Decoma announces financial results for third quarter 2003 (Part 3)
CONCORD, Ontario, November 5 -- Continued from Part 2.
Europe
European production sales increased 23% to US$451.7 million in the first
nine months of 2003 on substantially level European production volumes.
European content per vehicle grew US$7 or 23% to approximately US$37.
Content growth was driven by the translation of Euro and British Pound
sales into the Company's U.S. dollar reporting currency which added
approximately US$62.8 million to production sales and US$5 to European
content per vehicle.
Content growth was also driven by sales at recent new facility startups
in the latter part of 2002 and the first nine months of 2003 (including
Modultec, Formatex, Graz and the Brussels Sequencing Centre). These new
facilities collectively added approximately US$50.1 million to production
sales and US$4 to European content per vehicle.
The remaining net US$29.1 million reduction in production sales and US$2
reduction in European content per vehicle is due to a number of factors
including a decline in production volumes on the Jaguar X400 program
produced at Merplas. Adjusting to eliminate the impact of translation of
British Pound sales into U.S. dollars, Merplas' sales declined US$10.6
million negatively impacting European content per vehicle by US$1. In
addition, lower volumes on certain long running high content programs,
the cancellation of DaimlerChrysler PT Cruiser production in Europe and
the completion of the Audi TT hard top program negatively impacted
European content growth. These factors were partially offset by the
launch of various new Audi production programs at the Company's
facilities in Germany.
Global Tooling and Other
Tooling and other sales on a global basis increased 33% to US$158.0 million
for the first nine months of 2003. The increase came primarily in the
current quarter and is related to the Ford U204 (Escape) refresh program
in North America and the VW Group A5 (Golf) program in Europe.
Sales by Customer
The Company's sales by customer breakdown for the first nine months of
2003 and 2002 was as follows:
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Nine Month Period Ended Nine Month Period Ended
September 30, 2003 September 30, 2002
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North North
America Europe Global America Europe Global
Traditional "Big 3"
Brands
Ford 26.1% 2.2% 28.3% 26.6% 2.1% 28.7%
GM/Opel/Vauxhaull 22.2% 1.9% 24.1% 24.1% 1.4% 25.5%
Chrysler 13.3% 0.9% 14.2% 14.1% 0.7% 14.8%
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61.6% 5.0% 66.6% 64.8% 4.2% 69.0%
Mercedes - 8.8% 8.8% - 9.9% 9.9%
VW Group 0.1% 8.0% 8.1% 0.1% 3.8% 3.9%
BMW 0.7% 1.8% 2.5% 0.3% 1.5% 1.8%
Ford Premier Automotive
Group ("Ford PAG") - 2.0% 2.0% 0.1% 2.3% 2.4%
Renault Nissan 1.4% 0.5% 1.9% 1.7% 0.6% 2.3%
Other 5.1% 5.0% 10.1% 6.0% 4.7% 10.7%
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68.9% 31.1% 100.0% 73.0% 27.0% 100.0%
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The Company continues to grow it sales with OEM customers outside the
traditional "Big 3" automotive brands.
The majority of production programs with the Asian automotive
manufacturers operating in North America are within Decoma's exterior
trim product range and the Company continues to win more business in this
area. Although the Company moulds fascias for a number of North American
Honda programs, the majority of Asian OEMs currently manufacture their
bumper systems in-house. However, this may change as bumper systems and
modules grow in size and complexity and as Asian OEM capital equipment
reinvestment is required. The Company continues to closely monitor
potential opportunities in this area, particularly in the Southern United
States region.
The growth in sales to the VW Group is the result of the launch of the VW
Group T5 (Transit Van) front end module contract and the recent launch of
a number of new Audi programs. The Company's sales to the VW Group are
expected to continue to grow significantly as program launches ramp up
and the VW SLW (City Car) program launches at Formatex. In addition, on
completion of its new Belplas paint line in the fourth quarter of 2003,
the Company will supply fascias and front end modules for a portion of
the volume on the VW Group A5 (Golf) program.
