Decoma announces financial results for fourth quarter & year end 2003
Sales up 22% in the fourth quarter and 15% for the full year
CONCORD, ON, Feb. 25 -- Decoma International Inc. (TSX:DEC.A; NASDAQ:DECA) today announced financial results for the fourth quarter and year ended December 31, 2003.
Financial Highlights
--------------------
Three Months Year
Ended December 31, Ended December 31,
(US$, in millions,
except per share figures) 2003 2002 2003 2002
Sales $646.2 $528.2 $2,355.8 $2,056.7
Operating income $ 18.6 $ 42.7 $ 151.2 $ 173.7
Net income ($ 3.8) $ 23.1 $ 71.9 $ 93.0
Diluted earnings per share ($0.06) $ 0.25 $ 0.77 $ 1.03
Weighted average diluted
shares outstanding 83.5 98.3 104.3 98.3
Commenting on the above results, Al Power, Decoma's President and Chief Executive Officer, noted: "Despite lower overall production volumes, we increased sales and content per vehicle in both the fourth quarter and full year. These increases are the result of recent acquisitions, new facility start-ups, new programs and takeover contracts. Our loss for the fourth quarter and lower income for the full year are primarily attributable to our previously announced decision to write-down certain assets in the United Kingdom and consolidate paint capacity in continental Europe. We believe these actions will help improve the Company's long-term financial performance in Europe."
Results of Operations ---------------------
Total sales increased 22% to $646.2 million in the fourth quarter and 15% to $2,355.8 million for the full year ended December 31, 2003. Full year sales benefited $204.1 million from currency translation. Excluding the impact of currency translation, full year sales grew $95.0 million or 5% over 2002.
For the year ended December 31, 2003, vehicle production volumes declined 3% in North America and increased 1% in Europe. Despite lower overall volumes, Decoma's production sales increased 8% to $1,506.8 million in North America and 31% to $646.5 million in Europe. Average content per vehicle in 2003 increased 12% to $95 in North America and 30% to $39 in Europe.
Decoma's full year 2003 sales and content in North America benefited significantly from the translation of Canadian dollar sales into the Company's U.S. dollar reporting currency, which added approximately $102.1 million to production sales and $6 to content per vehicle. In addition to currency translation, sales and content benefited from Decoma's acquisition of Federal Mogul's original equipment automotive lighting operations, which added $51.9 million to production sales and $3 to North American content per vehicle. Sales and content growth also benefited from new takeover business, sales on programs launched during or subsequent to 2002 and strong volumes on certain high content production programs.
In Europe, full year 2003 sales and content growth were driven by the translation of Euro and British Pound sales into the Company's U.S. dollar reporting currency, which added approximately $83.1 million to European production sales and $5 to content per vehicle. Content growth was also driven by sales at new facilities added in the latter part of 2002 and in 2003. New facility start-ups in Austria, Germany and Poland, the start up of the Company's new Belgian paint line and the takeover of an existing sequencing facility in Belgium collectively added approximately $102.9 million to production sales and $6 to European content per vehicle.
Operating income in the fourth quarter of 2003 declined to $18.6 million, compared to $42.7 million for the same period last year. This decline largely reflects the above noted United Kingdom impairment and continental Europe paint capacity consolidation charges of $23.8 million. These charges are explained in the "Other Charges" section of the Management's Discussion and Analysis ("MD&A") attached to this press release.
Operating income for the year ended December 31, 2003 was $151.2 million compared to $173.7 million the previous year. These results reflect losses in Europe as a result of the $23.8 million of charges described above, efficiency and other performance issues at certain facilities, as well as costs incurred to support European sales growth, including investments in new facilities.
Net losses for the fourth quarter of 2003 were $3.8 million (a loss of $0.06 per diluted share), including the impact of $23.8 million in charges described above, compared to net income of $23.1 million (income of $0.25 per diluted share) for the fourth quarter of 2002.
Net income for the year ended December 31, 2003 declined to $71.9 million ($0.77 per diluted share), from $93.0 million ($1.03 per diluted share) in 2002. In addition to the U.K. impairment and continental Europe paint capacity consolidation charges, which reduced diluted earnings per share by $0.23 in 2003, diluted earnings per share were impacted by an increase in the average number of diluted Class A Subordinate Voting and Class B shares outstanding at the end of the period.
