Magna announces fourth quarter and 2003 fiscal year results
AURORA, ON, February 27 -- Magna International Inc. (TSX: MG.A, MG.B; NYSE: MGA) today reported sales, profits and earnings per share for the three months and year ended December 31, 2003.
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THREE MONTHS ENDED YEAR ENDED
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Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2003 2002 2003 2002
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Sales US$4,623 US$3,443 US$15,345 US$12,422
Net income (1),(4) US$ 140 US$ 110 US$ 522 US$ 554
Net income from continuing
operations(1),(2),(4) US$ 140 US$ 124 US$ 589 US$ 570
Net income from
operations(3),(4) US$ 150 US$ 110 US$ 606 US$ 550
Diluted earnings per
share (1),(4) US$ 1.38 US$ 1.10 US$ 5.21 US$ 5.82
Diluted earnings per share
from continuing
operations (1),(2),(4) US$ 1.38 US$ 1.25 US$ 5.91 US$ 5.99
Diluted earnings per share
from operations (3),(4) US$ 1.48 US$ 1.10 US$ 6.07 US$ 5.77
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(1) Net income, net income from continuing operations, diluted earnings
per share and diluted earnings per share from continuing operations
have been prepared in accordance with Canadian Generally Accepted
Accounting Principles ("Canadian GAAP").
(2) On September 2, 2003, we distributed 100% of the Class A Subordinate
Voting and Class B Shares of MI Developments Inc. ("MID") to our
shareholders of record as of August 29, 2003. MID owns substantially
all of what was previously our automotive real estate as well as our
former controlling interest in Magna Entertainment Corp. ("MEC"). Net
income from continuing operations and diluted earnings per share from
continuing operations reflect the disclosure of MEC as discontinued
operations until August 29, 2003.
(3) We measure and present net income from operations and diluted
earnings per share from operations because they are measures that are
widely used by analysts and investors in evaluating our operating
performance. However, net income from operations and diluted earnings
per share from operations do not have any standardized meaning under
Canadian GAAP and are therefore unlikely to be comparable to similar
measures presented by other companies.
Net income from operations for the three months ended December 31,
2003 is based on net income but excludes a future income tax charge
of US$10 million. Diluted earnings per share from operations for the
three months ended December 31, 2003 are based on diluted earnings
per share but exclude the future income tax charge of US$0.10 per
share.
Net income from operations for the year ended December 31, 2003 is
based on net income but excludes non-cash impairment losses of
US$68 million related to MEC and US$6 million related to certain real
estate properties of MID, associated with the distribution of shares
of MID on September 2, 2003, and excludes the future income tax
charge described above. Diluted earnings per share from operations
for the year ended December 31, 2003 are based on diluted earnings
per share but exclude the non-cash impairment losses associated with
the distribution of shares of MID and the future income tax charge,
as described above.
Net income from operations for the year ended December 31, 2002 is
based on net income but excludes ownership dilution gains and losses
from public subsidiary share issuances totaling a net gain of
US$4 million. Diluted earnings per share from operations for the year
ended December 31, 2002 are based on diluted earnings per share, but
exclude the ownership dilution gains and losses described above and
an US$11 million charge to retained earnings related to foreign
exchange on the redemption of the 4.875% Convertible Subordinated
Debentures.
(4) Net income, net income from continuing operations, net income from
operations, diluted earnings per share, diluted earnings per share
from continuing operations, and diluted earnings per share from
operations all include the impact of certain non-cash impairment
charges recorded during the three month periods ended December 31,
2003 and 2002.
During the three months ended December 31, 2003, we recorded
US$17 million in non-cash impairment charges related to long-lived
assets at certain operations. The impact of these impairment charges
to net income for the three months and year ended December 31, 2003
was US$13 million. The impact to diluted earnings per share for the
three months and year ended December 31, 2003 was US$0.13.
During the three months ended December 31, 2002, we recorded
US$54 million in non-cash impairment charges related to long-lived
assets at certain operations. The impact of these impairment charges
to net income for the three months and year ended December 31, 2002
was US$34 million. The impact to diluted earnings per share for the
three months and year ended December 31, 2002 was US$0.35 and US$0.37,
respectively.
