee.
In addition, tooling, engineering and other sales benefited from the
strengthening of the Canadian dollar against the U.S. dollar.
EBIT
For the six months
ended June 30,
--------------------
2006 2005 Change
-------------------------------------------------------------------------
North America US$ 468 US$ 381
Europe 93 137
Rest of World - 3
Corporate and Other 32 59
-------------------------------------------------------------------------
Total EBIT US$ 593 US$ 580 + 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the six-month periods ended June 30, 2006 and 2005
were the following unusual items, which have been discussed in the "
Highlights" section above.
For the six months
ended June 30,
----------------------
2006 2005
-------------------------------------------------------------------------
North America
Restructuring charges US$ (23) US$ (4)
Sale of facilities (5) 16
-------------------------------------------------------------------------
(28) 12
-------------------------------------------------------------------------
Europe
Restructuring charges (12) (7)
Sale of facility (12) -
Charges associated with MG Rover - (15)
Impairment charges - (5)
-------------------------------------------------------------------------
(24) (27)
-------------------------------------------------------------------------
Corporate and Other
Restructuring charges - (3)
Foreign currency gain - 18
-------------------------------------------------------------------------
- 15
-------------------------------------------------------------------------
US$ (52) US$ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America increased 23% or US$87 million to US$468 million
for the six months ended June 30, 2006 compared to US$381 million for the
six months ended June 30, 2005. Excluding the North American unusual items
discussed in the "Highlights" section above, EBIT increased US$127 million,
primarily as a result of:
- margins earned on new programs that launched during or subsequent to
the second quarter of 2005;
- margins earned on increased production and/or content on certain
programs;
- productivity and efficiency improvements at certain underperforming
divisions;
- the closure during the first six months of 2005 of a facility that
incurred losses during the first quarter of 2005; and
- lower employee profit sharing as a result of the decrease in Magna's
consolidated earnings.
These factors were partially offset by:
- lower margins as a result of a decrease in production volumes for
certain programs;
- launch costs incurred at certain divisions;
- continued productivity and efficiency issues at certain
underperforming divisions;
- amortization of fair value increments related to the Privatizations;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Europe
EBIT in Europe decreased US$44 million to US$93 million for the six
months ended June 30, 2006 compared to US$137 million for the six months
ended June 30, 2005. Excluding the European unusual items discussed in the
"Highlights" section above, EBIT decreased by US$47 million, primarily as a
result of:
- operating and other inefficiencies at certain facilities, primarily at
certain interior systems facilities;
- lower margins as a result of the decrease in sales on certain
programs;
- amortization of fair value increments related to the Privatizations;
- launch costs incurred at new facilities and certain other facilities;
and
- incremental customer price concessions.
These factors were partially offset by:
- margins earned on assembly and production programs that launched
during or subsequent to the second quarter of 2005;
- increased margins earned on higher volumes for other assembly
programs;
- lower affiliation fees paid to Corporate;
- improvements in productivity and efficiency at certain underperforming
divisions;
- a decrease in estimated product warranty costs; and
- the acquisition of CTS in February of 2006.
Rest of World
No EBIT was earned in the Rest of World for the six months ended June
30, 2006, a decrease of US$3 million from the six months ended June 30,
2005. EBIT decreased primarily as a result of:
- costs incurred at new facilities, primarily in China, as we continue
to pursue opportunities in this growing market; and
- the closure of a Brazilian facility during 2005 that was profitable in
the first quarter of 2005.
Partially offsetting these costs was the additional margin earned on
the increased production sales discussed above.
Corporate and Other
Corporate and Other EBIT decreased 46% or US$27 million to US$32
million for the six months ended June 30, 2006 compared to US$59 million
for the six months ended June 30, 2005. Excluding the unusual items
discussed in the "Highlights" section above, EBIT decreased US$12 million
primarily as a result of:
- a decrease in affiliation fees earned from our divisions;
- higher charitable donations, including hurricane Katrina disaster
relief; and
- foreign exchange losses incurred during the six months ended
June 30, 2006.
These factors were partially offset by:
- a decrease in stock compensation expense; and
- an increase in equity income earned on investments.