Capital spending for the year ended December 31, 2003 totalled $185.5 million, reflecting substantial investments in new facilities to support the Company's future growth in both North America and Europe.
Quarterly Dividend ------------------
At its meeting today, Decoma's Board of Directors declared a fourth quarter 2003 dividend of US$0.07 per share on Class A Subordinate Voting and Class B shares payable on March 19, 2004 to shareholders of record on March 9, 2004.
Outlook -------
Commenting on the Company's outlook, Randy Smallbone, Decoma's Executive Vice-President, Finance and Chief Financial Officer, said: "This past year was a year of investment for our Company, during which significant costs were incurred to support new facilities and program changeovers. These investments were necessary to support future sales and earnings growth. While our recent decision to write-down and consolidate certain European assets resulted in a loss in the fourth quarter, we believe we have taken the proactive measures necessary to address challenges in Europe. We are optimistic that these actions, combined with contributions from new start-ups and new program launches will allow Decoma to return to positive earnings growth."
Full Year 2004
North American light vehicle production is estimated at 16.1 million vehicles for 2004, an increase of approximately 2% over 2003 vehicle production volumes of 15.9 million units. Western European light vehicle production is estimated at 16.3 million vehicles for 2004, substantially unchanged from 2003 vehicle production volumes of 16.4 million units.
The Company's outlook assumes that average exchange rates for the Canadian dollar, Euro and British Pound relative to the U.S. dollar will approximate the average exchange rates experienced in the fourth quarter of 2003.
As a result of the above factors, 2004 North American content per vehicle is expected to be between $95 and $100, European content per vehicle is expected to be between $50 and $56 and total sales are expected to range between $2,530 million and $2,750 million.
North American content per vehicle in 2006 is expected to approach $120. This represents a compound average growth rate over 2003 content per vehicle of 8%.
European content per vehicle in 2006 is expected to approximate $55 representing a compound average growth rate over 2003 of 12%.
Capital spending for 2004 is expected to approximate $151 million. Director Appointment --------------------
Decoma also announced today that Mr. Vincent J. Galifi has been appointed to Decoma's Board of Directors. Mr. Siegfried Wolf has also been appointed as Chairman of the Board of Directors to replace Ms. Belinda Stronach who resigned from the Company's Board of Directors on January 20, 2004.
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 Statements" section of the MD&A for the three and twelve month periods ended December 31, 2003, which is 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). Decoma has 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 fourth quarter
and full year 2003 results on Thursday, February 26, 2004 at 9:30 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 MD&A attached to this release for a
more detailed discussion of the fourth quarter and full year 2003
results.
DECOMA INTERNATIONAL INC.
Consolidated Balance Sheets
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at As at
December 31, December 31,
(U.S. dollars in thousands) 2003 2002
-------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 93,545 $ 82,059
Accounts receivable 395,040 306,870
Inventories 216,502 160,091
Income taxes receivable 4,015 -
Prepaid expenses and other 18,267 15,902
-------------------------------------------------------------------------
727,369 564,922
-------------------------------------------------------------------------
Investments 20,781 17,382
-------------------------------------------------------------------------
Fixed assets, net 680,497 525,463
-------------------------------------------------------------------------
Goodwill, net (note 7) 71,106 62,008
-------------------------------------------------------------------------
Future tax assets 10,556 6,015
-------------------------------------------------------------------------
Other assets 18,390 16,745
-------------------------------------------------------------------------
$ 1,528,699 $ 1,192,535
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
Bank indebtedness (note 9(b)) $ 177,288 $ 55,021
Accounts payable 226,114 187,656
Accrued salaries and wages 68,298 59,715
Other accrued liabilities 77,260 54,104
Income taxes payable - 13,336
Long-term debt due within one year 4,856 6,918
Debt due to Magna and its affiliates
within one year (note 9(c)) 141,804 103,536
Convertible Series Preferred Shares,
held by Magna (note 9(a)) 150,572 95,639