For more information see notes 3, 4, 5, 6 and 9 to the Interim Unaudited
Fourth Quarter and 2003 Consolidated Financial Statements attached.
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All amounts in U.S. dollars and all tabular amounts in millions,
except per share figures.
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THREE MONTHS ENDED DECEMBER 31, 2003
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We posted sales of US$4.6 billion for the three months ended December 31, 2003, an increase of 34% over the three months ended December 31, 2002. The higher sales level in the fourth quarter of 2003 reflects increases of 21% in North American content per vehicle and 64% in European content per vehicle over the comparable quarter in 2002. The increase in content per vehicle in North America was largely attributable to the strengthening of the Canadian dollar against the U.S. dollar and new product launches. The increase in content per vehicle in Europe was largely attributable to new product launches and the strengthening of the euro and the British pound, each against the U.S. dollar. During the fourth quarter of 2003, North American vehicle production increased approximately 1% and European vehicle production declined approximately 1% from the comparable quarter.
We earned net income from operations for the three months ended December 31, 2003 of US$150 million, compared to US$110 million for the comparable quarter in 2002. Excluding the impairment charges described in note 4 above, net income from operations for the fourth quarter of 2003 would have been US$163 million, an increase of US$19 million or 13% over the comparable quarter in 2002. Net income and net income from continuing operations for the fourth quarter of 2003 were both US$140 million.
Diluted earnings per share from operations were US$1.48 for the three months ended December 31, 2003, compared to US$1.10 for the three months ended December 31, 2002. Excluding the impairment charges described in note 4 above, diluted earnings per share from operations would have been US$1.61, an increase of US$0.16 or 11% over the comparable quarter in 2002. Diluted earnings per share and diluted earnings per share from continuing operations for the fourth quarter of 2003 were both US$1.38.
During the three months ended December 31, 2003, we generated cash from operations before changes in non-cash working capital of US$327 million, an increase of 10% over the comparable quarter in 2002. We also generated US$538 million from non-cash working capital for the fourth quarter of 2003. Total investment activities for the fourth quarter of 2003 were US$437 million, including US$302 million in fixed asset additions, US$33 million for acquisitions, a US$93 million increase in other assets, and a US$9 million increase in investments.
YEAR ENDED DECEMBER 31, 2003
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Sales for the year ended December 31, 2003 were US$15.3 billion, an increase of 24% over the year ended December 31, 2002. The higher sales level in 2003 reflects increases of 20% in North American content per vehicle and 43% in European content per vehicle over 2002. The increase in content per vehicle in North America was largely attributable to new product launches, the strengthening of the Canadian dollar against the US dollar, and acquisitions completed subsequent to the third quarter of 2002. The increase in content per vehicle in Europe was largely attributable to the strengthening of the euro and the British pound, each against the US dollar, new product launches, and acquisitions completed in 2002. During 2003, North American vehicle production declined approximately 3% and European vehicle production increased approximately 1% from the comparable period.
We earned net income from operations for the year ended December 31, 2003 of US$606 million, compared to US$550 million for the year ended December 31, 2002. Excluding the impairment charges described in note 4 above, net income from operations for 2003 would have been US$619 million, an increase of US$35 million or 6% over 2002. Net income and net income from continuing operations for 2003 were US$522 million and US$589 million, respectively.
Diluted earnings per share from operations were US$6.07 for the year ended December 31, 2003, compared to US$5.77 for the year ended December 31, 2002. Excluding the impairment charges described in note 4 above, diluted earnings per share from operations for 2003 would have been US$6.20, an increase of US$0.06 or 1% over 2002. Diluted earnings per share and diluted earnings per share from continuing operations for 2003 were US$5.21 and US$5.91, respectively.
During the year ended December 31, 2003, we generated cash from operations before changes in non-cash working capital of US$1.3 billion, an increase of 15% over the year ended December 31, 2002. We also invested US$82 million in non-cash working capital. Total investment activities for 2003 were US$1.1 billion, including US$801 million in fixed asset additions, US$41 million for acquisitions, and a US$210 million increase in other assets.