The Company's largest production sales programs for 2003 in each of North
America and Europe are expected to include:
North America
- Ford U152 (Explorer)
- Ford EN114 (Crown Victoria and Grand Marquis)
- Ford U204 (Escape and Tribute)
- Daimler Chrysler JR (Stratus, Sebring and Sebring Convertible)
- Daimler Chrysler LH (Concorde, Intrepid and 300M)
Europe
- DaimlerChrysler Mercedes C Class
- DaimlerChrysler Mercedes E Class
- VW Group T5 (Transit Van)
- Opel Vectra
- Ford Mondeo
The DaimlerChrysler LH (Concorde, Intrepid and 300M) program remains one
of the Company's largest North American production sales programs despite
the fact that this program ended in the current quarter and the new LX
program does not start up until the first quarter of 2004.
Earnings Growth
The following table isolates the period over period impact of certain
unusual income and expense items on the Company's key earnings measures.
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(U.S. dollars, in millions Operating Net Diluted
except per share figures) Income Income EPS
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Nine month period ended
September 30, 2002 as reported US$131.0 US$69.9 US$0.78
Addback other charge in the
second quarter of 2002 8.3 8.3 0.08
Deduct other income in the
first quarter of 2002 - (2.9) (0.03)
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Adjusted nine month period
ended September 30, 2002 base 139.3 75.3 0.83
Add other income in the first
quarter of 2003 - 1.4 0.01
Decrease over adjusted nine
month period ended
September 30, 2002 base (6.5)(5%) (0.8)(1%) (0.04)(5%)
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Nine month period ended
September 30, 2003 as reported US$132.8 US$75.9 US$0.80
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The other charge of US$8.3 million in the second quarter of 2002 represents
the write-off of Merplas deferred preproduction expenditures. Readers are
asked to refer to the "Goodwill and Deferred Preproduction Expenditures"
section of this MD&A for further discussion.
Other income in the first quarter of 2002 represents a US$2.9 million after
tax gain on the sale of a non-core North American operating division.
Other income in the first quarter of 2003 of US$1.4 million represents the
recognition in income of a pro rata amount of the Company's cumulative
translation adjustment account on the permanent repatriation of US$75
million of the Company's net investment in its United States operations.
Excluding other income and the Merplas deferred preproduction
expenditures write-off, operating income declined 5% to US$132.8 million
and net income declined 1% to US$75.9 million for the first nine months of
2003. The decline in operating income came primarily in Europe as a
result of continued operating inefficiencies and costs related to new
European facilities. In addition, foreign exchange losses in the
corporate segment negatively impacted operating income. These declines
were partially offset by the strong performance of the Company's North
American operating segment primarily in the first two quarters of 2003.
North American operating income in the third quarter of 2003 was flat due
primarily to program changeovers, customer pricing pressures and Decostar
costs.
The percentage decline in net income was lower than the percentage
decline in operating income due to lower interest expense, increased
equity income and a reduction in the Company's effective tax rate.
Diluted earnings per share, excluding other income and the Merplas write-
off, declined 5% to US$0.80. The percentage decline in diluted earnings per
share exceeded the percentage decline in net income due to the increase
in the average number of diluted Class A Subordinate Voting and Class B
Shares outstanding primarily as a result of the issuance of the
Debentures and the recent issuances of Class A Subordinate Voting Shares
to the Decoma employee deferred profit sharing program.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Three Month Periods Ended September 30, 2003 and 2002
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Three Month Periods Ended
September 30,
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(U.S. dollars in millions) 2003 2002
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EBITDA
North America US$58.7 US$56.1
Europe
Excluding Merplas (1.0) 4.6
Merplas (1.5) (2.4)
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Total Europe (2.5) 2.2
Corporate (5.0) (2.4)
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51.2 55.9
Interest, cash taxes and other operating cash flows (13.7) (14.4)
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Cash flow from operations before changes in non-cash
working capital 37.5 41.5
Cash invested in non-cash working capital (33.1) (7.2)
Fixed and other asset spending, net
North America (29.7) (11.2)
Europe (19.4) (9.2)
Acquisition spending - North America (5.0) -
Proceeds from disposition of operating division - 0.3
Dividends
Convertible Series Preferred Shares (3.4) (3.0)
Class A Subordinate Voting and Class B Shares (4.8) (3.4)
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Cash generated and available for debt reduction
(shortfall to be financed) (57.9) 7.8
Net increase in debt 64.0 14.9
Issuances of Class A Subordinate Voting Shares - 4.6
Foreign exchange on cash and cash equivalents 0.4 (0.8)
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Net increase in cash and cash equivalents US$ 6.5 US$26.5
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The Company has presented EBITDA as supplementary information concerning
the cash operating earnings of the Company and because it is a measure
that is widely used by analysts in evaluating the operating performance
of companies in the automotive industry. The Company defines EBITDA as
operating income plus depreciation and amortisation plus the Merplas
deferred preproduction expenditures write-off based on the respective
amounts presented in the Company's unaudited interim consolidated
statements of income included elsewhere herein. However, EBITDA does not
have any standardised meaning under Canadian GAAP and is, therefore,
unlikely to be comparable to similar measures presented by other issuers.
