Decoma announces results for fourth quarter & year end 2002
Net income up 17% for the quarter and 35% for the full year
CONCORD, ON, Feb. 18 -- Decoma International Inc.
(TSX:DEC.A; NASDAQ:DECA) today announced financial results for the fourth
quarter and full year ended December 31, 2002. These results are in line with
the Company's most recent guidance provided via news release on November 5,
2002.
Financial Highlights
--------------------
Three Months Full Year
Ended December 31 Ended December 31
(US$ millions except
per share figures) 2002 2001(x) 2002 2001(x)
Sales $ 528.2 $ 466.4 $2,056.7 $1,815.9
Operating income $ 42.7 $ 36.4 $ 173.7 $ 141.3
Net income $ 23.1 $ 19.8 $ 93.0 $ 68.7
Diluted earnings per share $ 0.25 $ 0.20 $ 1.03 $ 0.81
Weighted average diluted
shares outstanding (millions) 98.3 97.8 98.3 90.6
(x) Restated for new accounting recommendations regarding foreign
currency gains and losses. See Note 3 to the unaudited interim
consolidated financial statements.
Commenting on the above results, Al Power, Decoma's President and Chief
Executive Officer said: "Fiscal 2002 was another excellent year for Decoma,
during which we retained our sales and earnings momentum and posted strong
financial results, despite increasing challenges in the automotive industry.
In North America, we began to reap the benefits of new programs and improved
processes implemented over the past several years, resulting in strong gains
in sales and content per vehicle. In Europe, we continued to make progress on
the strategic realignment of our operations. The substantial investments we
are making in new capacity in 2003 are required to accommodate future sales
growth in 2004 and beyond."
Results of Operations
---------------------
Total sales were up 13% to $528.2 million in the fourth quarter and 13%
to $2,056.7 million for the year ended December 31, 2002. Sales growth in the
fourth quarter came during a period where vehicle production volumes were up
3% in North America and 5% in Europe. During this time, Decoma's average
content per vehicle increased 13% to $90 in North America and declined 3% to
$30 in Europe. Vehicle production volumes for the full year increased 5% in
North America and declined 1% in Europe. During the same period, Decoma's
average content per vehicle increased 12% to $85 in North America and was up
3% to $30 in Europe.
In addition to increased vehicle production, Decoma's sales and content
growth in North America were driven by the full year contribution from the
Autosystems acquisition; new programs launched during 2001 such as the Ford
Explorer and Nissan Altima; as well as takeover business obtained in 2002,
including content on the Cadillac Escalade and Denali SUVs. Full year sales
and content growth in Europe were driven by increased sales in the United
Kingdom, largely as a result of continued strong volumes on the BMW Mini
program, as well as the translation of Euro and British Pound sales into U.S.
dollars.
Operating income in the fourth quarter of 2002 increased 17% to
$42.7 million and 23% to $173.7 million for the full year. Increased operating
income largely reflects the strong performance of the Company's North American
business segment, partially offset by the negative impact of costs incurred to
support future European sales growth and investments in new facilities.
Operating losses at Decoma's Merplas facility were down for the year, but up
in the fourth quarter as compared to the third quarter of 2002, as a result of
an anticipated reduction in volume on certain service part programs and the
Jaguar X400 program.
Net income for the fourth quarter increased 17% to $23.1 million ($0.25
per diluted share), compared to $19.8 million ($0.20 per diluted share) for
the same period in 2001. Net income for the full year ended December 31, 2002
increased 35% to $93.0 million ($1.03 per diluted share), compared to
$68.7 million ($0.81 per diluted share) last year.
During 2002, cash flow from operations before changes in non-cash working
capital increased 17% to $188.6 million, compared to $160.7 million the
previous year. Capital spending for fixed asset additions during 2002 was
$99.9 million.
Quarterly Dividend
------------------
At its meeting today, Decoma's Board of Directors declared a fourth
quarter 2002 dividend of US$0.06 per share on Class A Subordinate Voting and
Class B Shares payable March 14, 2003, to shareholders of record on March 3,
2003. Total dividends declared in respect of the full year ended December 31,
2002 were $0.22, representing a 10% increase over dividends declared in
respect of the previous year.
Outlook
-------
Commenting on the Company's outlook for 2003, Randy Smallbone, Decoma's
Executive Vice President and Chief Financial Officer said: "Like other
companies in the automotive industry, our results will continue to be
influenced by uncertain market conditions. While we expect some weakness in
vehicle production volumes this year, we will continue to focus on operating
efficiencies and prudent financial management."
The outlook figures provided below exclude the impact of possible future
acquisitions.
Full Year 2003
--------------
For the full year 2003, the Company has assumed that North American light
vehicle production volumes will be approximately 16.0 million units, or 2%
lower than 2002. The Company has assumed that European production volumes will
be approximately 16.2 million units, or 1% lower than 2002. Decoma's content
per vehicle for 2003 is expected to be in the range of $80 to $85 in North
America and $35 to $40 in Europe.
Based on these assumptions, the Company expects its full year 2003 sales
to range between $2,050 million to $2,200 million. Approved capital spending
is $195 million. Diluted earnings per share for 2003 is expected to be in the
range of $0.84 to $1.01.
Forward Looking Information
---------------------------
This press release contains "forward looking statements" within the
meaning of applicable securities legislation. Such statements involve
important risks and uncertainties that may cause actual results or anticipated
events to be materially different from those expressed or implied herein.