Please refer to the unaudited Interim Consolidated Financial Statements for the three months and year ended December 31, 2003 and the Management's Discussion and Analysis ("MD&A") for 2003 which are attached to this press release. The audited Consolidated Financial Statements and MD&A will be included in the 2003 Annual Report to Shareholders.
OTHER MATTERS
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We also announced that our Board of Directors today declared our regular quarterly dividend with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares in respect of the fiscal quarter ended December 31, 2003. The dividend of US$0.34 per share is payable on March 18, 2004 to shareholders of record on March 9, 2004.
We also reaffirmed our 2004 outlook as described in our press release dated January 7, 2004.
Magna, the most diversified automotive supplier in the world, designs, develops and manufactures automotive systems, assemblies, modules and components, and engineers and assembles complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks in North America, Europe, Mexico, South America and Asia. Magna's products include: automotive interior and closure components, systems and modules through Intier Automotive Inc.; metal body systems, components, assemblies and modules through Cosma International; exterior and interior mirror and engineered glass systems through Magna Donnelly; fascias, front and rear end modules, plastic body panels, exterior trim components and systems, greenhouse and sealing systems, roof modules and lighting components through Decoma International Inc.; various engine, transmission and fueling systems and components through Tesma International Inc.; a variety of drivetrain components through Magna Drivetrain; and complete vehicle engineering and assembly through Magna Steyr.
We have approximately 75,000 employees in 210 manufacturing operations and 49 product development and engineering centres in 22 countries. For further information on Magna, please visit our website at www.magna.com.
We will hold a conference call for interested analysts and shareholders to discuss our fourth quarter results on Friday, February 27, 2004 at 9:00 a.m. EST. The conference call will be chaired by Vincent J. Galifi, Executive Vice-President and Chief Financial Officer. The number to use for this call is 1-800-840-6238. The number for overseas callers is 1-416-620-2411. Please call in 10 minutes prior to the conference call. Magna will also webcast the conference call on our website: www.magna.com. The slide presentation accompanying the conference call will be on our website Friday morning prior to the call. In addition, a supplementary slide package for the fourth quarter and full year 2003 is currently available on our website.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(United States dollars in millions, except per share figures)
Three months ended Year ended
December 31, December 31,
Note 2003 2002 2003 2002
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(restated (restated
note 3) note 3)
Sales US$ 4,623 US$ 3,443 US$15,345 US$12,422
Cost of goods sold 3,940 2,866 12,805 10,273
Depreciation and
amortisation 136 116 505 422
Selling, general and
administrative 279 221 1,007 780
Interest income, net (3) (8) (13) (13)
Equity income (6) (6) (16) (23)
Impairment charges 5 17 36 17 36
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Operating income 260 218 1,040 947
Other income (loss) 3, 7 - - (6) 15
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Income from continuing
operations before
income taxes and
minority interest 260 218 1,034 962
Income taxes 6 107 83 373 326
Minority interest 13 11 72 66
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Net income from
continuing operations 140 124 589 570
Net loss from
discontinued
operations - MEC 4 - (14) (67) (16)
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Net income US$ 140 US$ 110 US$ 522 US$ 554
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Financing charges on
Preferred Securities and
other paid-in capital US$ (5) US$ (5) US$ (20) US$ (26)
Foreign exchange loss
on the redemption of
the 4.875% Convertible
Subordinated Debentures 9 - - - (11)
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Net income available to
Class A Subordinate
Voting and Class B
Shareholders 135 105 502 517
Retained earnings,
beginning of period 2,289 2,498 2,570 2,217
Dividends on Class A
Subordinate Voting
and Class B Shares (34) (33) (130) (121)
Distribution of
MID shares 3 - - (552) -
Adjustment for change
in accounting policy
related to goodwill 5 - - - (42)
Repurchase of Class A
Subordinate Voting
Shares 10 - - - (1)
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Retained earnings,
end of period US$ 2,390 US$ 2,570 US$ 2,390 US$ 2,570
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Earnings per Class A
Subordinate Voting or
Class B Share from
continuing operations:
Basic US$ 1.39 US$ 1.26 US$ 5.93 US$ 6.02