Cash Flows Before Financing Activities
Capital and acquisition spending and dividends exceeded cash generated
from operations by US$57.9 million for the third quarter of 2003. This was
due primarily to US$33.1 million being invested in non-cash working
capital. The increase in working capital is a result of the Company's new
European facilities, increases in tooling related amounts, an increase in
taxes receivable and the receipt of a substantial amount of customer
payments after the quarter end cut-off.
Increased capital and acquisition spending and dividends and lower EBITDA
also contributed to the usage of cash.
Investing Activities
Capital spending, excluding acquisition spending, on a global basis
totalled US$49.1 million in the third quarter of 2003.
North American capital spending was US$29.7 million which is up
significantly from the comparative prior year period due to spending on
the Company's new Decostar facility and paint line refurbishment spending
at the Company's Nascote facility in the United States.
European capital spending totalled US$19.4 million which is also up
significantly from the comparative prior year period due to spending on
the Company's Belgium paint line project and related assembly and
sequencing facility and new program spending at Innoplas including
spending for the DaimlerChrysler A Class program.
Acquisition spending in the third quarter of 2003 of US$5.0 million
represents additional payments for the FM Lighting Acquisition which was
substantially completed during the current quarter.
Dividends
Dividends paid on the Company's Convertible Series Preferred Shares were
US$3.4 million for the third quarter of 2003 up from US$3.0 million in the
comparative quarter due to translation of Canadian dollar dividends into
the Company's U.S. dollar reporting currency.
Dividends paid in the third quarter of 2003 on Class A Subordinate Voting
and Class B Shares totalled US$4.8 million. This represents dividends
declared of US$0.07 per share in respect of the three month period ended
June 30, 2003.
Dividends paid during the third quarter of 2002 on Class A Subordinate
Voting and Class B Shares totalled US$3.4 million representing dividends
declared of US$0.05 per share in respect of the three month period
ended June 30, 2002.
Subsequent to September 30, 2003, the board of directors of the Company
declared a dividend of US$0.07 per Class A Subordinate Voting and Class B
Share in respect of the three month period ended September 30, 2003.
Financing Activities
Increases in debt during the quarter reflect additional draws on the
Company's US$300 million operating credit facility. Bank indebtedness grew
to US$80.2 million at September 30, 2003 compared to US$11.4 million at
June 30, 2003. Cash and cash equivalents at September 30, 2003 were US$61.6
million compared to US$55.2 million at June 30, 2003.
Cash Flows for the Nine Month Periods Ended September 30, 2003 and 2002
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Nine Month Periods Ended
September 30,
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(U.S. dollars in millions) 2003 2002
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EBITDA
North America US$204.7 US$189.7
Europe
Excluding Merplas 14.2 21.8
Merplas (7.0) (8.3)
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Total Europe 7.2 13.5
Corporate (14.8) (5.5)
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197.1 197.7
Interest, cash taxes and other operating cash flows (57.3) (53.8)
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Cash flow from operations before changes in
non-cash working capital 139.8 143.9
Cash generated from (invested in) non-cash working
capital (95.2) 3.5
Fixed and other asset spending, net
North America (77.5) (33.6)
Europe (42.8) (20.7)
Acquisition spending - North America (13.3) (2.6)
Proceeds from disposition of operating division - 5.7
Debenture interest payments (1.2) -
Dividends
Convertible Series Preferred Shares (10.0) (9.1)
Class A Subordinate Voting and Class B Shares (13.0) (10.2)
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Cash generated and available for debt reduction
(shortfall to be financed) (113.2) 76.9
Net increase (decrease) in debt 15.1 (93.6)
Issuance of Debentures 66.1 -
Issuances of Class A Subordinate Voting Shares 4.7 4.7
Foreign exchange on cash and cash equivalents 6.9 1.7
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Net decrease in cash and cash equivalents US$(20.4) US$(10.3)
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Cash Flows Before Financing Activities
Capital and acquisition spending, Debenture interest and dividends
exceeded cash generated from operations by US$113.2 million for the first
nine months of 2003. This was due primarily to US$95.2 million being
invested in non- cash working capital. The FM Lighting Acquisition, the
Company's new European facilities, increases in tooling related amounts,
a reduction in taxes payable and a substantial amount of customer
payments being received after the quarter end cut-off, all contributed to
the increase in non-cash working capital.
