Magna Announces Third Quarter and Year to Date Results (Part 2)
AURORA, ON, November 6 -- Continued from part 1.
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(United States dollars in millions)
September 30, December 31,
Note 2003 2002
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(restated
note 2)
ASSETS
Current assets
Cash and cash equivalents US$1,067 US$1,121
Accounts receivable 2,784 2,094
Inventories 1,099 916
Prepaid expenses and other 124 78
Discontinued operations - MEC 3 - 160
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5,074 4,369
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Investments 130 114
Fixed assets, net 2,984 3,663
Goodwill, net 5 489 466
Future tax assets 162 164
Other assets 312 270
Discontinued operations - MEC 3 - 1,096
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US$9,151 US$10,142
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness US$ 319 US$ 223
Accounts payable 2,241 1,954
Accrued salaries and wages 372 304
Other accrued liabilities 210 180
Income taxes payable 3 67
Long-term debt due within one year 34 36
Discontinued operations - MEC 3 - 172
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3,179 2,936
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Deferred revenue 78 86
Long-term debt 247 248
Debentures' interest obligation 41 39
Other long-term liabilities 212 186
Future tax liabilities 190 159
Minority interest 6 586 410
Discontinued operations - MEC 3 - 657
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4,533 4,721
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Shareholders' equity
Capital stock 8
Class A Subordinate
Voting Shares
(issued: 95,229,304; December
31, 2002 - 94,477,224) 1,586 2,487
Class B Shares
(convertible into Class A
Subordinate Voting Shares)
(issued: 1,096,509) - 1
Preferred Securities 277 277
Other paid-in capital 67 64
Retained earnings 2,291 2,570
Currency translation adjustment 397 22
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4,618 5,421
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US$9,151 US$10,142
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See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions
unless otherwise noted)
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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 2002 annual consolidated financial statements.
The unaudited interim consolidated financial statements do not
conform in all respects to the requirements of generally accepted
accounting principles for annual financial statements. Accordingly,
these unaudited interim consolidated financial statements should be
read in conjunction with the 2002 annual consolidated financial
statements.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at September 30, 2003 and the results of
operations and cash flows for the three-month and nine-month periods
ended September 30, 2003 and 2002.
2. DISTRIBUTION OF MID SHARES
(a) On August 19, 2003, Magna shareholders approved the distribution
to shareholders of 100% of the outstanding shares of
MI Developments Inc. ("MID"), a wholly owned subsidiary of the
Company. MID owns substantially all of Magna's automotive real
estate and the Company's former controlling interest in Magna
Entertainment Corp. ("MEC"). On September 2, 2003, the Company
distributed 100% of MID's Class A Subordinate Voting and Class B
Shares to shareholders of record as of August 29, 2003 and,
accordingly, no longer has any ownership interest in MID and
MEC.
As required by recent amendments to The Canadian Institute of
Chartered Accountants ("CICA") Handbook Section 3475, "Disposal
of Long-Lived Assets and Discontinued Operations" ("CICA 3475"),
the Company recognized a non-cash impairment loss at the date of
the distribution equal to the excess of the Company's carrying
value of the distributed assets over their fair values on the
distribution date. The Company recorded impairment losses of
US$68 million related to MEC and US$6 million related to certain
real estate properties of MID. The impairment evaluation was
completed on an individual asset basis for the real estate
properties of MID and based on an assessment of the fair value
of MID's controlling interest in MEC.
Immediately prior to the distribution of the MID shares, the
Company increased the stated capital of its Class B Shares by
way of a transfer from retained earnings of US$10 million. On
August 29, 2003, the Company recorded the distribution of the
MID shares as a reduction of shareholders' equity of
US$1,492 million, representing Magna's net investment in MID,
after the impairment charges described above, plus costs related
to the distribution. The distribution was structured as a return
of stated capital of the Class A Subordinate Voting and Class B
Shares of US$939 million and US$1 million, respectively. The
remaining reduction in shareholders' equity has been recorded as
a charge to retained earnings of US$552 million.
In accordance with CICA 3475, the financial results of MEC have
been disclosed as discontinued operations until August 29, 2003
(note 3). However, because Magna and its operating subsidiaries
will continue to occupy their facilities under long-term leases
with MID, the operations of the real estate business of MID
cannot be reflected as discontinued operations. Therefore, the
results of the real estate business are disclosed in continuing
operations in the consolidated financial statements until
August 29, 2003.
