Magna announces fourth quarter and 2002 fiscal year results
AURORA, ON, Feb. 24 -- Magna International Inc. (TSX: MG.A, MG.B; NYSE: MGA) today reported sales, profits and earnings per share for the fourth quarter and year ended December 31, 2002.
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YEAR ENDED THREE MONTHS ENDED
------------------------ -------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2002 2001 2002 2001
--------- -------------- --------- ---------------
Sales $ 12,971 $ 11,026 $ 3,550 $ 2,829
Net income $ 554 $ 579 (2,3) $ 110 $ 118 (2,3)
Net income from
operations (1) $ 550 $ 521 $ 110 $ 120
Diluted earnings
per share $ 5.82 $ 6.20 (3) $ 1.10 $ 1.28 (3)
Diluted earnings
per share
from operations (1) $ 5.77 $ 5.56 $ 1.10 $ 1.30
Net income and net income from operations, and diluted earnings per share
and diluted earnings per share from operations include the impact of
certain non-cash charges during the fourth quarter of 2002.
In accordance with new recommendations of The Canadian Institute of
Chartered Accountants ("CICA"), in the fourth quarter of 2002 the Company
recorded a $36 million non-cash impairment charge related to goodwill and
fixed assets at certain underperforming European interior and die-casting
operations owned by Intier Automotive Inc. and Tesma International Inc.,
respectively, both of which are publicly traded subsidiaries of the
Company. In addition, Magna Entertainment Corp., also a publicly traded
subsidiary of the Company, recorded an $18 million non-cash impairment
charge related to the writedown of racing licenses and fixed assets at
two racetracks. The impact of these non-cash impairment charges to net
income for the fourth quarter and full year 2002 was $34 million. The
impact to diluted earnings per share for the fourth quarter and full year
2002 was $0.35 and $0.37, respectively.
For more information, see notes 2 and 3 to the Interim Unaudited Fourth
Quarter and 2002 Consolidated Financial Statements attached.
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(1) The Company measures and presents net income from operations and
diluted earnings per share from operations because they are measures
that are widely used by analysts and investors in evaluating the
operating performance of the Company. However, net income from
operations and diluted earnings per share from operations do not have
any standardized meaning under Canadian Generally Accepted Accounting
Principles and are therefore unlikely to be comparable to similar
measures presented by other companies.
Net income from operations and diluted earnings per share from
operations are based on net income and diluted earnings per share as
prepared in accordance with Canadian Generally Accepted Accounting
Principles, with the following adjustments:
YEAR ENDED THREE MONTHS ENDED
------------------------- -------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2002 2001 2002 2001
----------- ----------- ----------- -------------
Net income
as reported $ 554 $ 579 $ 110 $ 118
Exclude:
Other income
(net of related
taxes) (4) (46) - 2
Future income
tax recovery - (12) - -
----------- ----------- ----------- -------------
Net income from
operations $ 550 $ 521 $ 110 $ 120
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----------- ----------- ----------- -------------
Diluted earnings
per share
as reported $ 5.82 $ 6.20 $ 1.10 $ 1.28
Exclude:
Other income
(net of
related taxes) (0.05) (0.51) - 0.02
Future income
tax recovery - (0.13) - -
----------- ----------- ----------- -------------
Diluted earnings
per share
from operations $ 5.77 $ 5.56 $ 1.10 $ 1.30
----------- ----------- ----------- -------------
----------- ----------- ----------- -------------
Diluted earnings per share from operations for the year ended
December 31, 2002 is calculated using 92.0 million shares (2001 -
91.4 million). Diluted earnings per share from operations for the
fourth quarter of 2002 is calculated using 95.8 million shares
(2001 - 90.0 million).
For more information, see notes 4, 5 and 6 to the Interim Unaudited
Fourth Quarter and 2002 Consolidated Financial Statements attached.
(2) Net income has been restated due to an accounting policy change
related to foreign currency translation, as required by the new
recommendations of the CICA. The impact of the new recommendations on
the Company's consolidated statement of income for the twelve month
and three month periods ended December 31, 2001 was to decrease net
income by $1 million and $1 million, respectively. For more
information see note 2 to the Interim Unaudited Fourth Quarter and
2002 Consolidated Financial Statements attached.
(3) In accordance with new recommendations of the CICA, the Company no
longer records amortization expense for goodwill and indefinite life
intangible assets. If goodwill and indefinite life intangible assets
had not been amortized during the year ended December 31, 2001, net
income and diluted earnings per share would have increased by
$19 million and $0.21, respectively. If goodwill and indefinite life
intangible assets had not been amortized during the three months
ended December 31, 2001, net income and diluted earnings per share
would have increased by $5 million and $0.06, respectively. For more
information see notes 2 and 3 to the Interim Unaudited Fourth Quarter
and 2002 Consolidated Financial Statements attached.
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All results are reported in millions of U.S. dollars,
except per share figures.
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YEAR ENDED DECEMBER 31, 2002
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Sales for the twelve months ended December 31, 2002 were $13.0 billion, an increase of 18% over the twelve months ended December 31, 2001. During the year North American light vehicle production increased by 6% and European light vehicle production declined approximately 1%. The higher sales level in 2002 reflects increases over 2001 of 30% in European content per vehicle, 7% in North American content per vehicle, 20% in tooling and other automotive sales and the increased North American light vehicle production.