COMMITMENTS AND CONTINGENCIES
-------------------------------------------------------------------------
From time to time, we may be contingently liable for litigation and
other claims. Refer to note 21 of our audited consolidated financial
statements, which describes these claims.
SUBSEQUENT EVENTS
-------------------------------------------------------------------------
On August 3, 2006, we entered into an agreement to acquire two
facilities from Pressac PLC for US$58 million ((euro)45 million) subject to
regulatory approvals. The facilities in Germany and Italy manufacture
electronic devices for sale to various customers, including Volkswagen,
DaimlerChrysler and Fiat.
FORWARD-LOOKING STATEMENTS
-------------------------------------------------------------------------
The previous discussion may contain statements that, to the extent that
they are not recitations of historical fact, constitute "forward-looking
statements" within the meaning of applicable securities legislation.
Forward-looking statements may include financial and other projections, as
well as statements regarding our future plans, objectives or economic
performance, or the assumptions underlying any of the foregoing. We use
words such as "may", "would", "could", "will", "likely", "expect",
"anticipate", "believe", "intend", "plan", "forecast", "project", "estimate
" and similar expressions to identify forward-looking statements. Any such
forward-looking statements are based on assumptions and analyses made by us
in light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate in the circumstances. However, whether actual
results and developments will conform with our expectations and predictions
is subject to a number of risks, assumptions and uncertainties. These risks
, assumptions and uncertainties include, but are not limited to, the impact
of: declining production volumes and changes in consumer demand for
vehicles; the inability of our customers to meet their financial
obligations to us; a reduction in the production volumes of certain
vehicles; our ability to compete with suppliers with operations in low cost
countries; our inability to offset increases in
the cost of commodities, such as steel and resins, as well as energy prices;
changes in our mix of earnings between jurisdictions with lower tax rates
and those with higher tax rates, as well as our ability to fully benefit
tax losses; the financial distress of some of our suppliers and customers;
our inability to offset price concessions demanded by our customers; our
inability to fully recover pre-production expenses; warranty and recall
costs; the termination by our customers of any material contracts; product
liability claims in excess of our insurance coverage; expenses related to
the restructuring and rationalization of some of our operations; impairment
charges; legal claims against us; risks of conducting business in foreign
countries; unionization activities at our facilities; work stoppages and
labour relations disputes; changes in laws and governmental regulations;
costs associated with compliance with environmental laws and regulations;
potential conflicts of interest involving our controlling shareholder, the
Stronach Trust; and other factors set out in our Annual Information Form
filed with securities commissions in Canada and our annual report on Form
40-F filed with the United States Securities and Exchange Commission, and
subsequent filings. In evaluating forward-looking statements, readers
should specifically consider the various factors which could cause actual
events or results to differ materially from those indicated by such forward-
looking statements. Unless otherwise required by applicable securities laws
, we do not intend, nor do we undertake any obligation, to update or revise
any forward-looking statements to reflect subsequent information, events,
results or circumstances or otherwise.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(U.S. dollars in millions, except per share figures)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
Note 2006 2005 2006 2005
-------------------------------------------------------------------------
Sales US$6,369 US$5,858 US$ 12,388 US$ 11,576
-------------------------------------------------------------------------
Cost of goods sold 5,522 5,065 10,721 10,058
Depreciation and
amortization 201 173 389 341
Selling, general and
administrative 5 367 292 691 597
Interest (income)
expense, net (3) 2 (2) 3
Equity income (4) (2) (6) (5)
Impairment charges - 5 - 5
-------------------------------------------------------------------------
Income from operations
before income taxes and
minority interest 286 323 595 577
Income taxes 93 98 190 169
Minority interest - - - 11
-------------------------------------------------------------------------
Net income US$ 193 US$ 225 US$ 405 US$ 397
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting
or Class B Share:
Basic US$ 1.78 US$ 2.10 US$ 3.73 US$ 3.78
Diluted US$ 1.75 US$ 2.06 US$ 3.66 US$ 3.73
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash dividends paid
per Class A
Subordinate Voting or
Class B Share US$ 0.38 US$ 0.38 US$ 0.76 US$ 0.76
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in millions):