(b) Pro forma impact
If the distribution of the Class A Subordinate Voting and
Class B Shares of MID had occurred on December 31, 2001, the
Company's unaudited pro forma consolidated financial results
would have been as follows:
Statements of income
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
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Sales US$3,565 US$2,962 US$10,721 US$8,979
Cost of goods sold 2,997 2,494 8,927 7,456
Depreciation and
amortization 125 97 350 290
Selling, general and
administrative 245 187 727 559
Interest income, net (3) (5) (10) (5)
Equity income (3) (6) (10) (17)
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Operating income 204 195 737 696
Other income - 15 - 15
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Income before income
taxes and minority
interest 204 210 737 711
Income taxes 72 63 256 235
Minority interest 14 16 59 55
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Net income US$ 118 US$ 131 US$ 422 US$ 421
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Diluted earnings per
Class A Subordinate
Voting or Class B
Share US$ 1.17 US$ 1.39 US$ 4.24 US$ 4.43
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The pro forma income statements eliminate the results of MEC,
which have been reported as discontinued operations, and the
revenues and expenses of the real estate business of MID prior
to August 29, 2003. The pro forma income statements also include
adjustments, net of income taxes, to eliminate intercompany
interest expense on advances from the Company to MID, to reflect
the impact of amending certain leases effective January 1, 2003
and to reflect the impact of the MID distribution on the
Company's deferred profit sharing expense and executive
compensation.
(c) Cash Distribution
Dividends include US$19 million with respect to the MID
distribution, which represents the amount of cash held by MID on
August 29, 2003.
3. DISCONTINUED OPERATIONS - MEC
The Company's revenues and expenses, cash flows, and assets,
liabilities and equity related to MEC are as follows:
Statements of income:
Two Three Eight Nine
months months months months
ended ended ended ended
August 29, Sept. 30, August 29, Sept. 30,
2003 2002 2003 2002
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Sales US$ 67 US$ 65 US$ 525 US$ 442
Costs and expenses 84 82 520 425
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Operating income (loss) (17) (17) 5 17
Impairment loss recorded
on distribution (note 2) (68) - (68) -
Dilution loss (a) - - - (11)
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Income (loss) before income
taxes and minority interest (85) (17) (63) 6
Income taxes (7) (7) 3 7
Minority interest (4) (4) 1 1
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Net loss US$ (74) US$ (6) US$ (67) US$ (2)
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(a) 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
US$142 million. The Company recognized a loss of US$11 million
from its ownership dilution arising from the issue. The loss
incurred was not subject to income taxes as the issue was
completed on a primary basis by MEC.
Statements of cash flows:
Two Three Eight Nine
months months months months
ended ended ended ended
August 29, Sept. 30, August 29, Sept. 30,
2003 2002 2003 2002
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Cash provided from
(used for):
OPERATING ACTIVITIES
Net loss US$ (74) US$ (6) US$ (67) US$ (2)
Items not involving
current cash flows 70 (1) 92 26
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(4) (7) 25 24
Changes in non-cash
working capital - (4) (7) (17)
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(4) (11) 18 7
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INVESTMENT ACTIVITIES
Fixed asset additions (17) (39) (45) (72)
Increase in other assets (4) (10) (16) (13)
Proceeds from disposition
of investments and other 1 2 2 9
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(20) (47) (59) (76)
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FINANCING ACTIVITIES
Net repayments of debt (3) (1) (46) (10)
Issues of subordinated
debentures by subsidiaries - - 145 -
Issues of shares by
subsidiaries - - - 142
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(3) (1) 99 132
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Effect of exchange rate
changes on cash and cash
equivalents (3) - 3 4
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Net increase (decrease) in
cash and cash equivalents
during the period (30) (59) 61 67
Cash and cash equivalents,
beginning of period 197 184 106 58
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Cash and cash equivalents,
end of period US$ 167 US$ 125 US$ 167 US$ 125
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Balance Sheet:
December 31,
2002
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ASSETS
Current assets
Cash and cash equivalents US$ 106
Accounts receivable 46
Inventories 2
Prepaid expenses and other 6
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160
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Fixed assets, net 752
Future tax assets 12
Other assets 332
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US$1,256
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LIABILITIES AND MAGNA'S NET INVESTMENT
Current liabilities
Bank indebtedness US$ 49
Accounts payable and other accrued liabilities 108
Long-term debt due within one year 15
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172
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Deferred revenue 6
Long-term debt 118
Debentures' interest obligation 67
Future tax liabilities 166
Minority interest 300
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829
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Magna's net investment in MEC 427
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US$1,256
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4. OTHER INCOME (LOSS)
Other income for 2003 includes US$6 million of impairment losses
related to certain real estate properties of MID (note 2).
