Decoma announces results for second quarter 2003
CONCORD, ON, Aug. 4, 2003 -- Decoma International Inc. (TSX:DEC.A; NASDAQ:DECA) today announced its financial results for the second quarter ended June 30, 2003.
Financial Highlights
--------------------
Three Months Six Months
Ended June 30, Ended June 30,
(US$, in millions except
per share figures) 2003 2002 2003 2002
Sales $592.1 $565.8 $1,153.2 $1,063.0
Operating income $57.1 $54.8 $103.9 $94.9
Net income $33.9 $27.4 $61.1 $51.3
Diluted earnings per share $0.34 $0.30 $0.64 $0.57
Weighted average diluted shares
outstanding (millions) 105.8 98.3 102.1 98.2
Commenting on the above results, Al Power, Decoma's President and Chief Executive Officer, said: "The second quarter of 2003 was another strong quarter for Decoma, despite lower North American production volumes. Growth in our average content per vehicle in both North America and Europe during the quarter helped us to offset the impact on our sales from lower North American production volumes. Our consistently strong performance has enabled us to increase our dividend by 17% to US$0.07 per Class A Subordinate Voting and Class B Share for the second quarter of 2003. Going forward, we will continue our focus on achieving operational improvements at our European operations. As well, we will continue in our efforts to expand our business with our New Domestic customers and in growing our newly acquired lighting operations."
Results of Operations ---------------------
Total sales increased 5% to $592.1 million in the second quarter and by 8% to $1,153.2 million for the six month period ended June 30, 2003. In the second quarter, vehicle production volumes were down 9% in North America and remained level in Europe. Decoma's average content per vehicle for the second quarter increased 12% to $95 in North America and 21% to $35 in Europe.
North American sales and content growth were driven by the translation of Canadian dollar sales into the Company's U.S. dollar reporting currency and by the acquisition of Federal Mogul's original equipment automotive lighting operations. North American content per vehicle also benefited from new takeover business, primarily within our lighting operations.
In addition to the translation of Euro and British Pound sales into U.S. dollars, European sales and content growth benefited from sales at recent new facility startups in the latter half of 2002 and the first half of 2003. These increases were partially offset by a decline in production volumes on the Jaguar X400 program and lower volumes on certain long running high content programs such as the Mercedes C Class and Ford Mondeo programs.
Operating income in the second quarter of 2003 grew to $57.1 million, compared with $54.8 million for the same period last year. Excluding the Merplas deferred preproduction expenditures write-off in the second quarter of 2002, operating income declined 10% from adjusted second quarter of 2002 operating income of $63.1 million. This was largely the result of lower North American vehicle production volumes and an increase in the corporate segment operating loss due to foreign exchange losses in the second quarter of 2003 on U.S. dollar denominated monetary items held in Canada. This decline also reflects the impact of costs incurred to support future European sales growth and investments in new facilities in the southern U.S., Belgium, Germany and Poland, as well as efficiency issues at certain European plants. Despite a decline in production sales, Merplas' operating loss improved on a year-over- year basis. The Company expects significant sales growth in Europe over the next few years. Once through this launch period, and as continuous improvement plans are successfully implemented at underperforming divisions, the Company expects that European operating income will improve.
Operating income for the six month period ended June 30, 2003 increased 9% to $103.9 million, compared with $94.9 million last year.
Net income for the second quarter of 2003 increased to $33.9 million ($0.34 per diluted share) from $27.4 million ($0.30 per diluted share) for the second quarter of 2002. Excluding the Merplas write-off in the second quarter of 2002, net income for the second quarter of 2003 declined 5% over adjusted net income for the comparable period last year. This is primarily attributable to lower operating income, partially offset by lower interest costs and a decrease in the Company's effective tax rate.
Net income for the six month period ended June 30, 2003 increased to $61.1 million ($0.64 per diluted share) compared with $51.3 million ($0.57 per diluted share) for the comparable period in 2002.
Capital spending increased in the second quarter of 2003, reflecting substantial investments in new facilities to support the Company's future growth. Capital spending, excluding acquisition spending and proceeds from disposition, totalled $43.2 million in the second quarter of 2003 and $71.2 million for the six month period ended June 30, 2003.