The Company earned net income from operations(1) for the twelve months ended December 31, 2002 of $550 million, representing an increase of 6% over the twelve months ended December 31, 2001, despite the non-cash impairment charges of $34 million discussed above. Excluding these charges, net income from operations(1) would have been $584 million, an increase of 12% over the twelve months ended December 31, 2001. Net income for the twelve months ended December 31, 2002 was $554 million.
Diluted earnings per share from operations(1) were $5.77 for the twelve months ended December 31, 2002, representing an increase of 4% over the twelve months ended December 31, 2001, despite the non-cash impairment charges of $0.37 discussed above. Excluding these charges, diluted earning per share from operations(1) would have been $6.14, an increase of 10% over the twelve months ended December 31, 2001. Diluted earnings per share for the twelve months ended December 31, 2002 were $5.82.
Cash generated from operations before changes in non-cash working capital for the twelve months ended December 31, 2002 was $1.1 billion. Total investment activities for the twelve months ended December 31, 2002 were $1.2 billion, including $185 million in investments and other assets, $135 million to purchase subsidiaries, and $898 million in fixed assets of which $106 million relates to the purchase of the Eurostar facility from DaimlerChrysler.
THREE MONTHS ENDED DECEMBER 31, 2002 ------------------------------------
The Company posted sales of $3.6 billion for the three months ended December 31, 2002, an increase of 25% over the three months ended December 31, 2001. The higher sales level in the fourth quarter of 2002 reflects increases over the fourth quarter of 2001 of 26% in European content per vehicle, 20% in North American content per vehicle, 35% in tooling and other automotive sales, and increased light vehicle production of 1% in North America and 5% in Europe.
The Company earned net income from operations(1) for the three months ended December 31, 2002 of $110 million, compared to $120 million for the three months ended December 31, 2001. Excluding the non-cash impairment charges of $34 million discussed above, net income from operations(1) would have been $144 million, an increase of 20% over the three months ended December 31, 2001. Net income for the three months ended December 31, 2002 was $110 million.
Diluted earnings per share from operations(1) were $1.10 for the three months ended December 31, 2002, compared to $1.30 for the three months ended December 31, 2001. Excluding the non-cash impairment charges of $0.35 discussed above, diluted earning per share from operations(1) would have been $1.45, an increase of 12% over the three months ended December 31, 2001. Diluted earnings per share for the three months ended December 31, 2002 were $1.10.
Cash generated from operations before changes in non-cash working capital was $294 million for the three months ended December 31, 2002. Total investment activities for the three months ended December 31, 2002 were $534 million, including $305 million in fixed assets, $132 million to purchase subsidiaries and $97 million in investments and other assets.
Commenting on the 2002 fiscal year, Belinda Stronach, Magna's President and Chief Executive Officer stated: "I am pleased with our many achievements during the past year. We continued to post strong financial results, setting a new record for sales and, excluding the non-cash impairment charges, a new record for diluted earnings per share from operations. We took steps to improve our market positions at Magna Steyr with the purchase of the Eurostar facility and in our mirrors group with the acquisition of Donnelly. We also strengthened management at all levels of the organization. Our backlog of business combined with our strong balance sheet positions Magna for continued success in 2003 and beyond."
OTHER MATTERS -------------
The Company also announced that its Board of Directors today declared its regular quarterly dividend with respect to its outstanding Class A Subordinate Voting Shares and Class B Shares for the fiscal quarter ended December 31, 2002. The dividend of U.S. $0.34 per share is payable on March 18, 2003 to shareholders of record on March 7, 2003.
2003 OUTLOOK ------------
The outlook figures below exclude the impact of possible future acquisitions.
For the first quarter of 2003, the Company revised upwards its expectations for North American light vehicle production volumes, from 4.0 million to 4.2 million units, reflecting strong OEM production schedules. Based on this revision, the Company now expects automotive sales for the first quarter of 2003 to be between $3.2 billion and $3.4 billion, and expects diluted earnings per share from operations(1) to be at the high end or to exceed the range of $1.25 to $1.45 previously disclosed in its press release dated January 7, 2003.
For the full year 2003, the Company continues to expect light vehicle production to be approximately 16.0 million units and 16.2 million units, for North America and Europe, respectively. Further, the Company continues to expect full year 2003 automotive sales to be in the range of $13.3 billion and $14.1 billion, and diluted earnings per share from operations(1) to be in the range of $5.90 to $6.40, all as previously described in its press release dated January 7, 2003.
Magna, one of the most diversified automotive suppliers in the world, designs, develops and manufactures automotive systems, assemblies, modules and components, and engineers and assembles complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks in North America, Europe, Mexico, South America and Asia. Magna's products include: interior products, including complete seats, instrument and door panel systems and sound insulation, and closure systems through Intier Automotive Inc.; stamped, hydroformed and welded metal parts and assemblies through Cosma International; exterior and interior mirror, lighting and engineered glass systems, including advanced electronics through Magna Donnelly Corporation; a variety of plastic parts and exterior decorative systems including body panels and fascias through Decoma International Inc.; various engine, transmission, fueling and cooling components through Tesma International Inc.; and a variety of drivetrain components and complete vehicle engineering and assembly through Magna Steyr. Magna's non-automotive activities are conducted through Magna Entertainment Corp.
Magna has approximately 73,000 employees in 199 manufacturing operations and 46 product development and engineering centres in 22 countries.