-------------------------------------------------------------------------
846,192 575,925
-------------------------------------------------------------------------
Long-term debt 11,194 9,677
-------------------------------------------------------------------------
Long-term debt due to Magna and its
affiliates (note 9(c)) - 75,094
-------------------------------------------------------------------------
Convertible Series Preferred Shares,
held by Magna (note 9(a)) - 116,140
-------------------------------------------------------------------------
Other long-term liabilities 7,462 4,837
-------------------------------------------------------------------------
Future tax liabilities 50,214 48,114
-------------------------------------------------------------------------
Shareholders' equity:
Convertible Debentures (note 10) 66,127 -
Convertible Series Preferred Shares (note 11) 8,826 18,765
Class A Subordinate Voting Shares (note 11) 287,137 172,488
Class B Shares (note 11) 30,594 30,594
Contributed surplus (note 7) 267 -
Retained earnings 156,984 111,450
Currency translation adjustment 63,702 29,451
-------------------------------------------------------------------------
613,637 362,748
-------------------------------------------------------------------------
$ 1,528,699 $ 1,192,535
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Income and Retained Earnings
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
---------------------------------------------------
Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
-------------------------------------------------------------------------
(U.S. dollars, in
thousands except
share and per share
figures) 2003 2002 2003 2002
-------------------------------------------------------------------------
Sales $ 646,159 $ 528,188 $ 2,355,830 $ 2,056,673
-------------------------------------------------------------------------
Cost of goods sold 520,944 420,110 1,891,153 1,633,225
Depreciation and
amortization 25,573 19,846 89,894 78,284
Selling, general and
administrative
(notes 7 & 14) 51,021 39,793 175,267 137,859
Affiliation and social
fees 6,204 5,738 24,541 25,311
Other charges
(notes 5, 6 & 7) 23,785 - 23,785 8,301
-------------------------------------------------------------------------
Operating income 18,632 42,701 151,190 173,693
Equity income (416) (47) (1,844) (521)
Interest expense, net 2,865 2,510 10,693 11,984
Amortization of
discount on
Convertible Series
Preferred Shares,
held by Magna 2,014 1,938 8,631 8,351
Other income (note 15) - (495) (1,387) (4,369)
-------------------------------------------------------------------------
Income before income
taxes 14,169 38,795 135,097 158,248
Income taxes 17,946 15,700 63,195 65,223
-------------------------------------------------------------------------
Net (loss) income $ (3,777) $ 23,095 $ 71,902 $ 93,025
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing charges on
Convertible Series
Preferred Shares
held by Magna and
Convertible
Debentures, net of
taxes (note 10) $ (1,142) $ (1,297) $ (7,552) $ (4,792)
-------------------------------------------------------------------------
Net (loss) income
attributable to
Class A Subordinate
Voting and Class B
Shares (4,919) 21,798 64,350 88,233
Retained earnings,
beginning of period 167,749 93,736 111,450 49,768
Dividends on Class A
Subordinate Voting
and Class B Shares (5,846) (4,084) (18,816) (14,247)
Adjustment for change
in accounting policy
for goodwill (note 7) - - - (12,304)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 156,984 $ 111,450 $ 156,984 $ 111,450
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting
or Class B Share
Basic $ (0.06) $ 0.32 $ 0.88 $ 1.30
Diluted $ (0.06) $ 0.25 $ 0.77 $ 1.03
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
(in millions)
Basic 83.5 68.1 73.4 67.8
Diluted 83.5 98.3 104.3 98.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
-------------------------------------------------------------------------
(U.S. dollars in
thousands) 2003 2002 2003 2002
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net (loss) income $ (3,777) $ 23,095 $ 71,902 $ 93,025
Items not involving
current cash flows 47,477 21,576 111,595 95,557
-------------------------------------------------------------------------
43,700 44,671 183,497 188,582
Changes in non-cash
working capital 43,591 46,470 (51,621) 50,011
-------------------------------------------------------------------------
87,291 91,141 131,876 238,593
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Fixed asset additions (59,228) (49,564) (177,906) (99,940)
Increase in investments
and other assets (5,975) (5,512) (8,057) (9,708)
Business acquisitions
(note 8) (5,808) - (19,068) (2,584)
Proceeds from
disposition of fixed
and other assets (2) 1,353 455 1,578
Proceeds from
disposition of