Quarterly Dividend ------------------
At its meeting today, Decoma's Board of Directors declared a second quarter 2003 dividend of US$0.07 per share on Class A Subordinate Voting and Class B Shares payable on September 15, 2003 to shareholders of record on August 29, 2003. This represents an increase of 17% over dividends declared per share in respect of the three month period ended March 31, 2003.
Full Year 2003 Outlook Upgraded -------------------------------
Commenting on the Company's outlook, Randy Smallbone, Decoma's Executive Vice President, Finance and Chief Financial Officer, said: "In addition to the seasonal effects of lower production, significant investments in new facilities as well as program changeovers will impact our results for the second half of this year. However, these investments will clearly position Decoma for growth in 2004 and beyond. At the same time, our solid balance sheet continues to give us the financial strength to capitalize on takeover opportunities and strategic acquisitions."
For the full year 2003, the Company now assumes that North American light vehicle production volumes will be approximately 15.9 million units, or 2% lower than 2002. The Company has assumed that European production volumes will be approximately 16.0 million units, also 2% lower than 2002.
Decoma's content per vehicle for 2003 is expected to be in the range of $90 to $92 in North America and $39 to $41 in Europe.
Based on these assumptions and the factors discussed in the "Full Year 2003 Outlook" section of the MD&A attached to this press release, the Company expects its full year 2003 total sales to range between $2,275 million to $2,360 million. Diluted earnings per share for 2003 is now expected to be in the range of $0.92 to $1.04, up from our previous outlook of $0.84 to $0.98.
Approved capital spending for the year is $195 million. Conversion of Convertible Series Preferred Shares -------------------------------------------------
Decoma also announced today that it had received notice that Magna International Inc. ("Magna") will convert the Series 1, 2 and 3 Convertible Series Preferred Shares of Decoma held by Magna. There are currently issued and outstanding 500,000 of each of the three series, which have an aggregate face value of Cdn$150 million. The shares will be converted into Class A Subordinate Voting Shares at the rate of Cdn$10.07 per share. Magna elected to convert the shares at this time after discussions with Decoma. Decoma had the right to redeem these shares as of July 31, 2003, subject to Magna's conversion rights. The conversion will occur on August 30, 2003 following the record date for payment of the regular quarterly dividends on each of Decoma's Preferred, Class A Subordinate Voting and Class B Shares. Following the conversion, Magna will continue to hold Series 4 and 5 Convertible Series Preferred Shares with an aggregate face value of Cdn$200 million. For further information regarding the effect of the conversion on Decoma's financial position, readers are referred to the "Consolidated Capitalization" section of the MD&A attached to this press release.
Forward Looking Information ---------------------------
This press release contains "forward looking statements" within the meaning of applicable securities legislation. Readers are cautioned that such statements are only predictions and involve important risks and uncertainties that may cause actual results or anticipated events to be materially different from those expressed or implied herein. In this regard, readers are referred to the Company's Annual Information Form for the year ended December 31, 2002, 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, and the discussion of risks and uncertainties set out in the Forward Looking Information section of the MD&A attached to this press release. 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). At June 30, 2003, Decoma had approximately 15,000 employees in 49 manufacturing, engineering and product development facilities in Canada, the United States, Mexico, Germany, Belgium, England, France, Austria, Poland, the Czech Republic and Japan.
Conference Call --------------- ------------------------------------------------------------------------- Decoma management will hold a conference call to discuss second quarter 2003 results on Tuesday, August 5, 2003 at 11:30 a.m. EST. The dial-in numbers for the conference call are (416) 640-4127 (local) or 1 (800) 814-4853 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 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 press release for a more detailed discussion of the second quarter 2003 results.
DECOMA INTERNATIONAL INC.