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Magna will hold a conference call for interested analysts and
shareholders to discuss the fourth quarter results and other
developments on Monday, February 24, 2003 at 6:00 p.m. EST. The number
to use for this call is 1 800-470-5906. Please call in 10 minutes prior
to the conference call. The number for overseas callers is
1-416-641-6704. Magna will also webcast the conference call and will
include presentation slides at www.magna.com. The conference call will
be chaired by Belinda Stronach, President and Chief Executive Officer.
For further information: please contact Vincent Galifi or Louis Tonelli
at (905) 726-7100. For teleconferencing questions, please call
(905) 726-7103.
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This press release may contain "forward-looking statements" within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions and uncertainties which may cause the Company's actual or future results and performance to be materially different from those expressed or implied in these statements. These risks, assumptions and uncertainties include, but are not limited to: global economic conditions causing decreases in production volumes; price reduction pressures; pressure to absorb certain fixed costs; increased warranty, recall and product liability risk; dependence on outsourcing by automobile manufacturers; rapid technological and regulatory change; crude oil and energy prices; dependence on certain vehicle product lines; fluctuations in relative currency values; unionization activity; threat of work stoppages; the competitive nature of the auto parts supply market; program cancellations, delays in launching new programs and delays in constructing new facilities; completion and integration of acquisitions; disruptions caused by terrorism or war; changes in governmental regulations; the impact of environmental regulations; and other factors as set out in the Company's Annual Information Form and annual report on Form 40-F for its financial year ended December 31, 2001 filed with the Canadian securities commissions and the SEC respectively and subsequent public filings. 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.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
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(Unaudited)
(United States dollars in millions, except per share figures)
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Year ended Three months ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2002 2001 2002 2001
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(restated, (restated,
see note 2) see note 2)
Sales:
Automotive $ 12,422 $ 10,507 $ 3,443 $ 2,734
Magna Entertainment Corp. 549 519 107 95
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12,971 11,026 3,550 2,829
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Automotive costs and expenses:
Cost of goods sold 10,273 8,588 2,866 2,247
Depreciation and amortization 422 399 116 103
Selling, general and
administrative 780 687 221 182
Interest expense (income), net (13) 2 (8) (1)
Equity income (23) (16) (6) (3)
Impairment charges (note 3) 36 - 36 -
Magna Entertainment Corp.
costs and expenses 554 496 129 104
Magna Entertainment Corp.
impairment charges (note 3) 18 - 18 -
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Operating income - automotive 947 847 218 206
Operating income (loss) -
Magna Entertainment Corp. (23) 23 (40) (9)
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Operating income 924 870 178 197
Other income (loss) (note 4) 4 46 - (2)
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Income before income taxes
and minority interest 928 916 178 195
Income taxes (note 5) 317 289 67 68
Minority interest 57 48 1 9
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Net income $ 554 $ 579 $ 110 $ 118
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Financing charges on Preferred
Securities and other
paid-in capital $ (26) $ (44) $ (5) $ (9)
Foreign exchange loss on the
redemption of Convertible
Subordinated Debentures (note 6) (11) (10) - -
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Net income available to Class A
Subordinate Voting and
Class B Shareholders 517 525 105 109
Retained earnings, beginning of
period 2,217 1,789 2,498 2,136
Dividends on Class A Subordinate
Voting and Class B Shares (121) (109) (33) (28)
Adjustment for change in
accounting policy related
to goodwill (note 2) (42) - - -
Repurchase of Class A Subordinate
Voting Shares (note 9) (1) - - -
Distribution on transfer of
business to subsidiary (note 7) - 14 - -
Cumulative adjustment for change
in accounting policy related to
foreign currency
translation (note 2) - (2) - -
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Retained earnings, end of period $ 2,570 $ 2,217 $ 2,570 $ 2,217
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Earnings per Class A Subordinate
Voting or Class B Share (note 2):
Basic $ 5.83 $ 6.55 $ 1.10 $ 1.31
Diluted $ 5.82 $ 6.20 $ 1.10 $ 1.28
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Cash dividends paid per
Class A Subordinate Voting
or Class B Share $ 1.36 $ 1.36 $ 0.34 $ 0.34
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Average number of Class A
Subordinate Voting and
Class B Shares outstanding
during the period (in millions):
Basic 88.7 80.1 95.4 83.1
Diluted 92.0 91.4 95.8 90.0
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MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(Unaudited)
(United States dollars in millions)
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Year ended Three months ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2002 2001 2002 2001
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(restated, (restated,
see note 2) see note 2)
Cash provided from (used for):
OPERATING ACTIVITIES
Net income $ 554 $ 579 $ 110 $ 118
Items not involving
current cash flows 590 444 184 128
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1,144 1,023 294 246
Changes in non-cash
working capital 248 (10) 247 179
Increase (decrease)
in deferred revenue 68 16 (1) 1
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1,460 1,029 540 426
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INVESTMENT ACTIVITIES
Automotive fixed asset additions (791) (486) (270) (189)
Magna Entertainment Corp.