operating division,
net (note 15(c)) - - - 5,736
-------------------------------------------------------------------------
(71,013) (53,723) (204,576) (104,918)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness 90,366 (34,967) 109,689 (110,339)
Repayments of debt due
to Magna and its
affiliates (72,340) - (72,417) (7,836)
Increase (decrease) in
long term debt 3,980 (361) (179) (10,844)
Issuance of Convertible
Debentures (note 10) - - 66,128
Issuances of Class A
Subordinate Voting
Shares (note 11) - - 4,715 4,663
Convertible Debentures
interest payments (2,499) - (3,751)
Dividends on
Convertible Series
Preferred Shares (2,191) (3,022) (12,177) (12,098)
Dividends on Class A
Subordinate Voting
and Class B Shares (5,846) (4,084) (18,816) (14,247)
-------------------------------------------------------------------------
11,470 (42,434) 73,192 (150,701)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents 4,134 3,078 10,994 4,814
-------------------------------------------------------------------------
Net increase (decrease)
in cash and cash
equivalents during
the period 31,882 (1,938) 11,486 (12,212)
Cash and cash
equivalents,
beginning of period 61,663 83,997 82,059 94,271
-------------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 93,545 $ 82,059 $ 93,545 $ 82,059
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
Three and twelve month periods ended December 31, 2003 and 2002
(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 December 31, 2003 and the results of its
operations and cash flows for the three and twelve month periods ended
December 31, 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 reported amounts of assets and
liabilities; the disclosure of contingent assets and liabilities at the
date of the unaudited interim consolidated financial statements; and the
reported amounts of revenue and expenses during the period. 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. United Kingdom Impairment Charge
Upon completion of the 2004 business planning process, the Company
identified a number of indicators of United Kingdom long-lived asset
impairment including the continuation of United Kingdom budgeted
operating losses, uncertain long-term production volumes for the United
Kingdom market in general which affect certain of the Company's existing
programs, and excess paint capacity in the United Kingdom market. In
addition, Ford of Europe's decision to produce its 2006 Freelander
program at Ford facilities in Halewood, England, has caused the Company
to relocate its related 2006 Freelander fascia production from Sybex to
the closer Merplas facility.
Under Canadian GAAP, these impairment indicators required the Company to
assess its United Kingdom asset base for recoverability. Estimated
discounted future cash flows were used to determine the amount of the
write-down. The result was a write-down of $12.4 million in the three
month period ended December 31, 2003 of certain of the assets of the
Company's Sybex facility. This write-down will have no near term impact
on operations at the Company's United Kingdom facilities which will
continue their operations in the normal course.
As a result of cumulative losses in the United Kingdom, this impairment
charge has not been tax effected.
6. Continental Europe Paint Capacity Consolidation Charges
During the three month period ended December 31, 2003, the Company
completed, and committed to, a plan to consolidate its continental Europe
paint capacity. This plan entails mothballing the Company's Decoform
paint line in Germany and transferring Decoform's painted trim and fascia
business to the Company's newer paint lines at its Decorate and Belplas
facilities in Germany and Belgium, respectively. Decoform will continue
to mold and assemble products for the Company's Decorate facility.
The consolidation required the write-down of the carrying value of the
Decoform paint line. The consolidation will also result in severance
costs associated with a reduction of the Decoform workforce of 284
employees. Total charges in 2003 related to the continental Europe paint
capacity consolidation plan were $11.4 million.
Decoform employees have a contractual notice period of up to two quarters
following the quarter in which individual notice is given. The
consolidation plan envisions substantially all employees working through
their contractual notice periods with paint line production transfers
completed by the end of 2004.
These continental Europe paint capacity consolidation charges have
resulted in large accounting losses in Germany and create both taxable
temporary difference and loss carryforward future tax assets. A full
valuation allowance has been provided against these future tax assets
resulting in no net tax recovery in the consolidated statement of income
against these charges.