Consolidated Balance Sheets
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at As at
June 30, December 31,
(U.S. dollars in thousands) 2003 2002
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ASSETS
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 55,174 $ 82,059
Accounts receivable 415,781 306,870
Inventories 193,953 160,091
Income taxes receivable 726 -
Prepaid expenses and other 17,445 15,902
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683,079 564,922
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Investments 19,607 17,382
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Fixed assets, net 599,160 525,463
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Goodwill, net (note 7) 68,145 62,008
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Future tax assets 10,167 6,015
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Other assets 16,635 16,745
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$1,396,793 $1,192,535
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LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
Bank indebtedness (note 8(b)) $ 11,431 $ 55,021
Accounts payable 225,825 187,656
Accrued salaries and wages 66,244 59,715
Other accrued liabilities 81,146 54,104
Income taxes payable - 13,336
Long-term debt due within one year 4,775 6,918
Debt due to Magna within one year
(note 8(c)) 115,831 103,536
Convertible Series Preferred Shares,
held by Magna (note 8(a)) 183,312 95,639
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688,564 575,925
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Long-term debt 9,790 9,677
-------------------------------------------------------------------------
Long-term debt due to Magna (note 8(c)) 82,251 75,094
-------------------------------------------------------------------------
Convertible Series Preferred Shares,
held by Magna (note 8(a)) 67,551 116,140
-------------------------------------------------------------------------
Other long-term liabilities 6,342 4,837
-------------------------------------------------------------------------
Future tax liabilities 52,603 48,114
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Shareholders' equity:
Debentures (note 9) 66,378 -
Convertible Series Preferred Shares
(note 10) 15,153 18,765
Class A Subordinate Voting Shares
(note 10) 177,203 172,488
Class B Shares (note 10) 30,594 30,594
Retained earnings 160,451 111,450
Currency translation adjustment 39,913 29,451
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489,692 362,748
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$1,396,793 $1,192,535
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See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Income and Retained Earnings
(Unaudited)
-------------------------------------------------------------------------
---------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars, in thousands
except share and per share
figures) 2003 2002 2003 2002
-------------------------------------------------------------------------
Sales $592,084 $565,819 $1,153,227 $1,062,967
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Cost of goods sold 465,174 441,910 912,807 841,422
Depreciation and
amortization 21,780 19,104 42,063 38,632
Selling, general and
administrative (note 5) 41,531 35,335 81,831 65,525
Affiliation and social
fees 6,494 6,412 12,674 14,207
Other charge (note 7) - 8,301 - 8,301
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Operating income 57,105 54,757 103,852 94,880
Equity income (592) (537) (1,022) (779)
Interest expense, net 2,528 3,205 5,277 6,409
Amortization of discount
on Convertible Series
Preferred Shares 2,255 2,239 4,301 4,385
Other income (note 6) - - (1,387) (3,874)
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Income before income taxes 52,914 49,850 96,683 88,739
Income taxes 18,984 22,435 35,563 37,431
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Net income $ 33,930 $ 27,415 $ 61,120 $ 51,308
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Financing charges on
Convertible Series
Preferred Shares and
Debentures, net of taxes
(note 9) $ (2,487) $ (1,182) $ (3,951) $ (2,358)
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Net income attributable to
Class A Subordinate
Voting and Class B Shares 31,443 26,233 57,169 48,950
Retained earnings,
beginning of period 133,092 56,801 111,450 49,768
Dividends on Class A
Subordinate Voting and
Class B Shares (4,084) (3,380) (8,168) (6,760)
Adjustment for change in
accounting policy for
goodwill (note 7) - - - (12,304)
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Retained earnings,
end of period $ 160,451 $ 79,654 $ 160,451 $ 79,654
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Earnings per Class A
Subordinate Voting
or Class B Share
Basic $ 0.46 $ 0.39 $ 0.84 $ 0.72
Diluted $ 0.34 $ 0.30 $ 0.64 $ 0.57
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Average number of Class A
Subordinate Voting and
Class B Shares outstanding
(in millions)
Basic 68.1 67.6 68.1 67.6
Diluted 105.8 98.3 102.1 98.2
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See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars in thousands) 2003 2002 2003 2002
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Cash provided from (used for):
OPERATING ACTIVITIES
Net income $ 33,930 $ 27,415 $ 61,120 $ 51,308
Items not involving
current cash flows 21,258 32,477 41,214 51,119
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55,188 59,892 102,334 102,427
Changes in non-cash
working capital (58,613) 11,690 (62,106) 10,727
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(3,425) 71,582 40,228 113,154
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INVESTING ACTIVITIES
Fixed asset additions (42,679) (18,725) (70,243) (31,614)
Increase in investments
and other assets (623) (592) (1,325) (2,426)