fixed asset additions (107) (39) (35) (13)
Purchase of subsidiaries (note 8) (135) (40) (132) (8)
Decrease (increase) in investments (1) (3) 1 3
Increase in other assets (184) (43) (98) (13)
Proceeds from disposition of
investments and other 39 97 15 26
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(1,179) (514) (519) (194)
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FINANCING ACTIVITIES
Net repayments of debt (94) (43) (6) (54)
Redemption of Convertible
Subordinated Debentures (note 6) - (121) - -
Issues of subordinated
debentures by subsidiaries 72 - 72 -
Repayments of debentures' interest
obligations (13) (33) - (2)
Preferred Securities distributions (24) (28) (6) (7)
Redemption of Subordinated
Debentures by subsidiary - (90) - (56)
Issues of Class A Subordinate
Voting Shares 19 27 - 15
Repurchase of Class A Subordinate
Voting Shares (note 9) (2) - - -
Issues of shares by subsidiaries
(note 4) 208 184 - -
Dividends paid to minority
interests (14) (9) (5) (2)
Dividends (119) (109) (33) (28)
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33 (222) 22 (134)
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Effect of exchange rate changes
on cash and cash equivalents 23 (23) 19 (5)
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Net increase in cash and cash
equivalents during the period 337 270 62 93
Cash and cash equivalents,
beginning of period 890 620 1,165 797
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Cash and cash equivalents,
end of period $ 1,227 $ 890 $ 1,227 $ 890
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MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
(United States dollars in millions)
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December December
31, 2002 31, 2001
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(restated,
see note 2)
ASSETS
Current assets:
Cash and cash equivalents $ 1,227 $ 890
Accounts receivable 2,140 1,752
Inventories 918 842
Prepaid expenses and other 84 74
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4,369 3,558
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Investments 114 88
Fixed assets, net 4,415 3,595
Goodwill, net (notes 2, 3) 467 259
Future tax assets 176 114
Other assets (notes 2, 3) 601 287
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$ 10,142 $ 7,901
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness $ 272 $ 308
Accounts payable 2,040 1,435
Accrued salaries and wages 312 228
Other accrued liabilities 199 158
Income taxes payable 62 62
Long-term debt due within one year 51 54
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2,936 2,245
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Deferred revenue 92 16
Long-term debt 366 244
Debentures' interest obligation (note 6) 106 114
Other long-term liabilities 186 85
Future tax liabilities 325 274
Minority interest 710 441
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4,721 3,419
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Shareholders' equity:
Capital stock
Class A Subordinate Voting Shares (notes 6 and 9)
(issued: 94,477,224; December 31, 2001 - 82,244,518) 2,487 1,682
Class B Shares
(convertible into Class A Subordinate Voting Shares)
(issued: 1,096,509; December 31, 2001 - 1,097,009) 1 1
Preferred Securities 277 277
Other paid-in capital (note 6) 64 463
Retained earnings 2,570 2,217
Currency translation adjustment 22 (158)
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5,421 4,482
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$ 10,142 $ 7,901
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MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
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(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions unless
otherwise noted)
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1. Basis of Presentation
The unaudited interim consolidated financial statements have been
prepared in U.S. dollars following the accounting policies as set out
in the 2001 annual consolidated financial statements, except as
described in note 2.
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 2001 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 of the Company at December 31, 2002 and the
results of operations and cash flows for the twelve month and three
month periods ended December 31, 2002 and 2001.
2. Accounting Changes
(a) Impairment of Long-Lived Assets
In December 2002, The Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 3063 "Impairment of Long-lived
Assets" ("CICA 3063"). The Company early adopted these new
recommendations on a prospective basis effective January 1, 2002.
The most significant change under the new recommendations is to
require that impairment losses on long-lived assets be measured
as the amount by which the asset's carrying value exceeds its
fair value; previously, Canadian GAAP required that asset
impairment be measured as the amount by which the asset's
carrying value exceeded the undiscounted future cash flow from
the use of the asset. The new recommendations conform Canadian
GAAP as it applies to impairment of long-lived assets with U.S.
GAAP.
(b) Foreign Currency Translation
In December 2001, the CICA amended Handbook Section 1650 "Foreign
Currency Translation". Effective January 1, 2002, the Company
adopted these new recommendations on a retroactive basis. The
most significant change under the new recommendations is to
eliminate the deferral and amortization method for unrealized
translation gains and losses on long-term monetary assets and
liabilities. Unrealized translation gains and losses on long-term
monetary assets and liabilities are now reflected in income.
The retroactive changes to the consolidated statement of income
for the twelve month and three month periods ended December 31,
2001 are as follows:
Year ended Three months ended
December 31, 2001 December 31, 2001
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Increase in selling,
general and administrative $ 2 $ 2
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Decrease in operating income (2) (2)
Decrease in income taxes (1) (1)
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Decrease in net income $ (1) $ (1)
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In addition, for the twelve-month and three month periods ended
December 31, 2001, basic earnings per Class A Subordinate Voting
or Class B Share decreased $0.02 and $0.01, respectively.
The retroactive changes to the consolidated balance sheet as at
December 31, 2001 are as follows:
2001
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Decrease in other assets $ (5)
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Decrease in future tax liabilities $ (2)
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Decrease in retained earnings $ (3)
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(c) Goodwill and Other Intangible Assets
In September 2001, the 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 an
acquired intangible asset should be recognized separately from
goodwill.