These factors include, but are not limited to, risks relating to the
automotive industry, pricing concessions and cost absorptions, reliance on
major OEM customers, production volumes and product mix, excess OEM production
capacity currency exposure, environmental matters, new facility launch risk,
trade and labour relations, energy prices, technological developments by the
Company's competitors, government and regulatory policies, changes in the
competitive environment in which the Company operates and the Company's
ability to raise necessary financing. In this regard, readers are referred to
the Company's Annual Information Form for the year ended December 31, 2001,
filed with the Canadian securities commissions and as an annual report on Form
40-F with the United States Securities and Exchange Commission, and subsequent
public filings, including the MD&A for the year ended December 31, 2001,
contained in the 2001 Annual Report and the MD&A attached to this release for
the fourth quarter and full year 2002. The Company disclaims any intention and
undertakes no obligation to update or revise any forward looking statements to
reflect subsequent information, events or circumstances or otherwise.
About the Company
-----------------
Decoma designs, engineers and manufactures automotive exterior components
and systems which include fascias (bumpers), front and rear end modules,
plastic body panels, roof modules, exterior trim components, sealing and
greenhouse systems and lighting components for cars and light trucks
(including sport utility vehicles and mini-vans). Decoma has approximately
14,000 employees in 42 manufacturing, engineering and product development
facilities in Canada, the United States, Mexico, Germany, Belgium, England,
Japan, France and the Czech Republic.
Conference Call
---------------
Decoma management will hold a conference call to discuss year end results
for 2002 on Wednesday, February 19, 2003 at 9:30 a.m. EST. The dial-in numbers
for the conference call are (416) 640-4127 (local) or 1 (888) 881-4892 for out
of town callers, with call-in required 10 minutes prior to the start of the
conference call. The conference call will be recorded and copies of the
recording will be made available by request. The conference call will also be
available by live webcast at http://www.newswire.ca/webcast and will be available for
a period of 90 days.
Readers are asked to refer to the Management's Discussion and Analysis of
Results of Operations and Financial Position ("MD&A") attached to this release
for a more detailed discussion of the fourth quarter and full year 2002
results.
DECOMA INTERNATIONAL INC.
Consolidated Balance Sheets
(Unaudited)
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-------------------------------------------------------------------------
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As at As at
December 31, December 31,
(U.S. dollars in thousands) 2002 2001
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ASSETS
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Current assets:
Cash and cash equivalents $ 82,059 $ 94,271
Accounts receivable 306,870 270,961
Inventories 160,091 187,014
Prepaid expenses and other 15,902 16,568
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564,922 568,814
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Investments 17,382 16,909
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Fixed assets, net 525,463 491,774
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Goodwill, net (note 3) 62,008 71,516
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Future tax assets 6,015 9,942
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Other assets 16,745 10,204
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$1,192,535 $1,169,159
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Bank indebtedness (note 9(b)) $ 55,021 $ 159,959
Accounts payable 187,656 178,162
Accrued salaries and wages 59,715 42,983
Other accrued liabilities 54,104 38,896
Income taxes payable 13,336 9,734
Long-term debt due within one year 6,918 9,566
Debt due to Magna within one year (note 9(c)) 103,536 76,008
Convertible Series Preferred Shares,
held by Magna (note 9(a)) 95,639 -
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575,925 515,308
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Long-term debt 9,677 17,942
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Long-term debt due to Magna (note 9(c)) 75,094 88,524
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Convertible Series Preferred Shares,
held by Magna (note 9(a)) 116,140 199,956
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Other long-term liabilities 4,837 4,287
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Future tax liabilities 48,114 46,036
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Shareholders' equity:
Convertible Series Preferred Shares (note 8) 18,765 26,071
Class A Subordinate Voting Shares (note 8) 172,488 167,825
Class B Shares (note 8) 30,594 30,594
Retained earnings (note 3) 111,450 49,768
Currency translation adjustment 29,451 22,848
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362,748 297,106
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$1,192,535 $1,169,159
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See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Income and Retained Earnings
(Unaudited)
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Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
-------------------------------------------------------------------------
(U.S. dollars, in thousands 2002 2001 2002 2001
except share and per (restated - (restated -
share figures) see note 3) see note 3)
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Sales $ 528,188 $ 466,379 $2,056,673 $1,815,869
-------------------------------------------------------------------------
Cost of goods sold 420,110 368,749 1,633,225 1,450,360
Depreciation and
amortization 19,846 21,303 78,284 81,360
Selling, general and
administrative (note 4) 39,793 32,793 137,859 115,722
Affiliation and
social fees (note 4) 5,738 7,092 25,311 27,110
Other charge (note 3) - - 8,301 -
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Operating income 42,701 36,442 173,693 141,317
Equity (income) loss (47) 59 (521) (15)
Interest expense, net 2,510 3,991 11,984 19,095
Amortization of discount
on Convertible Series
Preferred Shares 1,938 2,130 8,351 9,276
Other income (note 10) (495) (2,780) (4,369) (2,780)
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Income before income taxes
and minority interest 38,795 33,042 158,248 115,741
Income taxes 15,700 13,218 65,223 46,222
Minority interest - - 843
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Net income $ 23,095 $ 19,824 $ 93,025 $ 68,676
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Financing charges on
Convertible Series
Preferred Shares and
Subordinated Debentures,
net of taxes $ (1,297) $ (1,454) $ (4,792) $ (6,474)
Loss on retirement of
Subordinated Debenture,
net of taxes (note 10) - (1,717) - (1,717)
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Net income attributable
to Class A Subordinate
Voting and Class B Shares 21,798 16,653 88,233 60,485
Retained earnings,
beginning of period 93,736 36,493 49,768 -
Dividends on Class A
Subordinate Voting
and Class B Shares (4,084) (3,378) (14,247) (10,873)
Cumulative adjustment for
change in accounting
policy for foreign currency