In July 2002, Tesma International Inc. ("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 Cdn$97 million. Magna recognized a gain of US$13 million from its
ownership dilution arising from the issue.
In July 2002, Decoma International Inc. ("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 US$2 million from its ownership dilution arising
from the issue.
The gains recognized were not subject to income taxes as the issues
were completed on a primary basis by Tesma and Decoma, respectively.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
In 2002, the Company adopted the new accounting recommendations of
the CICA for goodwill and other intangible assets. Upon initial
adoption of these recommendations, the Company recorded a goodwill
writedown of US$51 million, of which US$15 million related to Decoma's
U.K. reporting unit and US$36 million related to Intier Automotive
Inc.'s ("Intier") Interiors Europe, Closures Europe and Interiors
North America reporting units. Of the total goodwill writedown of
US$51 million, US$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 US$9 million was reflected as a reduction in January 1,
2002 opening minority interest.
6. DEBENTURES ISSUED BY SUBSIDIARIES
On March 27, 2003, Decoma issued Cdn$100 million of 6.5% convertible
unsecured subordinated debentures maturing March 31, 2010. The
subordinated debentures are convertible at any time into Decoma Class
A Subordinate Voting Shares at a fixed conversion price of Cdn$13.25
per share. All or part of the subordinated debentures are redeemable
at Decoma's option between March 31, 2007 and March 31, 2008 if the
weighted average trading price of Decoma'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
subordinated debentures are redeemable at Decoma's option at any
time. On redemption or maturity, Decoma will have the option of
retiring the Debentures with Decoma Class A Subordinate Voting Shares
and in addition, Decoma may elect from time to time to issue and
deliver freely tradable Class A Subordinate Voting Shares to a
trustee in order to raise funds to satisfy the obligation to pay
interest on the Debentures.
The present value of the principal and interest of the Decoma
subordinated debentures and the value ascribed to the holders'
conversion option are included in Decoma's equity. Accordingly, such
amounts are classified as minority interest in the Company's
consolidated balance sheet.
7. REDEMPTION OF THE 4.875% CONVERTIBLE SUBORDINATED DEBENTURES
In May 2002, the Company called for the redemption of the 4.875%
Convertible Subordinated Debentures effective June 6, 2002. Prior to
June 6, 2002, an aggregate US$29 million principal amount of such
debentures was converted into 389,719 Class A Subordinate Voting
Shares. The US$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
US$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. In accordance with the recommendations
of the CICA, the foreign exchange loss of US$11 million has 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.
8. CAPITAL STOCK
(a) On August 6, 2003, 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 and/or for purposes of its long-term retention
(restricted share) program up to 3 million 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, which is subject to a maximum aggregate expenditure of
U.S.$200 million, commenced on August 12, 2003, following the
expiry of its prior bid on August 11, 2003, and will expire no
later than August 11, 2004.
During the three months ended September 30, 2003, a subsidiary
of the Company purchased 75,356 Magna Class A Subordinate Voting
Shares for cash consideration of US$5 million, which were then
awarded on a restricted basis to three executives. During the
three months ended September 30, 2002, the Company repurchased
for cancellation 33,900 Class A Subordinate Voting Shares for
aggregate cash consideration of approximately US$2 million. In
accordance with the recommendations of the CICA, the excess of
the cash paid over the book value of the Class A Subordinate
Voting Shares repurchased of US$1 million was charged to retained
earnings.
(b) As a result of the MID distribution, the stated capital of the
Class A Subordinate Voting and Class B Shares was reduced by
US$939 million and US$1 million, respectively (note 2).
(c) 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 September 30, 2003
were exercised:
Class A Subordinate Voting and Class B Shares
outstanding at September 30, 2003 96.3
Stock options 2.9
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99.2
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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.
Continued. (See part 3)
For further information: please contact Vincent Galifi or Louis Tonelli at +1 (905) 726-7100. For teleconferencing questions, please call +1 (905) 726-7103. (MG.A. MG.B. MGA)