Business acquisitions
(note 13) (8,276) (2,584) (8,276) (2,584)
Proceeds from disposition
of fixed and other assets 84 41 334 52
Proceeds from disposition
of operating division, net
(note 6(b)) - - - 5,874
Less remaining proceeds
receivable (note 6(b)) - - - (478)
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(51,494) (21,860) (79,510) (31,176)
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FINANCING ACTIVITIES
Decrease in bank
indebtedness (28,323) (55,221) (47,990) (90,623)
Repayments of long term
debt (421) (4,401) (832) (10,122)
Repayments of debt due
to Magna (26) (66) (51) (7,836)
Issuance of Debentures
(note 9) - - 66,128 -
Debentures interest
payments (1,252) - (1,252) -
Issuances of Class A
Subordinate Voting Shares
(note 10) 4,715 74 4,715 109
Dividends on Convertible
Series Preferred Shares (3,442) (3,069) (6,583) (6,045)
Dividends on Class A
Subordinate Voting and
Class B Shares (4,084) (3,380) (8,168) (6,760)
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(32,833) (66,063) 5,967 (121,277)
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Effect of exchange rate
changes on cash and cash
equivalents 4,109 2,973 6,430 2,568
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Net decrease in cash and
cash equivalents during
the period (83,643) (13,368) (26,885) (36,731)
Cash and cash equivalents,
beginning of period 138,817 70,908 82,059 94,271
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Cash and cash equivalents,
end of period $ 55,174 $ 57,540 $ 55,174 $ 57,540
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See accompanying notes
DECOMA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
(Unaudited)
-------------------------------------------------------------------------
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, 2002 (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.
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 June 30, 2003 and the results of its
operations and cash flows for the three and six month periods ended June
30, 2003 and 2002.
3. 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.
4. 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.
5. Foreign Exchange
Selling, general and administrative expenses ("SG&A") are net of earnings
(losses) resulting from foreign exchange of:
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Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars in thousands) 2003 2002 2003 2002
-------------------------------------------------------------------------
Foreign exchange (loss)
income $(2,268) $ (470) $(4,900) $ 125
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6. Other Income
(a) During the first quarter of 2003, the Company permanently repatriated
$75 million from its United States operations. This repatriation gave
rise to the recognition of a pro rata amount of the Company's cumulative
translation adjustment account. This amount, totalling $1.4 million, has
been included in other income and is not subject to tax.
(b) During the first quarter of 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.
7. Goodwill and Deferred Preproduction Expenditures
In 2002, the Company adopted the new accounting recommendations of The
Canadian Institute of Chartered Accountants for goodwill and other
intangible assets. Upon initial adoption of these recommendations, the
Company recorded a goodwill 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. Refer to note 2 to the Company's annual
financial statements for further information.
8. Debt
(a) Convertible Series Preferred Shares
The liability amounts for the Series 1, 2, 3 and 4 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
share. The Series 4 Convertible Series Preferred Shares are retractable
by Magna at their aggregate face value of Cdn$100 million after
December 31, 2003. 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 share. The Company's Class A Subordinate Voting Shares
closed at Cdn$12.25 on July 25, 2003 and have traded between Cdn$8.81 and
Cdn$17.18 over the 52 week period ended July 25, 2003.
The liability amounts for the Series 5 Convertible Series Preferred
Shares are presented as long-term liabilities as these are not
retractable by Magna until December 31, 2004. 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 share.
The Series 1, 2 and 3 Convertible Series Preferred Shares are redeemable
by the Company commencing July 31, 2003 and the Series 4 and 5
Convertible Series Preferred Shares are redeemable by the Company
commencing December 31, 2005.
(b) Credit Facility
At June 30, 2003 the Company had lines of credit totaling $329.3 million.
Of this amount, $300 million is represented by an extendible, revolving
credit facility that expires on May 27, 2004, at which time the Company
may request, subject to lender approval, further revolving 364-day
extensions. The unused and available lines of credit at June 30, 2003
were approximately $303.6 million.
(c) Amounts Due to Magna
The Company's debt due to Magna consists of the following:
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June 30, December 31,
(U.S. dollars in thousands) 2003 2002
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Debt denominated in Canadian dollars (i) $ 44,480 $ 38,256
Debt denominated in Euros (ii) 152,501 139,324
Lease obligation denominated in Euros 1,101 1,050
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198,082 178,630
Less due within one year 115,831 103,536
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$ 82,251 $ 75,094
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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, 3.85% effective January 1, 2003, 4.25%
effective April 1, 2003 and 4.19% effective July 1, 2003. The
maturity date of this Cdn$60 million debt has been extended to
September 30, 2003.