translation (note 3) - - - 156
Adjustment for change in
accounting policy for
goodwill (note 3) - - (12,304) -
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Retained earnings,
end of period $ 111,450 $ 49,768 $ 111,450 $ 49,768
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Earnings per Class A
Subordinate Voting
or Class B Share
Basic $ 0.32 $ 0.25 $ 1.30 $ 1.00
Diluted $ 0.25 $ 0.20 $ 1.03 $ 0.81
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Average number of Class
A Subordinate Voting
and Class B Shares
outstanding (in millions)
Basic 68.1 67.6 67.8 60.5
Diluted 98.3 97.8 98.3 90.6
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See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
-------------------------------------------------------------------------
2002 2001 2002 2001
(restated - (restated -
(U.S. dollars, in thousands) see note 3) see note 3)
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Cash provided from (used for):
OPERATING ACTIVITIES
Net income $ 23,095 $ 19,824 $ 93,025 $ 68,676
Items not involving
current cash flows 21,576 18,903 95,557 92,034
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44,671 38,727 188,582 160,710
Changes in non-cash
working capital 46,470 18,463 50,011 (920)
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91,141 57,190 238,593 159,790
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INVESTING ACTIVITIES
Fixed asset additions (49,564) (19,510) (99,940) (68,472)
Business acquisitions
(note 12) - - - (20,051)
Less remaining purchase
price payable - (4,462) (2,584) 5,187
Increase in investments
and other assets (5,512) (3,066) (9,708) (6,251)
Proceeds from disposition
of fixed and other assets 1,353 45 1,578 1,492
Proceeds from disposition
of operating division, net
(note 10) - - 5,736 -
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(53,723) (26,993) (104,918) (88,095)
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FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness (34,967) 88,707 (110,339) 80,774
Repayments of long term debt (361) (3,821) (10,844) (14,770)
Repayments of debt
due to Magna - (90) (7,836) (85,435)
Repayments of debenture
interest obligation - (10,129) - (20,762)
Repayments of Subordinated
Debentures - (48,428) - (74,252)
Issuances of Class A
Subordinate Voting Shares,
net (note 8) - 145 4,663 111,346
Dividends on Convertible
Series Preferred Shares (3,022) (2,982) (12,098) (11,085)
Dividends on Class A
Subordinate Voting
and Class B Shares (4,084) (3,378) (14,247) (12,599)
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(42,434) 20,024 (150,701) (26,783)
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Effect of exchange rate
changes on cash and
cash equivalents 3,078 (664) 4,814 (682)
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Net increase (decrease) in
cash and cash equivalents
during the period (1,938) 49,557 (12,212) 44,230
Cash and cash equivalents,
beginning of period 83,997 44,714 94,271 50,041
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Cash and cash equivalents,
end of period $ 82,059 $ 94,271 $ 82,059 $ 94,271
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See accompanying notes
DECOMA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
Three and twelve month periods ended December 31, 2002 and 2001
(Unaudited)
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1. The Company
Decoma International Inc. ("Decoma" or the "Company") is a full
service supplier of exterior vehicle appearance systems for the
world's automotive industry. Decoma designs, engineers and
manufactures automotive exterior components and systems which include
fascias (bumpers), front and rear end modules, plastic body panels,
roof modules, exterior trim components, sealing and greenhouse
systems and lighting components for cars and light trucks (including
sport utility vehicles and mini vans).
2. Basis of Presentation
The unaudited interim consolidated financial statements of Decoma
have been prepared in U.S. dollars in accordance with Canadian
generally accepted accounting principles ("GAAP"), except that
certain disclosures required for annual financial statements have not
been included. Accordingly, the unaudited interim consolidated
financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended
December 31, 2001 (the Company's "annual financial statements") which
were included in the Company's annual report to shareholders for the
year then ended.
The unaudited interim consolidated financial statements have been
prepared on a basis that is consistent with the accounting policies
set out in the Company's annual financial statements, except as
described in note 3.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring items, necessary to present fairly the financial
position of the Company as at December 31, 2002 and the results of
its operations and cash flows for the three and twelve month periods
ended December 31, 2002 and 2001.
3. Accounting Policy Changes
Goodwill and Other Intangible Assets
In September 2001, The Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 1581, "Business Combinations" ("CICA
1581"), and Handbook Section 3062, "Goodwill and Other Intangible
Assets" ("CICA 3062").
CICA 1581 requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of
accounting. In addition, CICA 1581 provides new criteria to determine
when acquired intangible assets should be recognized separately from
goodwill.
CICA 3062 requires the application of the non-amortization and
impairment rules for existing goodwill and intangible assets that
meet the criteria for indefinite life. In accordance with CICA 3062,
effective January 1, 2002, the Company has applied the
recommendations contained therein prospectively, without restatement
of any comparable periods.
Upon adoption of the recommendations, the Company ceased recording
amortization of existing goodwill. The Company does not have any
intangible assets meeting the non-amortization criteria of CICA 3062.
In accordance with CICA 3062, the Company has provided the following
information related to the impact of the non-amortization method for
goodwill:
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Three Month Twelve Month
Period Ended Period Ended
December 31, December 31,
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(U.S. dollars, in thousands,
except per share figures) 2001 2001
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Net income, as reported $ 19,824 $ 68,676
Restatement to eliminate goodwill
amortization 1,013 4,192
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Adjusted net income $ 20,837 $ 72,868
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Adjusted earnings per Class A Subordinate
Voting or Class B Share
Basic $ 0.26 $ 1.07
Diluted $ 0.21 $ 0.85
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Prior to the current standard coming into effect, goodwill impairment
was assessed based on the estimated future undiscounted cash flows
for the business to which the goodwill relates. Under CICA 3062,
goodwill impairment is assessed based on a comparison of the fair
value of a reporting unit to the underlying carrying value of the
reporting unit's net assets, including goodwill. Under CICA 3062,
upon initial adoption of the goodwill valuation standards, any
write-down of goodwill that is a result of an identified impairment
is charged to opening retained earnings at January 1, 2002.