Substantially increased capital and acquisition spending and higher
dividends also contributed to the usage of cash.
Acquisition spending of US$13.3 million includes US$10.4 million related to
the FM Lighting Acquisition and US$2.9 million related to the repayment of
promissory notes that arose on the May 2001 acquisition of the remaining
minority interest in the Company's Mexican operations.
Investing Activities
Capital spending, excluding acquisition spending and proceeds from
disposition, on a global basis totalled US$120.3 million in the first nine
months of 2003.
The Company strives to keep its annual capital spending budget under 50%
of EBITDA and will allocate capital within this limit in priority to
those programs generating the greatest return on investment. In certain
circumstances, the Company will spend greater than 50% of EBITDA in a
particular year if a specific capital program is of longer term strategic
importance and the expected returns over the life of the program justify
the investment.
Given economic uncertainties throughout 2001 and 2002, the Company
eliminated or delayed planned capital spending wherever possible. As a
result, full year 2001 and 2002 capital spending, excluding acquisition
spending and proceeds from disposition, was well under the Company's 50%
of EBITDA guideline. However, capital spending for 2003 is expected to
increase and exceed 50% of EBITDA. Approved spending for 2003 is
currently US$195 million. The increase reflects continued spending on the
Belgium paint line and Decostar projects, European spending related to
new program launches and spending due to prior deferrals of previously
planned facility upgrade and other process related and improvement
projects. Readers are asked to refer to the "Financial Condition,
Liquidity and Capital Resources - Unused and Available Financing
Resources" section of this MD&A for further discussion.
Dividends
Dividends paid on the Company's Convertible Series Preferred Shares were
US$10.0 million for the first nine months of 2003 up from US$9.1 million in
the comparative prior year period due to translation of Canadian dollar
dividends into the Company's U.S. dollar reporting currency.
Dividends paid in the first nine months of 2003 on Class A Subordinate
Voting and Class B Shares totalled US$13.0 million. This represents
dividends declared of US US$0.07 per share in respect of the three month
period ended June 30, 2003 and US$0.06 per share in respect of the three
month periods ended March 31, 2003 and December 31, 2002. Dividends paid
during the first nine months of 2002 totalled US$10.2 million representing
dividends declared of US$0.05 per share in respect of the three month
periods ended June 30, 2002, March 31, 2002 and December 31, 2001.
Financing Activities
During the first quarter of 2003, the Company raised net proceeds of
US$66.1 million from the issuance of the Debentures. In addition, over the
first nine months of 2003, the Company made net borrowings of US$15.1
million primarily under its US$300 million operating credit facility and
issued 548,600 Class A Subordinate Voting Shares, totalling US$4.7 million,
to the Decoma employee deferred profit sharing program.
Consolidated Capitalisation
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September 30, December 31,
(U.S. dollars in millions) 2003 2002
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Cash and cash equivalents US$(61.6) US$(82.1)
Bank indebtedness 80.2 55.0
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18.6 (27.1)
Debt due within twelve months
Due to Magna December 31, 2003
(previously due September 30,
2003) 44.3 38.3
Due to Magna January 1, 2004
(previously due October 1,
2003) 70.6 64.2
Other 5.5 8.0
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120.4 110.5
Long-term debt
Due to Magna December 31, 2004 82.6 75.1
Other 6.5 9.7
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Net Conventional Debt US$228.1 23.3% US$168.2 22.6%
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Liability portion of Convertible
Series
Preferred Shares, held by Magna
Current US$73.0 US$95.6
Long-term 68.4 116.2
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US$141.4 14.5% US$211.8 28.5%
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Shareholders' equity
Debentures US$67.8 7.0% US$ -
Other 539.8 55.2% 362.7 48.9%
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US$607.6 62.2% US$362.7 48.9%
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Total Capitalisation US$977.1 100.0% US$742.7 100.0%
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During the current quarter, Magna converted the Series 1, 2 and 3
Convertible Series Preferred Shares into Decoma Class A Subordinate
Voting Shares at a fixed conversion price of Cdn.$10.07 per Class A
Subordinate Voting Share. Decoma issued 14,895,729 Class A Subordinate
Voting Shares on conversion.