Basic 108.6 107.2 108.6 105.0
Diluted 111.4 109.9 111.3 106.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(U.S. dollars in millions)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
Note 2006 2005 2006 2005
-------------------------------------------------------------------------
Retained earnings,
beginning of period US$3,579 US$3,068 US$3,409 US$2,937
Net income 193 225 405 397
Dividends on Class A
Subordinate Voting
and Class B Shares (41) (42) (83) (83)
-------------------------------------------------------------------------
Retained earnings,
end of period US$3,731 US$3,251 US$3,731 US$3,251
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in millions)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
Note 2006 2005 2006 2005
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income US$ 193 US$ 225 US$ 405 US$ 397
Items not involving
current cash flows 222 180 437 374
-------------------------------------------------------------------------
415 405 842 771
Changes in non-cash
operating assets
and liabilities (141) (272) (366) (110)
-------------------------------------------------------------------------
274 133 476 661
-------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Fixed asset additions (179) (205) (346) (329)
Purchase of subsidiaries 2 - (33) (203) (169)
Increase in other assets (43) (22) (52) (69)
Proceeds from disposition 7 43 31 58
-------------------------------------------------------------------------
(215) (217) (570) (509)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of debt (106) (18) (119) (278)
Issues of debt 17 19 19 54
Issues of Class A
Subordinate Voting
Shares 7 3 15 14
Dividends (41) (42) (82) (84)
-------------------------------------------------------------------------
(123) (38) (167) (294)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents 78 (46) 97 (83)
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the period 14 (168) (164) (225)
Cash and cash equivalents,
beginning of period 1,504 1,462 1,682 1,519
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period US$1,518 US$1,294 US$1,518 US$1,294
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in millions)
June 30, December 31,
Note 2006 2005
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents US$ 1,518 US$ 1,682
Accounts receivable 4,318 3,436
Inventories 1,535 1,388
Prepaid expenses and other 113 97
-------------------------------------------------------------------------
7,484 6,603
-------------------------------------------------------------------------
Investments 170 142
Fixed assets, net 4,258 4,124
Goodwill 2 1,036 918
Future tax assets 220 208
Other assets 435 326
-------------------------------------------------------------------------
US$ 13,603 US$ 12,321
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness US$ 164 US$ 89
Accounts payable 3,661 3,241
Accrued salaries and wages 479 474
Other accrued liabilities 551 394
Income taxes payable 134 59
Long term debt due within one year 80 131
-------------------------------------------------------------------------
5,069 4,388
-------------------------------------------------------------------------
Deferred revenue 82 85
Long term debt 699 700
Other long term liabilities 279 241
Future tax liabilities 347 342
-------------------------------------------------------------------------
6,476 5,756
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 4
Class A Subordinate Voting Shares
(issued: 108,500,211;
December 31, 2005 - 108,184,395) 2,486 2,470
Class B Shares
(convertible into Class A
Subordinate Voting Shares)
(issued: 1,093,983) - -
Contributed surplus 5 64 65
Retained earnings 3,731 3,409
Currency translation adjustment 846 621
-------------------------------------------------------------------------
7,127 6,565
-------------------------------------------------------------------------
US$ 13,603 US$ 12,321
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions unless
otherwise noted)
-------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in United States dollars following
Canadian generally accepted accounting principles, as set out in the
2005 annual consolidated financial statements.
The unaudited interim consolidated financial statements do not
conform in all respects to the requirements of generally accepted
accounting principles for annual financial statements. Accordingly,
these unaudited interim consolidated financial statements should be
read in conjunction with the 2005 annual consolidated financial
statements.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at June 30, 2006 and the results of operations and
cash flows for the three-month and six-month periods ended June 30,
2006 and 2005.
2. ACQUISITIONS
(a) For the six months ended June 30, 2006
On February 2, 2006, Magna acquired CTS Fahrzeug-Dachsysteme
GmbH, Bietingheim-Bissingen ("CTS"). CTS is one of the world's
leading manufacturers of roof systems for the automotive industry
and is based in Germany. CTS manufactures soft tops, hard tops
and modular retractable hard tops. In addition to Porsche, its
customers include DaimlerChrysler, Ferrari, Peugeot and General
Motors. CTS has six facilities in Europe and two facilities in
North America.