7. Accounting Policy Changes
Stock-based Compensation
As provided for by new accounting recommendations of The Canadian
Institute of Chartered Accountants (the "CICA"), the fair value of stock
options granted, modified or settled on or after January 1, 2003 is
recognized on a straight-line basis over the applicable stock option
vesting period as compensation expense in selling, general and
administrative expenses in the consolidated statements of income. For
stock options granted prior to January 1, 2003 which are not accounted
for at fair value, pro forma earnings disclosure showing the impact of
fair value accounting is included in note 12. The impact of this
accounting policy change on reported net income and earnings per share is
as follows:
Three Month Twelve Month
(U.S. dollars, in thousands Period Ended Period Ended
except per share figures) December 31, 2003 December 31, 2003
-------------------------------------------------------------------------
Increase in selling, general
and administrative expenses $ 67 $ 267
-------------------------------------------------------------------------
Reduction of net income $ 67 $ 267
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reduction of earnings per Class A
Subordinate Voting or Class B Share
Basic $ - $ -
Diluted $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill and Deferred Preproduction Expenditures
In 2002, the Company adopted the new accounting recommendations of the
CICA for goodwill and other intangible assets. These accounting
recommendations require that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method of accounting,
provide new criteria to determine when acquired intangible assets should
be recognized separately from goodwill and employ new non-amortization
and impairment rules for existing goodwill and indefinite life 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 initial 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 2002. As a
result of cumulative losses in the United Kingdom, this write-down was
not tax effected.
In addition, commencing in 2002, the Company ceased recording
amortization of existing goodwill. The Company does not have any
indefinite life intangible assets meeting the non-amortization criteria
under the new accounting recommendations.
8. Business Acquisitions
(a) During the fourth quarter of 2003, the Company acquired the shares of
HDO Galvano-und Oberflachentechnik GmbH ("HDO"). HDO operated a chroming
line adjacent to the Company's Idoplas facility in Germany. The line is
being converted to allow for grille chroming and will be integrated into
Idoplas' operations. The Company expects to launch the chroming line in
2004 and commence the insourcing of grille chroming business previously
outsourced by Decoma's European operations. Total consideration paid in
connection with the acquisition amounted to $5.8 million.
(b) 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 was $10.4 million. The transaction closed on
April 14, 2003 with a transition of the Hampton, Virginia contracts and
assets over the balance of 2003.
(c) 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 2003, respectively, each in the amount of Cdn$4.0 million that arose
on the May 2001 acquisition of the remaining minority interest in Decomex
Inc.
9. Debt
(a) Convertible Series Preferred Shares
During the third quarter of 2003, the Series 1, 2 and 3 Convertible
Series Preferred Shares held by Magna International Inc. ("Magna") were
converted into 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 liability amounts for the Series 4 and 5 Convertible Series Preferred
Shares are presented as current liabilities. The Series 4 Convertible
Series Preferred Shares are retractable by Magna at their aggregate face
value of Cdn$100 million after December 31, 2003 and the Series 5
Convertible Series Preferred are retractable by Magna at their aggregate
face value of Cdn$100 million commencing 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 and are redeemable by the Company commencing December 31, 2005.
(b) Credit Facility
At December 31, 2003 the Company had lines of credit totaling
$316.0 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
December 31, 2003 were approximately $122.7 million.
(c) Debt Due to Magna and its Affiliates
The Company's debt due to Magna and its affiliates consists of the
following:
-------------------------------------------------------------------------
(U.S. dollars in thousands) December 31, December 31,
2003 2002
-------------------------------------------------------------------------
Debt denominated in Canadian dollars (i) $ 46,512 $ 38,256
Debt denominated in Euros (ii) 94,128 139,324
Capital lease obligation denominated in Euros 1,164 1,050
-------------------------------------------------------------------------
141,804 178,630
Less due within one year 141,804 103,536
-------------------------------------------------------------------------
$ - $ 75,094
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes:
(i) 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 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, 4.19% effective July 1, 2003, 3.86%
effective October 1, 2003 and 3.65% effective January 1, 2004.
The maturity date of the Cdn$60 million debt has been extended
to March 31, 2004.
(ii) This debt, comprised of three tranches, initially bore interest
at 7.0%, 7.0% and 7.5%, respectively, and was repayable
October 1, 2002, October 1, 2003 and December 31, 2004,
respectively. The maturity date and the interest rate on the
first tranche was renegotiated to 4.29% effective October 2,
2002, 3.86% effective January 2, 2003, 3.51% effective April 2,
2003, 3.14% effective July 2, 2003 and 3.32% effective
October 2, 2003. The maturity date and the interest rate on the
second tranche was renegotiated to 3.32% effective October 2,
2003. Substantially all of the first and second tranches were
repaid in December 2003. The remaining portions of the first and
second tranches outstanding at December 31, 2003 have
subsequently been repaid. The third and final tranche of this
debt, totaling Euro 72.0 million, continues to be due
December 31, 2004 and bears interest at its original rate of
7.5%.