CICA 3062 requires the application of the non-amortization and
impairment rules for existing goodwill and intangible assets
which meet the criteria for indefinite life. In accordance with
CICA 3062, effective January 1, 2002, the Company adopted these
new recommendations prospectively without restatement of any
comparable period. Upon adoption of the recommendations, the
Company ceased recording amortization of goodwill and indefinite
life intangible assets. On an adjusted basis, the Company's net
income and basic and diluted earnings per Class A Subordinate
Voting or Class B Share would have been as follows:
Year ended Three months ended
December 31, 2001 December 31, 2001
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Net income as reported $ 579 $ 118
Restatement to eliminate
amortization of goodwill and
indefinite life intangible assets 19 5
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Adjusted net income $ 598 $ 123
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Basic earnings per share
as reported $ 6.55 $ 1.31
Restatement to eliminate
amortization of goodwill and
indefinite life intangible assets 0.24 0.06
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Adjusted basic earnings per share $ 6.79 $ 1.37
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Diluted earnings per share
as reported $ 6.20 $ 1.28
Restatement to eliminate
amortization of goodwill and
indefinite life intangible assets 0.21 0.06
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Adjusted diluted earnings per share $ 6.41 $ 1.34
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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 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 writedown 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
writedown would be charged against income (see note 3).
In accordance with CICA 3062, the Company completed its initial
impairment review of goodwill and indefinite life intangible
assets, represented by racing licenses held by Magna
Entertainment Corp. ("MEC"). Based on this review, the Company
recorded a goodwill writedown of $51 million, of which
$15 million related to Decoma International Inc.'s ("Decoma")
U.K. reporting unit and $36 million related to Intier Automotive
Inc.'s ("Intier") European seating and latching systems reporting
units. Of the total goodwill writedown of $51 million,
$42 million was charged against January 1, 2002 opening retained
earnings, representing Magna's ownership interest in the
writedowns of Decoma and Intier. The balance of the goodwill
writedown of $9 million was reflected as a reduction in January
1, 2002 opening minority interest.
(d) Stock-Based Compensation
In November 2001, the CICA issued Handbook Section 3870 "Stock-
Based Compensation and Other Stock-Based Payments". 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 all stock-based compensation paid to employees.
Specifically, the fair value method does not have to be applied
to option plans where the only choice is for the employee to pay
the exercise price and obtain stock. The new standard only
applies to awards granted after the adoption date. The Company
has prospectively adopted CICA 3870 effective January 1, 2002 and
has elected to continue accounting for employee stock options
using the intrinsic value method. The adoption of CICA 3870 had
no effect on the Company's reported earnings for the twelve month
and three month periods ended December 31, 2002 (see note 10).
3. GOODWILL, INTANGIBLE ASSETS AND LONG-LIVED ASSETS
In accordance with the new recommendations of the CICA, the Company
completed its annual goodwill and indefinite life intangible asset
impairment. In conjunction with this analysis, and other indicators
of impairment, the Company also assessed the recoverability of its
long-lived assets at certain operations. As a result of this
analysis, the Company has recorded impairments during the fourth
quarter of 2002 as follows:
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Selling, general and administrative:
Impairment of goodwill - Intier $ 4
Impairment of fixed assets
Intier 20
Tesma 12
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$ 36
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Magna Entertainment Corp. costs and expenses:
Impairment of racing licenses $ 3
Impairment of fixed assets 15
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$ 18
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(a) Intier
Intier completed its annual goodwill impairment test as at
December 31, 2002, after the annual forecasting process had been
completed. As a result of this analysis, Intier determined that
goodwill of $4 million relating to one reporting unit in its
Interiors Europe reporting segment was impaired under the new
rules. The impairment loss has been recorded in operating income
as a charge against earnings in the fourth quarter of 2002. There
was no tax recovery recorded on this charge to earnings.
In conjunction with the review of goodwill, Intier also assessed
the recoverability of its long-lived assets in the same reporting
unit in its Interiors Europe reporting segment, following the new
accounting recommendations in CICA 3063. As permitted by CICA
3063, discounted cash flows were used to determine fair value. As
a result of this review, the Company reduced the carrying value
of machinery and equipment, leasehold improvements and buildings
by $20 million. As required by CICA 3063, the $20 million
writedown of long-lived assets has been recorded in operating
income as a charge against earnings in the fourth quarter of
2002. Net tax assets of $2 million associated with these
operations were charged against earnings in the fourth quarter of
2002.
(b) Tesma
As a result of current and historical operating losses and
projected future losses following the launch of new business at
its German die-casting facility, Tesma International Inc.
("Tesma") initiated and completed a review for impairment of the
approximate $21 million carrying value of capital and other long-
lived assets ("asset group") of this subsidiary, which consisted
mainly of machinery, equipment, land and buildings. The estimated
fair value of the asset group was determined primarily using a
market-based approach which estimates value based on market
prices in actual transactions and on asking prices for currently
available assets that are in a similar state and condition. The
remaining assets, for which the market approach was not possible,
were valued using a cost approach. Utilizing these approaches,
the fair value of the asset group was determined to be
approximately $9 million. As a result, Tesma recorded a
$12 million write-down of the carrying value of the respective
assets.
(c) MEC
MEC's racetrack long-lived assets and racing licenses were tested
for impairment as at December 31, 2002, after the annual
forecasting process. As a result of declining attendance at
Remington Park and Great Lakes Downs, operating profits and cash
flows were lower than expected during 2002. Based on that trend,
the earnings forecasts for these two racetracks were revised.
The fair value of the racetracks was determined using the
discounted cash flow method including a probability-weighted
approach in considering the likelihood of possible outcomes. It
also includes the estimated future cash flows associated with the
racing licenses and long-lived assets directly associated with,
and expected to arise, as a direct result of the use and
disposition of those assets. The fair value determined was then
compared to the carrying value of the racing licenses and long-
lived assets in order to determine the amount of the impairment.