(ii) The debt denominated in Euros arose on closing of the Global
Exteriors Transaction. The 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, 3.86%
effective January 2, 2003, 3.51% effective April 2, 2003 and 3.14%
effective July 2, 2003. Of the debt outstanding at June 30, 2003,
$70.2 million is due October 1, 2003 and $82.3 million is due
December 31, 2004.
9. Debentures
On March 27, 2003, the Company issued Cdn$100 million of 6.5% convertible
unsecured subordinated debentures (the "Debentures") maturing March 31,
2010. The Debentures are convertible at the option of the holder at any
time into the Company's Class A Subordinate Voting Shares at a fixed
conversion price of Cdn$13.25 per share. All or part of the Debentures
are redeemable at the Company's option between March 31, 2007 and March
31, 2008 if the weighted average trading price of the Company's Class A
Subordinate Voting Shares is not less than Cdn$16.5625 for the 20
consecutive trading days ending five trading days preceding the date on
which notice of redemption is given. Subsequent to March 31, 2008, all or
part of the Debentures are redeemable at the Company's option at any
time. On redemption or maturity, the Company will have the option of
retiring the Debentures with Class A Subordinate Voting Shares in which
case the number of Class A Subordinate Voting Shares issuable is based on
95% of the trading price of the Company's Class A Subordinate Voting
Shares for the 20 consecutive trading days ending five trading days prior
to the date fixed for redemption or maturity. In addition, the Company
may elect from time to time to issue and deliver freely tradeable Class A
Subordinate Voting Shares to a trustee in order to raise funds to satisfy
the obligation to pay interest on the Debentures.
Under Canadian GAAP, the key attributes of the Debentures are separately
valued and accounted for as follows:
- the present value of principal and interest (each of which can, at
the option of the Company, be settled with the issuance of Class A
Subordinate Voting Shares) has been presented as equity. The
present value was determined using a discount rate of 7.75%
reflecting an estimate of the coupon rate that the Debentures
would have borne absent the holders' conversion feature. The
resulting discount is accreted to the Debentures' face value over
the period from issuance to unrestricted redemption (March 31,
2008) through periodic charges, net of income taxes, to retained
earnings; and
- the holders' conversion feature is similar to a stock warrant as it
provides the holder with the option to exchange their Debentures
for Class A Subordinate Voting Shares at a fixed price. The
residual approach was used to value this attribute and this amount
is also presented as equity.
In addition to the impact on diluted earnings per share of the Company's
Convertible Series Preferred Shares and issued and outstanding stock
options, diluted earnings per share have been calculated based on the
weighted average number of Class A Subordinate Voting and Class B Shares
that would have been outstanding during the period had the holders of the
Debentures exercised their fixed price conversion rights at the date of
issuance of the Debentures.
10. 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
---------------------------------------------------------------------
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 36,702,899
Class B Shares
(Convertible into Class A Subordinate
Voting Shares) Unlimited 31,909,091
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During the second quarter of 2003, the Company issued 548,600 Class
A Subordinate Voting Shares to the Decoma employee deferred profit
sharing plan.
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
---------------------------------------------------------------------
Outstanding at
December 31, 2002 2,195,000 Cdn$ 13.13 1,444,000
Granted 455,000 Cdn$ 12.43
Cancelled (10,000) Cdn$ 10.30 (4,000)
Vested 232,000
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Outstanding at
June 30, 2003 2,640,000 Cdn$ 13.02 1,672,000
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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 June 30, 2003 is 1,408,750.