Thereafter, goodwill must be assessed for impairment on an annual
basis and any required write-down would be charged against earnings.
As required by CICA 3062, the Company completed its initial review of
goodwill impairment in June of 2002. Based on this review, the
Company recorded a write-down of $12.3 million related to its United
Kingdom reporting unit. This write-down was charged against
January 1, 2002 opening retained earnings.
As part of its assessment of goodwill impairment, the Company also
reviewed the recoverability of deferred preproduction expenditures at
its Merplas United Kingdom facility. As a result of this review,
$8.3 million of deferred preproduction expenditures were written off
as a charge against income in the second quarter of 2002.
The Company reassessed goodwill for impairment at the end of 2002.
This assessment did not result in any further write-downs.
Foreign Currency Translation
In December 2001, the CICA amended Handbook Section 1650, "Foreign
Currency Translation" ("CICA 1650"). Under CICA 1650, unrealized
translation gains and losses arising on long-term monetary
liabilities denominated in a foreign currency are no longer deferred
and amortized over the period to maturity. Instead, such gains and
losses are recognized in income as incurred.
The Company adopted the amendments to CICA 1650 effective
January 1, 2002 with retroactive restatement to January 1, 2001. As a
result of applying the amendments to CICA 1650, the Company increased
opening retained earnings as at January 1, 2001 by $0.2 million.
For the three month period ended December 31, 2001, other income was
increased by $0.3 million, income taxes were increased by
$0.1 million, net income was increased by $0.2 million, basic
earnings per share was increased by $0.01, diluted earnings per share
were unchanged and items not involving current cash flows were
reduced by $0.2 million.
For the twelve month period ended December 31, 2001, selling, general
and administrative expenses were increased by $0.6 million, other
income was increased by $0.3 million, income taxes were reduced by
$0.1 million, net income was reduced by $0.2 million, basic and
diluted earnings per share were unchanged and items not involving
current cash flows were increased by $0.2 million.
Selling, general and administrative expenses ("SG&A") are net of
earnings (losses) resulting from foreign exchange of:
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Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
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(U.S. dollars in thousands) 2002 2001 2002 2001
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Foreign exchange income
(loss) $ 475 $ (20) $ 494 $ 526
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Stock-Based Compensation
In November 2001, the CICA issued Handbook Section 3870, "Stock-Based
Compensation and Other Stock-Based Payments" ("CICA 3870"). CICA 3870
requires that all stock-based awards granted to non-employees must be
accounted for at fair value. The new standard also encourages, but
does not require, the use of the fair value method for stock-based
compensation paid to employees and to directors, in their capacity as
a director, that requires settlement in stock. For all employee and
director option plans not accounted for at fair value, pro forma
earnings disclosure showing the impact of fair value accounting is
required. The new standard only applies to stock options granted
after January 1, 2002.
The Company's current stock option plan requires its employees and
directors to pay the option exercise price in order to obtain stock.
The Company has elected to continue accounting for employee stock
options using the intrinsic value method with pro forma earnings
disclosure showing the impact of stock options on earnings had the
Company accounted for all employee and director stock options at fair
value. The Company has elected to provide pro forma disclosures based
on all options granted rather than only for those options granted
after January 1, 2002 (see note 8). The adoption of CICA 3870 had no
effect on the Company's reported earnings for the three and twelve
month periods ended December 31, 2002.
4. Affiliation and Social Fees
The Company is party to an affiliation agreement with Magna
International Inc. ("Magna") that provides for the payment by Decoma
of an affiliation fee.
On June 25, 2002, the Company entered into an agreement with Magna to
amend the terms of its existing affiliation agreement. The amended
agreement, which became effective August 1, 2002, provides for a term
of nine years and five months, expiring on December 31, 2011, and
thereafter is renewable on a year to year basis at the parties'
option.
Affiliation fees payable under the amended agreement were reduced to
1% of Decoma's consolidated net sales (as defined in the agreement)
from the 1.5% that previously applied. In addition, the amended
agreement provides for a fee holiday on 100% of consolidated net
sales derived from future business acquisitions in the calendar year
of the acquisition and 50% of consolidated net sales derived from
future business acquisitions in the first calendar year following the
year of acquisition. The amended agreement also provided Decoma with
a credit of 0.25% of Decoma's consolidated net sales for the period
from January 1, 2002 to July 31, 2002 and a credit equal to 1.5% of
2001 consolidated net sales derived from the 2001 acquisition of
Autosystems and 50% of 1.25% of January 1, 2002 to July 31, 2002
consolidated net sales derived from Autosystems.
The Company also pays Magna a social fee based on a specified
percentage of consolidated pre-tax profits. Such fee represents a
contribution to social and charitable programs coordinated by Magna
on behalf of Magna and its affiliated companies, including Decoma.
Decoma's corporate constitution specifies that the Company will
allocate a maximum of two percent of its profit before tax to support
social and charitable activities.
In addition to affiliation and social fees payable to Magna, the
Company pays Magna a negotiated amount for certain management and
administrative services. The cost of management and administrative
services provided by Magna and included in SG&A totalled $0.9 million
and $3.6 million in the three and twelve month periods ended
December 31, 2002, respectively ($0.9 million and $3.5 million in the
three and twelve periods ended December 31, 2001, respectively).
5. Cyclicality of Operations
Substantially all revenue is derived from sales to the North American
and European facilities of the major automobile manufacturers. The
Company's operations are exposed to the cyclicality inherent in the
automotive industry and to changes in the economic and competitive
environments in which the Company operates. The Company is dependent
on continued relationships with the major automobile manufacturers.
6. Use of Estimates
The preparation of the unaudited interim consolidated financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the
unaudited interim consolidated financial statements and accompanying
notes. Management believes that the estimates utilized in preparing
its unaudited interim consolidated financial statements are
reasonable and prudent; however, actual results could differ from
these estimates.