The long-lived assets consist of fixed assets and real estate
properties.
As a result of the recoverability test, MEC recognized an
impairment loss of $15 million related to its long-lived assets
and an impairment of racing licenses of $3 million in the fourth
quarter of 2002.
4. Other Income
(a) In July 2002, Tesma completed a public offering by issuing
2.85 million of its Class A Subordinate Voting Shares for
aggregate cash consideration, net of share issue expenses, of
$62 million. Magna recognized a gain of $13 million from its
ownership dilution arising from the issue. The gain recognized
was not subject to income taxes as the issue was completed on a
primary basis by Tesma.
(b) In July 2002, Decoma issued 451,400 shares of its Class A
Subordinate Voting Stock to satisfy its obligations under
Decoma's Deferred Profit Sharing Plan. Magna recognized a gain of
$2 million from its ownership dilution arising from the issue.
The gain recognized was not subject to income taxes as the issue
was completed on a primary basis by Decoma.
(c) In April 2002, MEC completed a public offering by issuing
23 million shares of its Class A Subordinate Voting Stock for
aggregate cash consideration, net of share issue expenses, of
$142 million. The Company recognized a loss of $11 million from
its ownership dilution arising from the issue. The loss incurred
was not subject to income taxes as the issue was completed on a
primary basis by MEC.
(d) In April 2001, MEC issued 3.2 million shares of Class A
Subordinate Voting Stock of MEC to complete the acquisition of
certain businesses (see note 8). The Company incurred a loss of
$7 million from its ownership dilution on the issue. The loss
incurred was not subject to income taxes as the issue was
completed on a primary basis by MEC.
(e) In June 2001, Decoma, completed a public offering by issuing
16.1 million of its Class A Subordinate Voting Shares for
aggregate cash consideration, net of share issue expenses, of
$111 million. The Company recognized a gain of $49 million from
its ownership dilution arising from the issue. The gain realized
was not subject to income taxes as the issue was completed on a
primary basis by Decoma.
(f) In August 2001, Intier completed an initial public offering by
issuing 5.5 million of its Class A Subordinate Voting Shares to
third parties for aggregate cash consideration, net of share
issue expenses, of $72 million. The Company recognized a gain of
$6 million from its ownership dilution arising from the issue.
The gain realized was not subject to income taxes as the issue
was completed on a primary basis by Intier.
(g) In October 2001, Decoma redeemed the outstanding amount of the
Decoma Subordinated Debentures. Magna incurred a loss of
$2 million from its ownership dilution arising from the
redemption. The loss incurred was not subject to income taxes.
5. Income Taxes
During the second quarter of 2001, the Company recorded a future
income tax recovery of $12 million related to the reduction of
enacted income tax rates in Canada.
6. Redemption of Convertible Subordinated Debentures
(a) In May 2002, the Company called for redemption of the 4.875%
Convertible Subordinated Debentures effective June 6, 2002.
Prior to June 6, 2002, an aggregate $29 million principal amount
of such debentures was converted into 389,719 Class A Subordinate
Voting Shares. The balance of the $451 million principal amount
that remained outstanding was redeemed by issuing 6,155,863
Class A Subordinate Voting Shares.
On redemption, the Company incurred a foreign exchange loss of
$11 million related to the equity component of the 4.875%
Convertible Subordinated Debentures. Accordingly, such amount was
recorded as a charge to retained earnings.
(b) In August 2001, the Company called for redemption of the 5%
Convertible Subordinated Debentures effective September 18, 2001.
Prior to September 18, 2001, an aggregate $224 million principal
amount of such debentures was converted into 4,216,682 Class A
Subordinate Voting Shares. The balance of $121 million principal
amount that remained outstanding was redeemed in cash.
On redemption, the Company incurred a foreign exchange loss of
$10 million related to the equity component of the 5% Convertible
Subordinated Debentures. Accordingly, such amount was recorded as
a charge to retained earnings.
In accordance with the recommendations of the CICA, the foreign
exchange losses of $11 million and $10 million have been recorded as
a charge to income available to Class A Subordinate Voting or Class B
Shareholders and reflected in the calculation of basic and diluted
earnings per share.
7. Distribution on Transfer of Business to Subsidiary
In January 2001, Decoma purchased Magna Exterior Systems ("MES") and
the remaining 60% of Decoma Exterior Trim ("DET") owned by Magna. The
aggregate purchase price paid by Decoma was $203 million which was
satisfied by the payment of $3 million in cash, and through the
issuance of 8,333,333 Decoma Class A Subordinate Voting Shares and
2,000,000 5.75% convertible, redeemable and retractable Decoma
preferred shares. In addition, Decoma assumed the debt of MES and DET
owing to the Company which totalled $220 million at the closing date.
Given that the proceeds received from Decoma exceeded the net book
value of the Company's investment in MES and DET on the transaction
date, the minority interest portion of such excess has been recorded
as a distribution on the transfer of MES and DET to Decoma. Such
distribution also includes the effect of the increase in Magna's
equity interest in Decoma as a result of this transaction, from
approximately 89% to approximately 91%. The distribution on the
transfer of MES and DET to Decoma has been recorded in the
consolidated retained earnings of the Company.