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 June 30, 2003):
---------------------------------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
---------------------------------------------------------------------
(U.S. dollars in thousands) 2003 2002 2003 2002
---------------------------------------------------------------------
Risk free interest rate N/A 2.7% 3.0% 2.7%
Expected dividend yield N/A 1.9% 3.2% 1.9%
Expected volatility N/A 37% 39% 37%
Expected life of options
(years) N/A 5 5 5
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---------------------------------------------------------------------
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 Six Month Periods
Ended June 30, Ended June 30,
---------------------------------------------------------------------
(U.S. dollars, in
thousands except per
share figures) 2003 2002 2003 2002
---------------------------------------------------------------------
Net income attributable to
Class A Subordinate Voting
and Class B Shares $31,443 $26,233 $57,169 $48,950
Pro forma adjustments for
the fair value of stock
option grants (312) (277) (554) (598)
---------------------------------------------------------------------
Pro forma net income
attributable to Class A
Subordinate Voting and
Class B Shares $31,131 $25,956 $56,615 $48,352
---------------------------------------------------------------------
Pro forma earnings per
Class A Subordinate
Voting or Class B Share
Basic $ 0.46 $ 0.38 $ 0.83 $ 0.72
Diluted $ 0.34 $ 0.30 $ 0.64 $ 0.56
---------------------------------------------------------------------
---------------------------------------------------------------------
Maximum Shares
The following table presents the maximum number of shares that
would be outstanding if all of the outstanding options, Convertible
Series Preferred Shares and Debentures issued and outstanding as at
June 30, 2003 were exercised or converted:
---------------------------------------------------------------------
Number of Shares
---------------------------------------------------------------------
Class A Subordinate Voting Shares outstanding
at June 30, 2003 36,702,899
Class B Shares outstanding at June 30, 2003 31,909,091
Options to purchase Class A Subordinate Voting Shares 2,640,000
Debentures, convertible by the holders at Cdn$13.25
per share 7,547,170
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
---------------------------------------------------------------------
108,846,405
---------------------------------------------------------------------
---------------------------------------------------------------------
The above amounts include shares issuable if the holders of the
Debentures exercise their conversion option but exclude Class A
Subordinate Voting Shares issuable, only at the Company's option, to
settle interest and principal related to the Debentures. The number
of Class A Subordinate Voting Shares issuable at the Company's option
is dependent on the trading price of Class A Subordinate Voting
Shares at the time the Company elects to settle Debenture interest
and principal with shares.
11. 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.
12. Segmented Information
The Company operates in one industry segment, the automotive exteriors
business. As at June 30, 2003, the Company had 27 manufacturing
facilities in North America and 14 in Europe. In addition, the Company
had 8 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 June 30, 2003
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $412,346 $180,442 $ - $592,788
Inter-segment sales (189) (515) - (704)
-------------------------------------------------------------------------
Sales to external
customers $412,157 $179,927 $ - $592,084
-------------------------------------------------------------------------
Depreciation and
amortization $ 15,236 $ 6,544 $ - $ 21,780
-------------------------------------------------------------------------
Operating income (loss) $ 62,530 $ (117) $ (5,308) $ 57,105
-------------------------------------------------------------------------
Equity income $ (592) $ - $ - $ (592)
-------------------------------------------------------------------------
Interest expense (income),
net $ 7,262 $ 4,489 $ (9,223) $ 2,528
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares $ - $ - $ 2,255 $ 2,255
-------------------------------------------------------------------------
Fixed assets, net $409,632 $189,528 $ - $599,160
-------------------------------------------------------------------------
Fixed asset additions $ 27,150 $ 15,529 $ - $ 42,679
-------------------------------------------------------------------------
Goodwill, net $ 48,834 $ 19,311 $ - $ 68,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Period Ended June 30, 2002
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $418,032 $148,182 $ - $566,214
Inter-segment sales (383) (12) - (395)
-------------------------------------------------------------------------
Sales to external
customers $417,649 $148,170 $ - $565,819
-------------------------------------------------------------------------
Depreciation and
amortization $ 13,219 $ 5,885 $ - $ 19,104
-------------------------------------------------------------------------
Other charge (note 7) $ - $ 8,301 $ - $ 8,301
-------------------------------------------------------------------------
Operating income (loss) $ 62,900 $ (6,782) $ (1,361) $ 54,757