10. Convertible Debentures
On March 27, 2003, the Company issued Cdn$100 million of unsecured,
subordinated Convertible Debentures bearing interest at 6.5% and maturing
March 31, 2010. The Convertible 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 Convertible 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 Convertible Debentures are redeemable
at the Company's option at any time. On redemption or maturity, the
Company will have the option of retiring the Convertible 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 Convertible Debentures.
Under Canadian GAAP, the key attributes of the Convertible 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 Convertible Debentures would
have borne absent the holders' conversion feature. The resulting
discount is accreted to the Convertible Debentures' face value over
the period from issuance to unrestricted redemption (March 31, 2008)
through periodic charges, net of income taxes, presented as financing
charges on Convertible Debentures in the consolidated statements of
income; and
- the holders' conversion feature is similar to a stock warrant as it
provides the holder with the option to exchange their Convertible
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
Convertible Debentures exercised their fixed price conversion rights at
the date of issuance of the Convertible Debentures.
11. Capital Stock
Class and Series of Outstanding Securities
For details concerning the nature of the Company's securities, 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:
-------------------------------------------------------------------------
Authorized Issued
-------------------------------------------------------------------------
Convertible Series Preferred Shares
(Convertible into Class A Subordinate
Voting Shares) 3,500,000 2,000,000
Preferred Shares, issuable in series Unlimited -
Class A Subordinate Voting Shares Unlimited 51,598,628
Class B Shares
(Convertible into Class A Subordinate
Voting Shares) Unlimited 31,909,091
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the second quarter of 2003, the Company issued 548,600 Class A
Subordinate Voting Shares to the Decoma employee deferred profit sharing
plan.
During the third quarter of 2003, the Company issued 14,895,729 Class A
Subordinate Voting Shares on conversion of the Series 1, 2 and 3
Convertible Series Preferred Shares (see note 9(a)).
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 Convertible Debentures issued and outstanding as at
December 31, 2003 were exercised or converted:
-------------------------------------------------------------------------
Number of Shares
-------------------------------------------------------------------------
Class A Subordinate Voting Shares
outstanding at December 31, 2003 51,598,628
Class B Shares outstanding at December 31, 2003 31,909,091
Options to purchase Class A Subordinate Voting Shares 2,640,000
Convertible Debentures, convertible by the holders
at Cdn$13.25 per share 7,547,170
Convertible Series Preferred Shares,
convertible at Cdn$13.20 per share 15,151,516
-------------------------------------------------------------------------
108,846,405
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The above amounts include shares issuable if the holders of the
Convertible Debentures exercise their conversion option but exclude Class
A Subordinate Voting Shares issuable, only at the Company's option, to
settle interest and principal related to the Convertible Debentures. The
number of Class A Subordinate Voting Shares issuable at the Company's
option is dependent on the trading price of Class A Subordinate Voting
Shares at the time the Company elects to settle Convertible Debenture
interest and principal with shares.