8. Acquisitions
(a) Acquisitions in the year ended December 31, 2002
Donnelly
On October 1, 2002, the Company completed the acquisition of
Donnelly Corporation ("Donnelly"), the second largest global
supplier of exterior and interior mirrors to the automotive
industry, for total consideration, including transaction costs,
of $287 million (net of cash acquired of $11 million) plus the
assumption of approximately $102 million of interest-bearing
debt. The consideration paid to the former Donnelly shareholders
consisted of 5.3 million Magna Class A Subordinate Voting Shares.
Lone Star Park
On October 23, 2002, MEC completed the acquisition of
substantially all the operations and related assets of Lone Star
Park at Grand Prairie, for total consideration, including
transaction costs, of $79 million (net of cash acquired of
$2 million). Lone Star Park at Grand Prairie is a Thoroughbred
and American Quarter Horse racetrack located near Dallas, Texas.
Maryland Jockey Club
On November 27, 2002, the Company completed the acquisition of a
controlling interest in the Pimlico Race Course and Laurel Park,
which are operated under the trade name "The Maryland Jockey
Club", for total consideration, including transaction costs, of
$85 million (net of cash acquired of $5 million). The
consideration was satisfied by cash payments of $67 million and
the issuance of purchase options totalling $18 million, which
bear interest at the six-month LIBOR. Pimilco Race Course, the
home of the Preakness Stakes, the middle jewel in thoroughbred
racing's Triple Crown, and Laurel Park, are located in the
Baltimore, Maryland area.
Flamboro
On October 18, 2002, the shares of Flamboro Downs Holdings
Limited, the owner and operator of Flamboro Downs, a harness
racetrack located near Hamilton, Ontario, 45 miles west of
Toronto, were acquired by Ontario Racing Inc. ("ORI"). ORI is a
former subsidiary of MEC that is presently owned by an employee
of MEC. Five days after the Company receives all necessary
regulatory approvals for the acquisition of Flamboro Downs, the
shares of ORI will be transferred to MEC. The results of
operation of ORI have been accounted for under the equity method
pending receipt of the approvals, which are expected to be
received in the first quarter of 2003.
The purchase price, net of cash, was approximately $56 million,
consisting of a cash payment of $23 million on closing, with the
remainder satisfied by ongoing payments under secured notes of
approximately $33 million. As of December 31, 2002, MEC has
advanced $23 million to ORI, representing acquisition costs,
which is recorded in other assets.
(b) Acquisitions in the year ended December 31, 2001
Autosystems
In September 2001, Decoma acquired the lighting components
manufacturing business and related fixed and working capital
assets of Autosystems Manufacturing Inc. ("Autosystems"), an
automotive lighting manufacturer located in Ontario whose
principal customers include General Motors Corporation and
Visteon Corporation. Total consideration paid in connection with
the acquisition amounted to $12 million.
Ladbroke Companies
In April 2001, MEC completed the acquisition of Ladbroke Racing
Pennsylvania Inc. and Sport Broadcasting, Inc. (collectively the
"Ladbroke Companies") for total consideration of $48 million (net
of cash acquired of $7 million). In accordance with the terms of
the agreement, $21 million of the purchase price was paid in
cash, $13 million was satisfied through the issuance of
3.2 million shares of Class A Subordinate Voting Stock of MEC and
the balance was satisfied through the issuance of two promissory
notes that are payable on the first and second anniversaries of
closing, respectively. The promissory notes bear interest at 6%
per annum. The Ladbroke Companies include account wagering
operations, The Meadows harness track and four off-track betting
facilities.
9. Capital Stock
(a) On August 7, 2002, the Company announced that The Toronto Stock
Exchange ("TSX") and the New York Stock Exchange ("NYSE")
accepted notices of the Company's intention to purchase for
cancellation up to 3,250,000 of its Class A Subordinate Voting
Shares, representing less than 5% of the Company's issued and
outstanding Class A Subordinate Voting Shares, pursuant to a
normal course issuer bid. The Company's bid commenced on August
12, 2002 and will expire no later than August 11, 2003. All
purchases of Class A Subordinate Voting Shares will be made at
the market price at the time of purchase in accordance with the
by-laws, rules and policies of the TSX and the NYSE, subject to a
maximum aggregate expenditure of U.S.$200 million. The actual
number of Class A Subordinate Voting Shares and the timing of any
purchases will be determined by the Company. The Company will not
purchase any of its Class B Shares pursuant to the bid.
During the three months ended December 31, 2002, the Company
repurchased for cancellation 33,900 Class A Subordinate Voting
Shares for aggregate cash consideration of approximately
$2 million. In accordance with the recommendations of the CICA,
the excess of the cash paid over the book value of the common
shares repurchased of $1 million has been charged to retained
earnings.
(b) The following table presents the maximum number of Class A
Subordinate Voting and Class B Shares that would be outstanding
if all dilutive instruments outstanding at December 31, 2002 were
exercised:
Class A Subordinate Voting and Class B Shares
outstanding at December 31, 2002 95.6
Stock options 3.4
-----------------------------------------------------------------
99.0
-----------------------------------------------------------------
-----------------------------------------------------------------
The above amounts exclude Class A Subordinate Voting Shares
issuable, at the Company's option, to settle the 7.08%
subordinated debentures and Preferred Securities on redemption or
maturity.