-------------------------------------------------------------------------
Equity income $ (537) $ - $ - $ (537)
-------------------------------------------------------------------------
Interest expense (income),
net $ 5,963 $ 5,382 $ (8,140) $ 3,205
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares $ - $ - $ 2,239 $ 2,239
-------------------------------------------------------------------------
Fixed assets, net $359,631 $137,329 $ - $496,960
-------------------------------------------------------------------------
Fixed asset additions $ 12,321 $ 6,404 $ - $ 18,725
-------------------------------------------------------------------------
Goodwill, net $ 45,554 $ 16,811 $ - $ 62,365
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Month Period Ended June 30, 2003
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $807,144 $347,790 $ - $1,154,934
Inter-segment sales (391) (1,316) - (1,707)
-------------------------------------------------------------------------
Sales to external
customers $806,753 $346,474 $ - $1,153,227
-------------------------------------------------------------------------
Depreciation and
amortization $ 29,389 $ 12,674 $ - $ 42,063
-------------------------------------------------------------------------
Operating income (loss) $116,546 $ (2,891) $ (9,803) $ 103,852
-------------------------------------------------------------------------
Equity income $ (1,022) $ - $ - $ (1,022)
-------------------------------------------------------------------------
Interest expense (income),
net $ 13,151 $ 8,825 $(16,699) $ 5,277
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares $ - $ - $ 4,301 $ 4,301
-------------------------------------------------------------------------
Other income (note 6(a)) $ - $ - $ (1,387) $ (1,387)
-------------------------------------------------------------------------
Fixed assets, net $409,632 $189,528 $ - $ 599,160
-------------------------------------------------------------------------
Fixed asset additions $ 47,964 $ 22,279 $ - $ 70,243
-------------------------------------------------------------------------
Goodwill, net $ 48,834 $ 19,311 $ - $ 68,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Month Period Ended June 30, 2002
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $787,657 $276,422 $ - $1,064,079
Inter-segment sales (1,075) (37) - (1,112)
-------------------------------------------------------------------------
Sales to external
customers $786,582 $276,385 $ - $1,062,967
-------------------------------------------------------------------------
Depreciation and
amortization $ 26,973 $ 11,659 $ - $ 38,632
-------------------------------------------------------------------------
Other charge (note 7) $ - $ 8,301 $ - $ 8,301
-------------------------------------------------------------------------
Operating income (loss) $106,646 $ (8,584) $ (3,182) $ 94,880
-------------------------------------------------------------------------
Equity income $ (779) $ - $ - $ (779)
-------------------------------------------------------------------------
Interest expense (income),
net $ 9,331 $ 10,393 $(13,315) $ 6,409
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares $ - $ - $ 4,385 $ 4,385
-------------------------------------------------------------------------
Other income (note 6(b)) $ (3,874) $ - $ - $ (3,874)
-------------------------------------------------------------------------
Fixed assets, net $359,631 $137,329 $ - $ 496,960
-------------------------------------------------------------------------
Fixed asset additions $ 21,081 $ 10,533 $ - $ 31,614
-------------------------------------------------------------------------
Goodwill, net $ 45,554 $ 16,811 $ - $ 62,365
-------------------------------------------------------------------------
13. Business Acquisitions
(a) During the second quarter of 2003, the Company entered into an
agreement to acquire Federal Mogul's original equipment automotive
lighting operations in Matamoros, Mexico, a distribution centre in
Brownsville, Texas, an assembly operation in Toledo, Ohio and certain of
the engineering operations, contracts and equipment at Federal Mogul's
original equipment automotive lighting operations in Hampton, Virginia.
The total purchase price is $2.25 million for fixed assets plus an amount
for inventory based on the final determination of the value of inventory
on hand plus transaction costs. The transaction closed on April 14, 2003
with a transition of the Hampton, Virginia contracts and assets over the
balance of 2003. As at June 30, 2003, $1.6 million of the purchase price
plus $3.7 million for inventory had been paid to Federal Mogul.
(b) During both the second quarter of 2002 and the second quarter of
2003, the Company repaid two promissory notes that were due May 31, 2002
and May 31, 2003, respectively, each in the amount of Cdn$4 million that
arose on the May 2001 acquisition of the remaining minority interest in
Decomex Inc. Refer to note 3 to the Company's annual financial statements
for further information regarding this acquisition.
14. Subsequent Events
On August 4, 2003, Magna delivered to Decoma notice that it will convert
the Series 1, 2 and 3 Convertible Series Preferred Shares into Decoma
Class A Subordinate Voting Shares effective August 30, 2003.
The conversion will have no impact on income before taxes, net income or
diluted earnings per share.
FIRST AND FINAL ADD - MANAGEMENT'S DISCUSSION AND ANALYSIS - TO FOLLOW