The Debentures and the remaining Series 4 and 5 Convertible Series
Preferred Shares are also convertible into Class A Subordinate Voting
Shares at the holders' option at fixed prices (Cdn$13.25 per share in the
case of the Debentures and Cdn $13.20 per share in the case of the Series
4 and 5 Convertible Series Preferred Shares). The Company's Class A
Subordinate Voting Shares closed at Cdn $14.25 on October 28, 2003, and
have traded between Cdn $8.81 and Cdn $14.95 over the 52 week period
ended October 28, 2003. As a result, it is possible that all, or a
portion, of the Debentures and the Series 4 and 5 Convertible Series
Preferred Shares will be settled with Class A Subordinate Voting Shares
if the holders' exercise their fixed price conversion options. The
possible conversion of the Company's Debentures and the Series 4 and 5
Convertible Series Preferred Shares into Class A Subordinate Voting
Shares is reflected in the Company's reported diluted earnings per share.
In addition to the fixed price conversion options noted above, Magna may
retract the Convertible Series Preferred Shares for cash at their face
value after December 31, 2003 in the case of the Series 4 Convertible
Series Preferred Shares and commencing December 31, 2004 in the case of
the Series 5 Convertible Series Preferred Shares. Accordingly, the
liability portion of the Series 4 Convertible Series Preferred Shares is
shown as current and the liability portion of the Series 5 Convertible
Series Preferred Shares is shown as long-term in the Company's
consolidated balance sheet.
Should the holders' of the Debentures not exercise their fixed price
conversion option, they are entitled to receive cash on redemption or
maturity (subject to the Company's 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).
The Debentures mature on March 10, 2010 but 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.
The Company can call the Series 4 and 5 Convertible Series Preferred
Shares for redemption commencing December 31, 2005.
The Company's Net Conventional Debt to Total Capitalisation at
September 30, 2003 was 23.3% compared to 22.6% at December 31, 2002. This
measure treats the Company's hybrid Debenture and Convertible Series
Preferred Share instruments like equity rather than debt given their
possible conversion into Class A Subordinate Voting Shares.
The Company's Net Conventional Debt plus the liability portions of the
Convertible Series Preferred Shares to Total Capitalisation, has improved
to 37.8% at September 30, 2003 compared to 51.1% at December 31, 2002.
This measure treats the liability portions of the Convertible Series
Preferred Shares like debt rather than equity given their possible
retraction for cash.
The Company's Net Conventional Debt plus the liability portions of the
Convertible Series Preferred Shares plus the Debentures to Total
Capitalisation was 44.8% at September 30, 2003 compared to 51.1% at
December 31, 2002. In addition to the liability portions of the
Convertible Series Preferred Shares, this measure treats the Debentures
like debt rather than equity given the possibility of settling them for
cash on maturity or redemption rather than for Class A Subordinate Voting
Shares.
Unused and Available Financing Resources
At September 30, 2003 the Company had cash on hand of US$61.6 million and
US$234.8 million of unused and available credit facilities. Of the unused
and available credit facilities, US$219.8 million represents the unused and
available portion of the Company's US$300 million extendible, revolving
credit facility that expires on May 27, 2004 at which time Decoma may
request, subject to lender approval, further revolving 364 day
extensions.
Debt, excluding bank indebtedness, that comes due in the next twelve
months totals US$120.4 million including debt due to Magna of US$44.3
million due December 31, 2003 and US$70.6 million due January 1, 2004.
Since the original maturity of the amounts due December 31, 2003 and
January 1, 2004, the Company, with Magna's consent, has been extending
the repayment of this debt at 90 day intervals at market interest rates.
Although the Company expects Magna to continue to extend the repayment
dates for this debt, there can be no assurance that Magna will do so.