7. Contingencies
In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers,
suppliers and former employees and for environmental remediation
costs. Management believes that adequate provisions have been
recorded in the accounts where required. Although it is not possible
to estimate the extent of potential costs and losses, if any,
management believes, but can provide no assurance, that the ultimate
resolution of such contingencies would not have a material adverse
effect on the financial position and results of operations of the
Company.
8. Capital Stock
Class and Series of Outstanding Securities
For details concerning the nature of the Company's securities, please
refer to note 11 "Convertible Series Preferred Shares" and note 12
"Capital Stock" of the Company's annual financial statements.
The following table summarizes the outstanding share capital of the
Company:
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Authorized Issued
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Convertible Series Preferred Shares
(Convertible into Class A Subordinate
Voting Shares) 3,500,000 3,500,000
Preferred Shares, issuable in series Unlimited -
Class A Subordinate Voting Shares Unlimited 36,154,299
Class B Shares
(Convertible into Class A Subordinate
Voting Shares) Unlimited 31,909,091
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During the twelve month period ended December 31, 2002, Class A
Subordinate Voting Shares increased by $0.1 million related to 16,000
shares issued as a result of the exercise of stock options and by
$4.6 million related to 451,400 Class A Subordinate Voting Shares
issued to the Decoma employee deferred profit sharing program.
Incentive Stock Options
Information concerning the Company's Incentive Stock Option Plan is
included in note 12 "Capital Stock" of the Company's annual financial
statements. The following is a continuity schedule of options
outstanding:
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Weighted Number of
Average Options
Number Exercise Price Exercisable
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Outstanding at
December 31, 2001 1,796,000 Cdn. $ 12.02 1,089,000
Granted 435,000 Cdn. $ 17.53
Exercised (16,000) Cdn. $ 10.59 (16,000)
Cancelled (20,000) Cdn. $ 11.24 (4,000)
Vested 375,000
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Outstanding at
December 31, 2002 2,195,000 Cdn. $ 13.13 1,444,000
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The maximum number of shares reserved to be issued for stock options
is 4,100,000 Class A Subordinate Voting Shares. The number of
reserved but unoptioned shares at December 31, 2002 is 1,853,750. The
total number of shares issued from exercised stock options, from the
inception date of the plan, is 51,250.
The fair value of stock options is estimated at the grant date using
the Black-Scholes option pricing model using the following weighted
average assumptions for stock options issued in each period indicated
(no stock options were issued during the three month period ended
December 31, 2002):
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Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
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2002 2001 2002 2001
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Risk free interest rate N/A 2.5% 2.7% 3.1%
Expected dividend yield N/A 1.8% 1.9% 1.8%
Expected volatility N/A 28% 37% 28%
Expected life of options
(years) N/A 6 years 5 years 6 years
---------------------------------------------------------------------
---------------------------------------------------------------------
The Black-Scholes option valuation model, as well as other currently
accepted option valuation models, was developed for use in estimating
the fair value of freely tradable options which are fully
transferable and have no vesting restrictions. In addition, this
model requires the input of highly subjective assumptions, including
future stock price volatility and expected time until exercise.
Because the Company's outstanding options have characteristics which
are significantly different from those of traded options, and because
changes in any of the assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of
its stock options.
However, for purposes of pro forma disclosures, the Company's net
income attributable to Class A Subordinate Voting and Class B Shares,
based on the fair value of all stock options at the grant date, would
have been:
---------------------------------------------------------------------
Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
---------------------------------------------------------------------
(U.S. dollars, in thousands
except per share figures) 2002 2001 2002 2001
---------------------------------------------------------------------
Net income attributable to
Class A Subordinate Voting
and Class B Shares $21,798 $16,653 $88,233 $60,485
Pro forma adjustments for
the fair value of stock
option grants (203) (321) (1,019) (1,199)
---------------------------------------------------------------------
Pro forma net income
attributable to Class A
Subordinate Voting and
Class B Shares $21,595 $16,332 $87,214 $59,286
---------------------------------------------------------------------
---------------------------------------------------------------------
Pro forma earnings per
Class A Subordinate
Voting or Class B Share
Basic $ 0.32 $ 0.24 $ 1.29 $ 0.98
Diluted $ 0.25 $ 0.20 $ 1.02 $ 0.80
---------------------------------------------------------------------
---------------------------------------------------------------------
Maximum Shares
The following table presents the maximum number of shares that would
be outstanding if all of the outstanding options and Convertible
Series Preferred Shares issued and outstanding as at December 31,
2002 were exercised or converted:
---------------------------------------------------------------------
Number of Shares
---------------------------------------------------------------------
Class A Subordinate Voting Shares outstanding
at December 31, 2002 36,154,299
Class B Shares outstanding at December 31, 2002 31,909,091
Options to purchase Class A Subordinate Voting Shares 2,195,000
Convertible Series Preferred Shares,
convertible at Cdn. $10.07 per share 14,895,729
Convertible Series Preferred Shares,
convertible at Cdn. $13.20 per share 15,151,516
---------------------------------------------------------------------
100,305,635
---------------------------------------------------------------------
---------------------------------------------------------------------
In addition, the Company has reserved 548,600 Class A Subordinate
Voting Shares for future issuances to the Decoma employee deferred
profit sharing plan.
9. Debt
(a) Convertible Series Preferred Shares
The liability amounts for the Series 1, 2 and 3 Convertible Series
Preferred Shares are presented as current liabilities. The Series 1,
2 and 3 Convertible Series Preferred Shares are retractable by Magna
at their aggregate face value of Cdn. $150 million after
June 30, 2003. These shares are also convertible by Magna into the
Company's Class A Subordinate Voting Shares at a fixed conversion
price of Cdn. $10.07 per Class A Subordinate Voting Share. The
Company's Class A Subordinate Voting Shares closed at Cdn. $13.13 on
January 31, 2003 and have traded between Cdn. $10.56 and Cdn. $21.10
over the 52 week period ended January 31, 2003.