12. Incentive Stock Options
Information concerning the Company's Incentive Stock Option Plan is
included in note 12, "Capital Stock", of the Company's annual financial
statements. The following is a continuity schedule of options
outstanding:
-------------------------------------------------------------------------
Weighted
Average Number of
Exercise Options
Number Price Exercisable
-------------------------------------------------------------------------
Outstanding at December 31, 2002 2,195,000 Cdn$ 13.13 1,444,000
Granted 455,000 Cdn$ 12.43
Cancelled (10,000) Cdn$ 10.30 (4,000)
Vested 339,000
-------------------------------------------------------------------------
Outstanding at December 31, 2003 2,640,000 Cdn$ 13.02 1,779,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The maximum number of shares reserved to be issued for stock options is
4,100,000 Class A Subordinate Voting Shares. The number of reserved but
unoptioned shares at December 31, 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 periods ended December 31,
2003 and 2002):
-------------------------------------------------------------------------
Twelve Month Periods
Ended December 31,
-------------------------------------------------------------------------
(U.S. dollars in thousands) 2003 2002
-------------------------------------------------------------------------
Risk free interest rate 3.0% 2.7%
Expected dividend yield 3.2% 1.9%
Expected volatility 39% 37%
Expected life of options 5 years 5 years
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options granted prior to January 1, 2003 are not accounted for at
fair value. Had these stock options been accounted for at fair value, the
Company's net income attributable to Class A Subordinate Voting and Class
B Shares would have been:
-------------------------------------------------------------------------
Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
-------------------------------------------------------------------------
(U.S. dollars, in
thousands except
per share figures) 2003 2002 2003 2002
-------------------------------------------------------------------------
Net (loss) income
attributable to
Class A Subordinate
Voting and Class B
Shares $ (4,919) $ 21,798 $ 64,350 $ 88,233
Pro forma adjustments
for the fair value
of stock options
granted prior to
January 1, 2003 (254) (203) (947) (1,019)
-------------------------------------------------------------------------
Pro forma net (loss)
income attributable
to Class A
Subordinate Voting
and Class B Shares $ (5,173) $ 21,595 $ 63,403 $ 87,214
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro forma earnings
per Class A
Subordinate Voting
or Class B Share
Basic $ (0.06) $ 0.32 $ 0.86 $ 1.29
Diluted $ (0.06) $ 0.25 $ 0.76 $ 1.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. 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.
14. Foreign Exchange
Selling, general and administrative expenses are net of earnings (losses)
resulting from foreign exchange of:
-------------------------------------------------------------------------
Three Month Periods Twelve Month Periods
Ended December 31, Ended December 31,
-------------------------------------------------------------------------
(U.S. dollars
in thousands) 2003 2002 2003 2002
-------------------------------------------------------------------------
Foreign exchange
(losses) income $ (1,008) $ 475 $ (7,259) $ 494
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. 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 fourth quarter of 2002, the Company permanently
repatriated Euro 10 million from its European operations. This
repatriation gave rise to the recognition of a pro rata amount of the
Company's cumulative translation adjustment account. This amount,
totalling $0.5 million, has been included in other income and is not
subject to tax.
(c) 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.
16. Segmented Information
The Company operates in one industry segment, the automotive exteriors
business. As at December 31, 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 operate separately from the Company's
North American divisions as a result of differences in customer mix and
business environment. The Company's internal financial reports, which are
reviewed by executive management including the Company's President and
Chief Executive Officer, segment divisional results between North America
and Europe. This segmentation recognizes the different geographic
business risks faced by the Company's North American and European
divisions, including vehicle production volumes in North America and
Europe, foreign currency exposure, differences in OEM customer mix, the
level of customer outsourcing and the nature of products and systems
outsourced.
The accounting policies of each segment are consistent with those used in
the preparation of the unaudited interim consolidated financial
statements. Inter-segment sales and transfers are accounted for at fair
market value. The following tables show certain information with respect
to segment disclosures.
-------------------------------------------------------------------------
Three Month Period Ended December 31, 2003
-------------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 436,310 $ 212,969 $ - $ 649,279
Inter-segment sales (2,358) (762) - (3,120)
-------------------------------------------------------------------------
Sales to external
customers $ 433,952 $ 212,207 $ - $ 646,159
-------------------------------------------------------------------------
Depreciation and
amortization $ 17,242 $ 8,331 $ - $ 25,573
-------------------------------------------------------------------------
Other charges
(notes 5 & 6) $ - $ 23,785 $ - $ 23,785
-------------------------------------------------------------------------