The Company anticipates that capital expenditures and currently scheduled
repayments of debt will exceed cash generated from operations in 2003. As
a result, the Company is dependent on its lenders to continue to revolve
its existing US$300 million credit facility. In addition, the Company may
seek additional debt or equity financing and/or pursue further extensions
of the maturity dates of debt due to Magna or work with Magna to
establish a new fixed long term amortisation schedule related to this
debt.
In addition to the above unused and available financing resources, the
Company sponsors a finance program for tooling suppliers to finance
tooling under construction for the Company. Under this program, the
facility provider orders tooling from suppliers and subsequently sells
such tooling to the Company. The facility provider makes advances to
tooling suppliers based on tool build milestones approved by the Company.
On completion of the tooling the facility provider sells the tooling to
the Company for an amount equal to cumulative advances. In the event of
tooling supplier default, the Company will purchase in progress tooling
for an amount approximating cumulative advances.
A number of Magna affiliated companies are sponsors under this facility.
The maximum facility amount is US$100 million and is available to
individual sponsors on an uncommitted demand basis subject to individual
sponsor sub limits. The Company's sub limit is US$35 million. As at
September 30, 2003, US$1.6 million had been advanced to tooling suppliers
under the Company's portion of this facility. This amount is included in
accounts payable.
Off Balance Sheet Financing
The Company's off balance sheet financing arrangements are limited to
operating lease contracts.
A number of the Company's facilities are subject to operating leases with
Magna and with third parties. As of December 31, 2002, operating lease
commitments for facilities totalled US$19.3 million for 2003 including
US$10.1 million under lease arrangements with Magna. For 2007, total
operating lease commitments for facilities totalled US$14.5 million
including US$9.8 million under lease arrangements with Magna. In certain
situations, the Company has posted letters of credit to collateralize
lease obligations.
The Company also has third party operating lease commitments for
equipment. These leases are generally of shorter duration. As of December
31, 2002, operating lease commitments for equipment totalled US$6.5 million
for 2003. For 2007, operating lease commitments for equipment totalled
US$3.1 million.
Although the Company's consolidated contractual annual lease commitments
decline year by year, existing leases will either be renewed or replaced
resulting in lease commitments being sustained at current levels or the
Company will incur capital expenditures to acquire equivalent capacity.
Return on Investment
Decoma defines after tax return on common equity as net income
attributable to Class A Subordinate Voting and Class B Shares over
shareholders' equity excluding Subordinated Debentures and the equity
portion of Convertible Series Preferred Shares. After tax return on
common equity was 29% for the year ended December 31, 2002. After tax
return on common equity for the nine month period ended September 30,
2003 was 23%.
Each operating segment's return on investment is measured using return on
funds employed. Return on funds employed is defined as operating income
plus equity income divided by long term assets, excluding future tax
assets, plus non-cash working capital. Return on funds employed
represents a return on investment measure before the impacts of capital
structure. The Company views capital structure as a corporate, rather
than operating segment, decision.
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Return on
Funds Employed Funds Employed
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Nine month period ended Year ended As at As at
September December September December
30, 31, 30, 31,
(U.S. dollars in millions) 2003 2002 2003 2002
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North America 35% 35% US$679.1 US$569.3
Europe
Excluding Merplas (2%) 1% 288.7 193.6
Merplas (44%) (66%) 30.3 26.9
Corporate n/a n/a 25.7 (0.1)
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Global 20% 22% US$1,023.8 US$789.7
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Return on funds employed was 19.9% in the first nine months of 2003.
Return on funds employed for the first nine months of 2003 compared to
the full year 2002 was negatively impacted by the normal seasonal effects
of lower sales and earnings in the third quarter; lower European
operating income; and increased investments in Europe, particularly with
the new Belplas paint line, and in North America at Decostar. In
addition, the significant increase in the Company's working capital
investment negatively impacted return on funds employed. Translation,
particularly of European funds employed into the Company's U.S. dollar
reporting currency, also negatively impacted return on funds employed.
These negative impacts were partially offset by strong North American
segment operating income in the first two quarters of 2003 and the 2002
write-down of Merplas deferred preproduction expenditures.