The liability amounts for the Series 4 and 5 Convertible Series
Preferred Shares are presented as long-term liabilities as these are
not retractable by Magna before January 1, 2004 and January 1, 2005,
respectively. These shares are also convertible by Magna into the
Company's Class A Subordinate Voting Shares at a fixed conversion
price of Cdn. $13.20 per Class A Subordinate Voting Share.
The Series 1, 2 and 3 Convertible Series Preferred Shares are
redeemable by the Company after July 31, 2003 and the Series 4 and 5
Convertible Series Preferred Shares are redeemable by the Company
after December 31, 2005.
(b) Credit Facility
At December 31, 2002 the Company had lines of credit totaling
$328.7 million. Of this amount, $300 million is represented by an
extendible, revolving credit facility that expires on May 29, 2003,
at which time the Company may request, subject to lender approval,
further revolving 364-day extensions. The unused and available lines
of credit at December 31, 2002 were approximately $260.0 million.
(c) Amounts Due to Magna
The Company's debt due to Magna consists of the following:
---------------------------------------------------------------------
December 31, December 31,
(U.S. dollars in thousands) 2002 2001
---------------------------------------------------------------------
Debt denominated in Canadian dollars(i) $ 38,256 $ 37,604
Debt denominated in Euros and
British Pounds(ii) 139,324 126,137
Lease obligation denominated in Euros 1,050 791
---------------------------------------------------------------------
178,630 164,532
Less due within one year 103,536 76,008
---------------------------------------------------------------------
$ 75,094 $ 88,524
---------------------------------------------------------------------
---------------------------------------------------------------------
Notes:
(i) The debt denominated in Canadian dollars arose on closing
of the Global Exteriors Transaction. This debt initially
bore interest at 7.5% and was repayable in 2001. In
addition to the maturity date, the interest rate on this
debt was subsequently renegotiated to 4.85% effective
September 4, 2001, 3.10% effective January 1, 2002, 3.60%
effective April 1, 2002, 3.83% effective July 1, 2002,
3.90% effective October 1, 2002 and 3.85% effective
January 1, 2003. The maturity date of this Cdn. $60 million
debt has been extended to March 31, 2003.
(ii) The debt denominated in Euros and British Pounds arose on
closing of the Global Exteriors Transaction. All debt
denominated in British Pounds was repaid in the period
ended December 31, 2002. The remaining debt initially bore
interest at 7.0% to 7.5% and was repayable over the period
to December 31, 2004 with the first tranche of the
principal due October 1, 2002. In addition to the maturity
date, the interest rate on the first tranche of the
principal was renegotiated to 4.29% effective
October 2, 2002 and 3.86% effective January 2, 2003. Of the
debt outstanding at December 31, 2002, $26.6 million is due
April 1, 2003, $37.6 million is due October 1, 2003 and
$75.1 million is due December 31, 2004.
10. Other Income
(a) On March 11, 2002, the Company completed the divestiture of one
of its non-core North American divisions. The division was engaged in
the coating of automotive parts. The Company recorded other income of
$3.9 million related to this transaction, representing the excess of
sale proceeds over the carrying value of the fixed and working
capital assets of this division and direct costs related to the
transaction. Income taxes includes an expense of $1.0 million related
to this transaction.
(b) During 2002, the Company permanently repatriated Euro 10 million
from its continental Europe operations. This repatriation gave rise
to the recognition of a pro rata amount of the Company's cumulative
translation adjustment account. This amount, totalling $0.5 million,
has been included in other income and is not subject to tax.
(c) On October 16, 2000, Decoma issued $32 million and $58 million of
9.5% unsecured Subordinated Debentures at par, as partial
consideration for the remaining interest in the Conix Group. These
Subordinated Debentures were repaid with cash in June and November of
2001, respectively.
The November 2001 repayment of the $58 million Subordinated Debenture
gave rise to a foreign exchange loss. There were no substantial
foreign exchange losses on the June 2001 repayment of the $32 million
Subordinated Debenture. Decoma funded the repayment of the
$58 million Subordinated Debenture in part by $25 million that was
permanently repatriated from the Company's United States operations.
The $25 million repatriation and $58 million repayment transactions
gave rise to the following income statement amounts during the three
and twelve month periods ended December 31, 2001:
(restated -
(U.S. dollars in thousands) see note 3)
---------------------------------------------------------------------
Recognition of pro rata amount of cumulative translation
adjustment on repatriation presented as other income $ 2,780
---------------------------------------------------------------------
Income before income taxes and minority interest 2,780
Income tax recovery -
---------------------------------------------------------------------
Net income 2,780
Foreign exchange loss on retirement of Subordinated
Debenture, net of taxes (1,717)
---------------------------------------------------------------------
Net income attributable to Class A Subordinate Voting
and Class B Shares $ 1,063
---------------------------------------------------------------------
---------------------------------------------------------------------
11. Segmented Information
The Company operates in one industry segment, the automotive
exteriors business. As at December 31, 2002, the Company had 23
manufacturing facilities in North America and 11 in Europe. In
addition, the Company had 7 product development and engineering
centres.
The Company's European divisions are managed separately from the
Company's North American divisions as a result of differences in
customer mix and business environment. The Company's internal
financial reports, which are reviewed by executive management
including the Company's President and Chief Executive Officer,
segment divisional results between North America and Europe. This
segmentation recognizes the different geographic business risks faced
by the Company's North American and European divisions, including
vehicle production volumes in North America and Europe, foreign
currency exposure, differences in OEM customer mix, the level of
customer outsourcing and the nature of products and systems
outsourced.