The total consideration for the acquisition of CTS amounted to
US$271 million, consisting of US$203 million paid in cash and
US$68 million of assumed debt. The excess purchase price over the
book value of assets acquired and liabilities assumed was
US$175 million.
(b) For the six months ended June 30, 2005
(i) Tesma
On February 6, 2005, Magna acquired the 56% equity interest
in Tesma international Inc. ("Tesma") that it did not
previously own for total consideration of US$613 million,
which was satisfied by issuing 6.7 million Magna Class A
Subordinate Voting Shares and cash of US$103 million. In
addition, Magna assumed responsibility for the existing
stock options of Tesma, resulting in an increase in the
purchase price of US$17 million, representing the
approximate fair value of the stock options assumed. The
excess of the purchase price over the Company's incremental
interest in the book value of the assets acquired and
liabilities assumed was US$270 million.
(ii) Decoma
On March 6, 2005, Magna acquired the 27% equity interest in
Decoma International Inc. ("Decoma") that it did not
previously own for total consideration of US$239 million,
which was satisfied by issuing 2.9 million Magna Class A
Subordinate Voting Shares and cash of US$31 million. In
addition, Magna assumed responsibility for the existing
stock options of Decoma, resulting in an increase in the
purchase price of US$2 million, representing the
approximate fair value of the stock options assumed. The
excess of the purchase price over the Company's incremental
interest in the book value of the assets acquired and
liabilities assumed was US$78 million.
(iii) Intier
On April 3, 2005, Magna acquired the 15% equity interest in
Intier Automotive Inc. ("Intier") that it did not
previously own for total consideration of US$202 million,
which was satisfied by issuing 2.3 million Magna Class A
Subordinate Voting Shares and cash of US$50 million. In
addition, Magna assumed responsibility for the existing
stock options of Intier resulting in an increase in the
purchase price of US$23 million, representing the
approximate fair value of the stock options assumed. The
excess of the purchase price over the Company's incremental
interest in the book value of the assets acquired and
liabilities assumed was US$87 million.
The purchase price allocations for CTS and the 2005
acquisitions are preliminary and adjustments to the
allocations may occur as a result of obtaining more
information regarding asset valuations. On a preliminary
basis, an allocation of the excess purchase price over the
book value of assets acquired and liabilities assumed has
been made to fixed assets and intangible assets.
3. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2006 2005 2006 2005
---------------------------------------------------------------------
Defined benefit pension
plans and other US$ 5 US$ 5 US$ 9 US$ 7
Termination and long
service arrangements 5 3 10 8
Retirement medical
benefits plan 4 3 5 5
---------------------------------------------------------------------
US$ 14 US$ 11 US$ 24 US$ 20
---------------------------------------------------------------------
---------------------------------------------------------------------
4. CAPITAL STOCK
(a) Changes in the Class A Subordinate Voting Shares for the three-
month and six-month periods ended June 30, 2006 are shown in the
following table (numbers of shares in the following table are
expressed in whole numbers):
Subordinate Voting
-----------------------------
Number of Stated
shares value
-----------------------------------------------------------------
Issued and outstanding at
December 31, 2005 108,184,395 US$ 2,470
Issued for cash under the Incentive
Stock Option Plan 166,209 11
Issued under the Dividend
Reinvestment Plan 5,770 1
-----------------------------------------------------------------
Issued and outstanding at
March 31, 2006 108,356,374 2,482
Issued for cash under the Incentive
Stock Option Plan 140,535 10
Issued under the Dividend
Reinvestment Plan 3,302 -
Repurchase of Class A Subordinate
Voting Shares(i) - (6)
-----------------------------------------------------------------
Issued and outstanding at
June 30, 2006 108,500,211 US$ 2,486
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) During the three months ended June 30, 2006, 80,407 Magna
Class A Subordinate Voting Shares, which were purchased for
cash consideration of US$6 million, have been awarded on a
restricted basis to an executive. Since this stock has not
been released to the executive, it has been reflected as a
reduction in the stated value of the Company's Class A
Subordinate Voting Shares.