Operating income
(loss) $ 54,335 $ (34,201) $ (1,502) $ 18,632
-------------------------------------------------------------------------
Equity income $ (416) $ - $ - $ (416)
-------------------------------------------------------------------------
Interest expense
(income), net $ 11,912 $ 3,802 $ (12,849) $ 2,865
-------------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 2,014 $ 2,014
-------------------------------------------------------------------------
Fixed assets, net $ 449,571 $ 230,926 $ - $ 680,497
-------------------------------------------------------------------------
Fixed asset additions $ 31,361 $ 27,867 $ - $ 59,228
-------------------------------------------------------------------------
Goodwill, net $ 50,174 $ 20,932 $ - $ 71,106
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Period Ended December 31, 2002
-------------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 368,220 $ 160,964 $ - $ 529,184
Inter-segment sales (308) (688) - (996)
-------------------------------------------------------------------------
Sales to external
customers $ 367,912 $ 160,276 $ - $ 528,188
-------------------------------------------------------------------------
Depreciation and
amortization $ 14,445 $ 5,401 $ - $ 19,846
-------------------------------------------------------------------------
Operating income
(loss) $ 55,652 $ (10,355) $ (2,596) $ 42,701
-------------------------------------------------------------------------
Equity income $ (47) $ - $ - $ (47)
-------------------------------------------------------------------------
Interest expense
(income), net $ 8,935 $ 4,461 $ (10,886) $ 2,510
-------------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 1,938 $ 1,938
-------------------------------------------------------------------------
Other income
(note 15) $ - $ - $ (495) $ (495)
-------------------------------------------------------------------------
Fixed assets, net $ 358,675 $ 166,788 $ - $ 525,463
-------------------------------------------------------------------------
Fixed asset additions $ 23,828 $ 25,736 $ - $ 49,564
-------------------------------------------------------------------------
Goodwill, net $ 44,728 $ 17,280 $ - $ 62,008
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve Month Period Ended December 31, 2003
-------------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 1,616,812 $ 744,497 $ - $ 2,361,309
Inter-segment sales (2,885) (2,594) - (5,479)
-------------------------------------------------------------------------
Sales to external
customers $ 1,613,927 $ 741,903 $ - $ 2,355,830
-------------------------------------------------------------------------
Depreciation and
amortization $ 62,407 $ 27,487 $ - $ 89,894
-------------------------------------------------------------------------
Other charges
(notes 5 & 6) $ - $ 23,785 $ - $ 23,785
-------------------------------------------------------------------------
Operating income
(loss) $ 213,804 $ (46,109) $ (16,505) $ 151,190
-------------------------------------------------------------------------
Equity income $ (1,844) $ - $ - $ (1,844)
-------------------------------------------------------------------------
Interest expense
(income), net $ 32,825 $ 17,184 $ (39,316) $ 10,693
-------------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 8,631 $ 8,631
-------------------------------------------------------------------------
Other income
(note 15) $ - $ - $ (1,387) $ (1,387)
-------------------------------------------------------------------------
Fixed assets, net $ 449,571 $ 230,926 $ - $ 680,497
-------------------------------------------------------------------------
Fixed asset additions $ 108,884 $ 69,022 $ - $ 177,906
-------------------------------------------------------------------------
Goodwill, net $ 50,174 $ 20,932 $ - $ 71,106
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Twelve Month Period Ended December 31, 2002
-------------------------------------------------------------------------
(U.S. dollars North
in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 1,486,975 $ 572,613 $ - $ 2,059,588
Inter-segment sales (1,588) (1,327) - (2,915)
-------------------------------------------------------------------------
Sales to external
customers $ 1,485,387 $ 571,286 $ - $ 2,056,673
-------------------------------------------------------------------------
Depreciation and
amortization $ 55,454 $ 22,830 $ - $ 78,284
-------------------------------------------------------------------------
Other charge (note 7) $ - $ 8,301 $ - $ 8,301
-------------------------------------------------------------------------
Operating income
(loss) $ 204,431 $ (22,595) $ (8,143) $ 173,693
-------------------------------------------------------------------------
Equity income $ (521) $ - $ - $ (521)
-------------------------------------------------------------------------
Interest expense
(income), net $ 27,196 $ 19,826 $ (35,038) $ 11,984
-------------------------------------------------------------------------
Amortization of
discount on
Convertible Series
Preferred Shares $ - $ - $ 8,351 $ 8,351
-------------------------------------------------------------------------
Other income
(note 15) $ (3,874) $ - $ (495) $ (4,369)
-------------------------------------------------------------------------
Fixed assets, net $ 358,675 $ 166,788 $ - $ 525,463
-------------------------------------------------------------------------
Fixed asset additions $ 54,505 $ 45,435 $ - $ 99,940
-------------------------------------------------------------------------
Goodwill, net $ 44,728 $ 17,280 $ - $ 62,008
-------------------------------------------------------------------------
-------------------------------------------------------------------------