The accounting policies of each segment are consistent with those
used in the preparation of the unaudited interim consolidated
financial statements. Inter-segment sales and transfers are accounted
for at fair market value. The following tables show certain
information with respect to segment disclosures.
---------------------------------------------------------------------
Three Month Period Ended December 31, 2002
---------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $ 368,220 $ 160,964 $ - $ 529,184
Intersegment sales (308) (688) - (996)
---------------------------------------------------------------------
Sales to external
customers $ 367,912 $ 160,276 $ - $ 528,188
---------------------------------------------------------------------
Depreciation and
amortization $ 14,445 $ 5,401 $ - $ 19,846
---------------------------------------------------------------------
Operating income
(loss) $ 55,652 $ (10,355) $ (2,596) $ 42,701
---------------------------------------------------------------------
Equity income $ (47) $ - $ - $ (47)
---------------------------------------------------------------------
Interest expense
(income), net $ 8,935 $ 4,461 $ (10,886) $ 2,510
---------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 1,938 $ 1,938
---------------------------------------------------------------------
Other income $ - $ - $ (495) $ (495)
---------------------------------------------------------------------
Fixed assets, net $ 358,675 $ 166,788 $ - $ 525,463
---------------------------------------------------------------------
Fixed asset additions $ 23,828 $ 25,736 $ - $ 49,564
---------------------------------------------------------------------
Goodwill, net $ 44,728 $ 17,280 $ - $ 62,008
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Three Month Period Ended December 31, 2001
---------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $ 333,775 $ 133,777 $ - $ 467,552
Intersegment sales (930) (243) $ - (1,173)
---------------------------------------------------------------------
Sales to external
customers $ 332,845 $ 133,534 $ - $ 466,379
---------------------------------------------------------------------
Depreciation and
amortization $ 14,299 $ 7,004 $ - $ 21,303
---------------------------------------------------------------------
Operating income
(loss) $ 42,323 $ (2,072) $ (3,809) $ 36,442
---------------------------------------------------------------------
Equity loss $ 59 $ - $ - $ 59
---------------------------------------------------------------------
Interest expense
(income), net $ 4,658 $ 4,932 $ (5,599) $ 3,991
---------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 2,130 $ 2,130
---------------------------------------------------------------------
Other income $ - $ - $ (2,780) $ (2,780)
---------------------------------------------------------------------
Fixed assets, net $ 356,989 $ 134,785 $ - $ 491,774
---------------------------------------------------------------------
Fixed asset additions $ 8,849 $ 10,661 $ - $ 19,510
---------------------------------------------------------------------
Goodwill, net $ 44,298 $ 27,218 $ - $ 71,516
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Twelve Month Period Ended December 31, 2002
---------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $1,486,975 $ 572,613 $ - $2,059,588
Intersegment sales (1,588) (1,327) $ - (2,915)
---------------------------------------------------------------------
Sales to external
customers $1,485,387 $ 571,286 $ - $2,056,673
---------------------------------------------------------------------
Depreciation and
amortization $ 55,454 $ 22,830 $ - $ 78,284
---------------------------------------------------------------------
Operating income
(loss) $ 204,431 $ (22,595) $ (8,143) $ 173,693
---------------------------------------------------------------------
Equity income $ (521) $ - $ - $ (521)
---------------------------------------------------------------------
Interest expense
(income), net $ 27,196 $ 19,826 $ (35,038) $ 11,984
---------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 8,351 $ 8,351
---------------------------------------------------------------------
Other income $ (3,874) $ - $ (495) $ (4,369)
---------------------------------------------------------------------
Fixed assets, net $ 358,675 $ 166,788 $ - $ 525,463
---------------------------------------------------------------------
Fixed asset additions $ 54,505 $ 45,435 $ - $ 99,940
---------------------------------------------------------------------
Goodwill, net $ 44,728 $ 17,280 $ - $ 62,008
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Twelve Month Period Ended December 31, 2001
---------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
---------------------------------------------------------------------
Sales $1,286,108 $ 534,578 $ - $1,820,686
Intersegment sales (4,501) (316) $ - (4,817)
---------------------------------------------------------------------
Sales to external
customers $1,281,607 $ 534,262 $ - $1,815,869
---------------------------------------------------------------------
Depreciation and
amortization $ 57,278 $ 24,082 $ - $ 81,360
---------------------------------------------------------------------
Operating income
(loss) $ 146,556 $ 2,404 $ (7,643) $ 141,317
---------------------------------------------------------------------
Equity income $ (15) $ - $ - $ (15)
---------------------------------------------------------------------
Interest expense
(income), net $ 23,652 $ 18,825 $ (23,382) $ 19,095
---------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 9,276 $ 9,276
---------------------------------------------------------------------
Other income $ - $ - $ (2,780) $ (2,780)
---------------------------------------------------------------------
Fixed assets, net $ 356,989 $ 134,785 $ - $ 491,774
---------------------------------------------------------------------
Fixed asset additions $ 44,670 $ 23,802 $ - $ 68,472
---------------------------------------------------------------------
Goodwill, net $ 44,298 $ 27,218 $ - $ 71,516
---------------------------------------------------------------------
---------------------------------------------------------------------
12. Business Acquisition
Decomex
In May 2001, the Company acquired the remaining minority interest in
Decomex Inc. ("Decomex") from Corporacion Activa, S.A. de C.V.
Decomex operates fascia moulding and finishing operations in Mexico.