10. 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 and have not been rounded to the nearest million):
Options outstanding
-----------------------
Weighted
average Number
Number exercise of options
of options price exercisable
-----------------------------------------------------------------
Outstanding at
December 31, 2001 2,553,000 Cdn$75.16 1,157,000
Granted 1,247,500 Cdn$109.45 -
Exercised (333,625) Cdn$76.06 (333,625)
Vested - - 249,500
-----------------------------------------------------------------
Outstanding at
March 31, 2002 3,466,875 Cdn$87.41 1,072,875
Granted 100,000 Cdn$109.45 -
Exercised (54,000) Cdn$69.00 (54,000)
Vested - - 172,000
-----------------------------------------------------------------
Outstanding at
June 30, 2002 3,512,875 Cdn$88.32 1,190,875
Exercised (6,000) Cdn$62.75 (6,000)
Vested - - 49,500
-----------------------------------------------------------------
Outstanding at
September 30, 2002 3,506,875 Cdn$88.36 1,234,375
Exercised (9,000) Cdn$65.00 (9,000)
Cancelled (120,000) Cdn$66.80 (120,000)
Vested - - 853,000
-----------------------------------------------------------------
Outstanding at
December 31, 2002 3,377,875 Cdn$89.19 1,958,375
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) The Company does not recognize compensation expense for its
outstanding fixed price stock options. Under CICA 3870, the
Company is required to disclose compensation expense for fixed
price stock options issued subsequent to January 1, 2002,
assuming compensation expense for the stock option plan had been
determined based upon the fair value at the grant date.
The fair value of stock options is estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions:
-----------------------------------------------------------------
Risk free interest rate 5%
Expected dividend yield 1.45%
Expected volatility 24%
Expected time until exercise 4 years
-----------------------------------------------------------------
-----------------------------------------------------------------
The Black-Scholes option valuation model used by the Company to
determine fair values was developed for use in estimating the
fair value of freely traded 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 stock 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.
For purposes of pro forma disclosures, the Company's net income
and basic and diluted earnings per Class A Subordinate Voting or
Class B Share for the twelve months and three months ended
December 31, 2002 would have been as follows:
Year ended Three months ended
December 31, 2002 December 31, 2002
-----------------------------------------------------------------
Pro forma net income $ 539 $ 109
Pro forma earnings per Class A
Subordinate Voting or Class B Share
Basic $ 5.68 $ 1.09
Diluted $ 5.66 $ 1.09
-----------------------------------------------------------------
-----------------------------------------------------------------
The weighted average fair value of options granted during the
twelve months and three months ended December 31, 2002 was:
Year ended Three months ended
December 31, 2002 December 31, 2002
-----------------------------------------------------------------
Weighted average fair value of
options granted during the period $ 15.39 $ -
-----------------------------------------------------------------
-----------------------------------------------------------------
11. Segmented Information
Year ended Year ended
December 31, 2002 December 31, 2001
------------------------------------------ --------------------------
Fixed Fixed
Total Operating assets, Total Operating assets,
sales income net sales income net
------------------------------------------ --------------------------
Public
Automotive
Operations
Decoma
International
Inc. $ 2,125 $ 170 $ 529 $ 1,885 $ 118 $ 488
Intier
Automotive
Inc. 3,862 114 460 3,268 81 404
Tesma
International
Inc. 926 83 275 791 74 246
Wholly Owned
Automotive
Operations
Magna Steyr 1,906 13 413 1,472 28 262
Cosma
International
and Other
Automotive
Operations 3,678 382 985 3,182 369 829
Corporate
and other (75) 185 1,001 (91) 177 791
------------------------------------------ --------------------------
Total
Automotive
Operations 12,422 947 3,663 10,507 847 3,020
MEC 549 (23) 752 519 23 575
------------------------------------------ --------------------------
Total
reportable
segments $12,971 $ 924 4,415 $11,026 $ 870 3,595
Current assets 4,369 3,558
Investments,
goodwill and
other assets 1,358 748
------------------------------------------ --------------------------
Consolidated
total assets $10,142 $ 7,901
------------------------------------------ --------------------------
------------------------------------------ --------------------------
Three months ended Three months ended
December 31, 2002 December 31, 2001
------------------------------------------ --------------------------
Operating Fixed Operating Fixed
Total income assets, Total income assets,
sales (loss) net sales (loss) net
------------------------------------------ --------------------------
Public
Automotive
Operations
Decoma
International
Inc. $ 542 $ 39 $ 529 $ 481 $ 34 $ 488
Intier
Automotive
Inc. 1,055 16 460 867 25 404
Tesma
International
Inc. 248 16 275 202 17 246
Wholly Owned
Automotive
Operations
Magna Steyr 468 (1) 413 435 10 262
Cosma
International
and Other
Automotive
Operations 1,148 113 985 774 80 829
Corporate
and other (18) 35 1,001 (25) 40 791
------------------------------------------ --------------------------
Total
Automotive
Operations 3,443 218 3,663 2,734 206 3,020
MEC 107 (40) 752 95 (9) 575
------------------------------------------ --------------------------
Total reportable
segments $ 3,550 $ 178 4,415 $ 2,829 $ 197 3,595
Current assets 4,369 3,558
Investments,
goodwill and
other assets 1,358 748
------------------------------------------ --------------------------
Consolidated
total assets $10,142 $ 7,901
------------------------------------------ --------------------------
------------------------------------------ --------------------------
12. Comparative Figures
Certain of the comparative figures have been reclassified to conform
to the current period's method of presentation.