(b) The following table presents the maximum number of shares that
would be outstanding if all the dilutive instruments outstanding
at August 4, 2006 were exercised or converted:
Class A Subordinate Voting and Class B Shares 109,596,409
Subordinated Debentures(i) 1,096,589
Stock options(ii) 4,375,243
-----------------------------------------------------------------
115,068,241
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) The above amounts include shares issuable if the holders of
the 6.5% Convertible Subordinated Debentures exercise their
conversion option but exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle
interest and principal related to the 6.5% Convertible
Subordinated Debentures. The number of Class A Subordinate
Voting Shares issuable at the Company's option is dependent
on the trading price of the Class A Subordinate Voting
Shares at the time the Company elects to settle the 6.5%
Convertible Subordinated Debenture interest and principal
with shares.
The above amounts also exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle
the 7.08% Subordinated Debentures on redemption or
maturity. The number of shares issuable is dependent on the
trading price of Class A Subordinate Voting Shares at
redemption or maturity of the 7.08% Subordinated
Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting
provisions and upon payment of the exercise price as may be
determined from time to time pursuant to the Company's
stock option plans.
5. STOCK-BASED COMPENSATION
(a) The following is a continuity schedule of options outstanding
(number of options in the table below are expressed in whole
numbers):
2006 2005
-------------------------------- -------------------------------
Options outstanding Options outstanding
-------------------------------- -------------------------------
Options Options
Exercise exercis- Exercise exercis-
Options price(i) able Options price(i) able
No. CdnUS$ No. No. CdnUS$ No.
-------------------------------------------------------------------------
Beginning
of year 4,600,039 75.46 4,116,104 2,614,376 85.74 2,042,876
Assumed on
privati-
zation - - - 1,053,353 71.31 864,688
Granted 115,000 87.80 - 35,000 85.75 -
Exercised (166,209) 58.32 (166,209) (170,106) 61.09 (170,106)
Vested - - 80,100 - - 9,291
Cancelled (17,001) 93.35 (12,059) - - -
-------------------------------------------------------------------------
March 31 4,531,829 76.33 4,017,936 3,532,623 82.62 2,746,749
Assumed on
privati-
zation - - - 1,377,067 54.11 973,668
Exercised (140,535) 62.92 (140,535) (80,486) 53.67 (80,486)
Vested - - 8,138 - - 11,775
Cancelled (6,862) 73.11 (2,658) (17,033) 84.60 -
-------------------------------------------------------------------------
June 30 4,384,432 76.76 3,882,881 4,812,171 74.94 3,651,706
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The exercise price noted above represents the weighted
average exercise price in Canadian dollars.
(b) The fair value of stock options is estimated at the date of grant
using the Black-Scholes option pricing model. The weighted
average assumptions used in measuring the fair value of stock
options granted or modified and the compensation expense recorded
in selling, general and administrative expenses are as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2006 2005 2006 2005
-----------------------------------------------------------------
Risk free interest rate - 3.32% 3.99% 3.24%
Expected dividend yield - 2.40% 2.05% 2.18%
Expected volatility - 23% 23% 23%
Expected time until
exercise - 2 years 4 years 2 years
-----------------------------------------------------------------
Weighted average fair
value of options granted
or modified in period
(CdnUS$) US$ - US$19.33 US$14.89 US$18.48
-----------------------------------------------------------------
Compensation expense
recorded in selling,
general and
administrative
expenses US$ 1 US$ 6 US$ 3 US$ 9
-----------------------------------------------------------------
(c) At June 30, 2006, unamortized compensation expense related to the
restricted stock arrangements was US$46 million, and has been
presented as a reduction of shareholders' equity.