Total consideration paid in connection with the acquisition amounted
to $7.8 million, which gave rise to goodwill of $0.1 million. The
purchase price was satisfied with cash of $2.6 million and by the
issuance of $5.2 million of prime rate promissory notes, denominated
in Canadian dollars, maturing $2.6 million on May 31, 2002 and
$2.6 million on May 31, 2003. Interest on the promissory notes is
payable in Canadian dollars on a quarterly basis.
The acquisition has been accounted for by the purchase method in
these unaudited interim consolidated financial statements from the
date of acquisition.
Autosystems
On September 28, 2001, the Company acquired the lighting components
manufacturing business and related fixed and working capital assets
of Autosystems Manufacturing Inc. ("Autosystems") from the court
appointed receiver and monitor of Autosystems.
Autosystems is located in Ontario and its principal customers include
General Motors Corporation and Visteon Corporation. Total
consideration paid in connection with the acquisition amounted to
$12.3 million. The acquisition has been accounted for by the purchase
method in these consolidated financial statements from the date of
acquisition.
The net effect of the transaction on the Company's consolidated
balance sheet was as follows:
(U.S. dollars in thousands)
---------------------------------------------------------------------
Non-cash working capital $ 2,200
Fixed assets 10,070
---------------------------------------------------------------------
Net assets acquired $ 12,270
---------------------------------------------------------------------
---------------------------------------------------------------------
DECOMA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations
and Financial Position
Three and twelve month periods ended December 31, 2002 and 2001
-------------------------------------------------------------------------
All amounts in this Management's Discussion and Analysis of Results of
Operations and Financial Position ("MD&A") are in U.S. dollars unless
otherwise noted. This MD&A should be read in conjunction with the Company's
unaudited interim consolidated financial statements for the three and twelve
month periods ended December 31, 2002, included elsewhere herein, and the
Company's consolidated financial statements and MD&A for the year ended
December 31, 2001, each included in the Company's Annual Report to
Shareholders for 2001.
OVERVIEW
Total sales grew to a record of $2,056.7 million in 2002, a 13% increase
over 2001. Diluted earnings per share was also a record of $1.03 for 2002, an
improvement of 27% over diluted earnings per share of $0.81 for 2001.
The Company's sales and earnings growth was driven by strong performance
in North America. The ramp up of programs that launched in 2001, the
Autosystems lighting acquisition, takeover programs that launched at the
beginning of 2002, favourable production volume program mix and a year with
relatively few major new program launches and associated launch costs all
contributed to record sales and operating income performance in North America.
In Europe, production sales increased as a result of the ramp up of the
BMW Mini and Jaguar X400 programs both in the United Kingdom and as a result
of the translation of Euro and British Pound sales into U.S. dollars due to a
significant strengthening of these currencies against the U.S. dollar.
However, combined production sales in Germany and Belgium, measured in Euros,
declined as a result of lower vehicle production volumes including lower
volumes on certain high content programs. This sales decline, in conjunction
with costs incurred to support significant future European booked sales
growth, contributed to a decline in European, excluding Merplas, operating
income. Merplas, on the other hand, reduced its operating losses before the
write-off of deferred preproduction expenditures in 2002 (see the "Goodwill
and Deferred Preproduction Expenditures" section of this MD&A for further
discussion).
Years Ended December 31, 2002 and 2001
Sales
-------------------------------------------------------------------------
Years Ended
December 31,
---------------------------
%
2002 2001 Change
-------------------------------------------------------------------------
Light Vehicle Production Volumes (in millions)
North America 16.3 15.5 5%
Western Europe 16.3 16.5 (1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle (U.S. dollars)
North America $85 $76 12%
Europe 30 29 3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales (U.S. dollars in millions)
North America $1,391.5 $1,180.4 18%
Europe
Excluding Merplas 457.1 445.8 3%
Merplas 34.7 28.4 22%
Total Europe 491.8 474.2 4%
Global Tooling and Other Sales 173.4 161.3 8%
-------------------------------------------------------------------------
Total Sales $2,056.7 $1,815.9 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America North American production sales grew by 18% to $1,391.5
million in 2002 from $1,180.4 million in 2001. This increase was driven by
growth in average North American content per vehicle. North American content
per vehicle grew to approximately $85 compared to $76 for 2002 and 2001,
respectively. The increase in content was driven by the Autosystems lighting
acquisition on September 28, 2001 which added approximately $4 to North
American content per vehicle in 2002; new takeover business including content
on the General Motors 820 C and D (Cadillac Escalade and Denali SUVs), GMT 806
(Escalade EXT) and GMT 800 and 830 (Silverado, Sierra and Suburban) programs;
a full year's sales on programs that launched during 2001 including the Ford
U152 (Explorer), Nissan TK (Altima), General Motors GMX 320 (Cadillac CTS) and
Saturn GMT 315 (Vue) programs; content on programs that launched during 2002
including the DaimlerChrysler KJ (Jeep Liberty) and the Ford U231 (Aviator)
programs; increased content and higher volumes on the GMT 250 (Aztek) and
increased content on the Ford U204 (Escape) programs; and strong volumes on
other high content production programs including the General Motors GMX 210
(Impala) and GMX 230 (Monte Carlo) programs. These increases were partially
offset by lower Mexican production volumes on the GMT 805 (Avalanche) program,
where 2001 volumes were strong as General Motors filled its distribution
channels, and the DaimlerChrysler PT Cruiser program as well as lower
production volumes on the DaimlerChrysler RS (Minivan) program; the
disposition of a non-core North American operating division in the first
quarter of 2002; and the translation of Canadian dollar sales into the
Company's U.S. dollar reporting currency which negatively impacted North
American production sales. The Canadian dollar weakened against the U.S.
dollar by 1% for 2002 compared to 2001.
Increases in North American production sales were also driven by an
increase in vehicle production volumes. Total North American light vehicle
production for 2002 was 16.3 million units representing an increase of 5% from
the 15.5 million vehicles built in 2001.