North America return on funds employed is likely to be negatively
impacted in the fourth quarter of 2003 and in 2004 as the Company
continues to make significant construction and start-up investments in
its new Decostar facility.
Operating inefficiencies and increased investments in Europe are expected
to continue to negatively impact European (excluding Merplas) return on
funds employed.
Further improvements to Merplas' return on funds employed are dependent
on additional business to utilise open capacity. Readers are asked to
refer to the "United Kingdom" section of this MD&A for further discussion
regarding Merplas.
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 US$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, US$8.3 million of deferred
preproduction expenditures were written off as a charge against income in
the second quarter of 2002.
OUTLOOK
United Kingdom
Given the magnitude of Merplas' historic losses, the Merplas results have
been separately disclosed in this MD&A in order to better explain the
performance of the European operating segment.
The Merplas facility was initially built to service the X400 program
assembled at Jaguar's Halewood plant, and other Jaguar programs,
including the X100 program, with additional capacity to service other
future business opportunities. Production volumes on the Jaguar X400 and
X100 programs continue at levels that are well below original planning
volume estimates of 115,000 and 11,000, respectively. In 2002, production
volumes were approximately 72,800 and 6,800 for the X400 and X100. Our
current 2003 forecast for X400 production is between 55,000 to 61,000
vehicles and the X100 program is currently forecast at approximately
6,000 vehicles.
Merplas was recently awarded the Freelander fascia program by Ford PAG in
the United Kingdom. The Company expects that the Freelander program will
launch in the latter part of 2006 with an annual estimated volume of
approximately 70,000 vehicles after ramp up.
The Company is continuing with its United Kingdom market review. As part
of this review, the Company is assessing probable long term production
volumes within the existing portfolio of business at its two United
Kingdom facilities, Merplas and Sybex. In addition to the Jaguar and
Freelander programs, these facilities produce for the BMW Mini and
various Rover programs, amongst others. While BMW Mini program volumes
are strong, long term volumes on the Jaguar and Rover programs remain
subject to uncertainty. In addition, the probability of obtaining further
new business for these facilities is being assessed.
The Company expects to complete this review during the fourth quarter of
2003. At that time, future United Kingdom capacity utilisation and the
resulting impact, if any, on the recoverability of the Company's United
Kingdom investment will be determined.
Continental Europe
Improving operating performance in Europe remains a chief priority.
Robert Brownlee has recently assumed responsibility for our European
operations. In conjunction with this management change, we are evaluating
existing operating structures with a view toward improving overall
operating performance in continental Europe.
Full Year 2003 Outlook
Our outlook for full year 2003 vehicle production volumes remains
unchanged from prior guidance. North American light vehicle production is
estimated at 15.9 million vehicles for 2003, a reduction of approximately
2% over 2002 vehicle production volumes of 16.3 million units. Western
European light vehicle production is estimated at 16.0 million vehicles
for 2003, also down approximately 2% from 2002 vehicle production volumes
of 16.3 million units.
Decoma expects that North American sales and earnings will be negatively
impacted in the fourth quarter of 2003 by increased spending at Decostar
as the Company continues to prepare for the launch of this facility and
by the continued impact of the changeover of the DaimlerChrysler LH
changeover to the LX program (the LH program ended in the current quarter
and the new LX program does not start up until the first quarter of
2004), the ramp up of Ford V229 (Freestar) program which recently
replaced the WIN 126 (Windstar) program and continued intensive customer
pricing pressures.
These negative impacts are expected to be partially offset by a stronger
Canadian dollar relative to the U.S. dollar in the fourth quarter of 2003
compared to 2002, the FM Lighting Acquisition and the extension of Decoma
fascia production on programs originally scheduled to end in the first
half of 2003.
European sales are expected to continue to be favourably impacted by a
stronger Euro and British Pound relative to the U.S. dollar in the fourth
quarter of 2003 compared to 2002. However, European earnings will
continue to be negatively impacted by operating inefficiencies, costs
associated with European sales growth, start up costs with the launch of
the Company's new Belplas paint line and related assembly and sequencing
facility and lower production volumes on certain high content programs.
In addition, subsequent to the current quarter end, one of the Company's
European facilities completed the acquisition of a chroming line. The
line is currently being converted to allow for grille chroming. The
Company expects to launch the chroming line in early 2004 and commence
the insourcing of grille chroming business currently outsourced by
Decoma's European operations at that time. As a result, the fourth
quarter of 2003 and the first half of 2004 are expected to be negatively
impacted by chroming line start-up and launch costs.