(d) Contributed surplus consists of accumulated stock option
compensation expense less the fair value of options at the grant
date that have been exercised and reclassified to share capital,
the accumulated restricted stock compensation expense, and the
value of the holders conversion option on the 6.5% Convertible
Subordinated Debentures. The following is a continuity schedule
of contributed surplus:
2006 2005
-----------------------------------------------------------------
Stock-based compensation
Balance, beginning of period US$ 62 US$ 16
Impact of privatization transactions - 20
Stock-based compensation expense 2 2
Exercise of options (3) (5)
-----------------------------------------------------------------
Balance, March 31, 61 33
Impact of privatization transactions - 25
Stock-based compensation expense 3 5
Exercise of options (3) (2)
-----------------------------------------------------------------
Balance, June 30, 61 61
Holders conversion option 3 3
-----------------------------------------------------------------
US$ 64 US$ 64
-----------------------------------------------------------------
-----------------------------------------------------------------
6. SEGMENTED INFORMATION
Three months ended
June 30, 2006
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada US$1,743 US$1,672 US$1,130
United States 1,558 1,501 1,241
Mexico 420 410 337
Eliminations (130) - -
---------------------------------------------------------------------
3,591 3,583 US$ 249 2,708
Europe
Euroland 2,392 2,349 1,167
Great Britain 238 237 80
Other European countries 155 119 96
Eliminations (49) - -
---------------------------------------------------------------------
2,736 2,705 24 1,343
Rest of World 92 81 - 93
Corporate and Other (50) - 10 114
---------------------------------------------------------------------
Total reportable segments US$6,369 US$6,369 US$ 283 4,258
Current assets 7,484
Investments, goodwill and
other assets 1,861
---------------------------------------------------------------------
Consolidated total assets US$ 13,603
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended
June 30, 2005
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada US$1,608 US$1,542 US$ 989
United States 1,510 1,437 1,294
Mexico 296 278 327
Eliminations (138) - -
---------------------------------------------------------------------
3,276 3,257 US$ 219 2,610
Europe
Euroland 2,236 2,197 1,094
Great Britain 245 241 81
Other European countries 152 119 91
Eliminations (44) - -
---------------------------------------------------------------------
2,589 2,557 81 1,266
Rest of World 52 44 2 77
Corporate and Other (59) - 23 96
---------------------------------------------------------------------
Total reportable segments US$5,858 US$5,858 US$ 325 4,049
Current assets 6,279
Investments, goodwill and
other assets 1,554
---------------------------------------------------------------------
Consolidated total assets US$ 11,882
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months ended
June 30, 2006
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada US$3,441 US$3,308 US$1,130
United States 3,015 2,898 1,241
Mexico 778 759 337
Eliminations (244) - -
---------------------------------------------------------------------
6,990 6,965 US$ 468 2,708
Europe
Euroland 4,652 4,572 1,167
Great Britain 481 479 80
Other European countries 309 235 96
Eliminations (98) - -
---------------------------------------------------------------------
5,344 5,286 93 1,343
Rest of World 156 137 - 93
Corporate and Other (102) - 32 114
---------------------------------------------------------------------
Total reportable segments US$ 12,388 US$ 12,388 US$ 593 4,258
Current assets 7,484
Investments, goodwill and
other assets 1,861
---------------------------------------------------------------------
Consolidated total assets US$ 13,603
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months ended
June 30, 2005
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada US$3,195 US$3,066 US$ 989
United States 2,915 2,777 1,294
Mexico 514 484 327
Eliminations (272) - -
---------------------------------------------------------------------
6,352 6,327 US$ 381 2,610
Europe
Euroland 4,524 4,424 1,094
Great Britain 506 497 81
Other European countries 318 250 91
Eliminations (102) - -
---------------------------------------------------------------------
5,246 5,171 137 1,266
Rest of World 93 78 3 77
Corporate and Other (115) - 59 96
---------------------------------------------------------------------
Total reportable segments US$ 11,576 US$ 11,576 US$ 580 4,049
Current assets 6,279
Investments, goodwill and
other assets 1,554
---------------------------------------------------------------------
Consolidated total assets US$ 11,882
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) EBIT represents operating income before interest income or
expense.
7. RELATED PARTY TRANSACTION
On March 31, 2006, the Company purchased a real estate property
located in the United States from Magna Entertainment Corp. for a
total purchase price of US$6 million.
8. SUBSEQUENT EVENTS
On August 3, 2006, the Company entered into an agreement to acquire
two facilities from Pressac PLC for US$58 million ((euro)45 million)
subject to regulatory approvals. The facilities in Germany and Italy
manufacture electronic devices for sale to various customers,
including Volkswagen, DaimlerChrysler and Fiat.
9. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current period's method of presentation.
Magna International Inc
For further information: Louis Tonelli, Vice-President, Investor Relations
at +1-(905)-726-7035
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