The Company's outlook assumes that average exchange rates for the fourth
quarter of 2003 for the Canadian dollar, Euro and British Pound relative
to the U.S. dollar will approximate the average exchange rates
experienced in the third quarter of 2003.
Diluted earnings per share in the fourth quarter of 2003 compared to 2002
will also be impacted by the dilutive effect of the Debentures that were
issued by the Company at the end of the first quarter of 2003.
As a result of the above factors, the Company's full year 2003 sales and
content expectations remain unchanged from prior guidance. North American
content per vehicle is expected to be between US$90 and US$92, European
content per vehicle is expected to be between US$39 and US$41 and total
sales is expected to range between US$2,275 million and US$2,360 million.
Diluted earnings per share for the full year 2003, before possible
charges, if any, related to the Company's United Kingdom review and its
continental Europe review, is also expected to be within our previous
guidance of US$0.92 to US$1.04.
FORWARD LOOKING STATEMENTS
The contents of this MD&A contain statements which, to the extent that they are not recitations of historical fact, constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "estimate", "anticipate", "believe", "expect" and similar expressions are intended to identify forward looking statements. Persons reading this MD&A are cautioned that such statements are only predictions and that the Company's actual future results or performance may be materially different. In evaluating such forward looking statements readers should specifically consider the various risk factors which could cause actual events or results to differ materially from those indicated by such forward looking statements. These risks and uncertainties include, but are not limited to, specific risks relating to the Company's relationship with its customers, the automotive industry in general and the economy as a whole. Such risks include, without limitation; the Company's reliance on its major OEM customers, increased pricing concession and cost absorption pressures from the Company's customers; the impact of production volumes and product mix on the Company's financial performance, including changes in the actual customer production volumes compared to original planning volumes; program delays and/or cancellations; the extent, nature and duration of purchasing or leasing incentive programs offered by automotive manufacturers and the impact of such programs on future consumer demand; warranty, recall and product liability costs and risks; the continuation and extent of automotive outsourcing by automotive manufacturers; changes in vehicle pricing and the resulting impact on consumer demand; the Company's operating and/or financial performance, including the effect of new accounting standards that are promulgated from time to time (such as the ongoing requirement for impairment testing of long lived assets) on the Company's financial results; the Company's ability to finance its business requirements and access capital markets; trade and labour issues or disruptions impacting the Company's operations and those of its customers; the Company's ability to identify, complete and integrate acquisitions and to realise projected synergies relating thereto; the impact of environment related matters including emission regulations; risks associated with the launch of new facilities, including cost overruns and construction delays; technological developments by the Company's competitors; fluctuations in fuel prices and availability; electricity and natural gas cost volatility; government and regulatory policies and the Company's ability to anticipate or respond to changes therein; the Company's relationship with Magna International Inc.; currency exposure risk; fluctuations in interest rates; changes in consumer and business confidence levels; consumer personal debt levels; disruptions to the economy relating to acts of terrorism or war; and other changes in the competitive environment in which the Company operates. In addition, and without limiting the above, readers are cautioned that the specific forward looking statements contained herein relating to the Company's vehicle production volume outlook; the anticipated impact on 2003 North America sales and earnings of lower production volumes, Decostar spending, the scheduled changeover of certain high content programs and the Federal Mogul lighting acquisition; sales, operating income and return on funds employed improvement opportunities in Europe; the possible conversion of the Company's Debentures and Convertible Series Preferred Shares to Class A Subordinate Voting Shares; the Company's ability to raise necessary future financing; capital spending estimates; the future performance of Merplas; and the recoverability of the Company's remaining goodwill and other long lived assets, are all subject to significant risk and uncertainty. Readers are also referred to the discussion of "Other Factors" set out in the Company's Annual Information Form dated May 20th, 2003, wherein certain of the above risk factors are discussed in further detail. The Company expressly disclaims any intention and undertakes no obligation to update or revise any forward looking statements contained in this MD&A to reflect subsequent information, events or circumstances or otherwise.
For further information: S. Randall Smallbone, Executive Vice President, Finance and Chief Financial Officer of Decoma at +1 (905) 669-2888