Diluted US$ 1.38 US$ 1.25 US$ 5.91 US$ 5.99
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Earnings per Class A
Subordinate Voting
or Class B Share:
Basic US$ 1.39 US$ 1.10 US$ 5.23 US$ 5.83
Diluted US$ 1.38 US$ 1.10 US$ 5.21 US$ 5.82
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Cash dividends paid per
Class A Subordinate
Voting or Class B
Share US$ 0.34 US$ 0.34 US$ 1.36 US$ 1.36
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Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in millions):
Basic 96.4 95.4 95.9 88.7
Diluted 97.0 95.8 96.3 92.0
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(United States dollars in millions)
Three months ended Year ended
December 31, December 31,
Note 2003 2002 2003 2002
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(restated (restated
note 3) note 3)
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income from
continuing operations US$ 140 US$ 124 US$ 589 US$ 570
Items not involving
current cash flows 187 174 699 554
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327 298 1,288 1,124
Changes in non-cash
working capital 538 231 (82) 249
Increase (decrease) in
deferred revenue (4) (1) 10 68
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861 528 1,216 1,441
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INVESTMENT ACTIVITIES
Fixed asset additions (302) (312) (801) (833)
Purchase of subsidiaries (33) 14 (41) 11
Decrease (increase)
in investments (9) 1 - (1)
Increase in other assets (93) (84) (210) (157)
Proceeds from disposition
of investments and
other 25 12 50 27
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(412) (369) (1,002) (953)
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FINANCING ACTIVITIES
Net issues (repayments)
of debt (38) (51) 73 (129)
Repayments of debentures'
interest obligations (2) - (6) (13)
Preferred Securities
distributions (6) (6) (26) (24)
Issues of subordinated
debentures by
subsidiaries 8 - - 66 -
Issues of Class A
Subordinate Voting
Shares 4 - 42 19
Issues of shares
by subsidiaries 3 - 16 66
Repurchase of Class A
Subordinate Voting
Shares - - - (2)
Dividends paid to
minority interests (5) (5) (16) (14)
Dividends 3 (32) (33) (147) (119)
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(76) (95) 2 (216)
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Effect of exchange rate
changes on cash and
cash equivalents 88 17 191 17
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Net increase in cash
and cash equivalents
during the period 461 81 407 289
Cash and cash equivalents,
beginning of period 1,067 1,040 1,121 832
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Cash and cash equivalents,
end of period US$ 1,528 US$ 1,121 US$ 1,528 US$ 1,121
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(United States dollars in millions)
December 31, December 31,
Note 2003 2002
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(restated
note 3)
ASSETS
Current assets
Cash and cash equivalents US$ 1,528 US$ 1,121
Accounts receivable 2,615 2,094
Inventories 1,116 916
Prepaid expenses and other 112 78
Discontinued operations - MEC 4 - 160
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5,371 4,369
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Investments 127 114
Fixed assets, net 3,300 3,663
Goodwill, net 5 505 466
Future tax assets 179 175
Other assets 334 270
Discontinued operations - MEC 4 - 1,096
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US$ 9,816 US$10,153
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness US$ 298 US$ 223
Accounts payable 2,471 1,954
Accrued salaries and wages 368 304
Other accrued liabilities 244 180
Income taxes payable 19 67
Long-term debt due within one year 35 36
Discontinued operations - MEC 4 - 172
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3,435 2,936
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Deferred revenue 80 86
Long-term debt 267 248
Debentures' interest obligation 41 39
Other long-term liabilities 207 186
Future tax liabilities 230 170
Minority interest 8 626 410
Discontinued operations - MEC 4 - 657
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4,886 4,732
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Shareholders' equity
Capital stock 10
Class A Subordinate Voting Shares
(issued: 95,310,518; December
31, 2002 - 94,477,224) 1,592 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 68 64
Contributed Surplus 3 -
Retained earnings 2,390 2,570
Currency translation adjustment 600 22
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4,930 5,421
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US$ 9,816 US$10,153
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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 audited 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 audited 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 December 31, 2003 and the results of operations
and cash flows for the three-month periods and years ended
December 31, 2003 and 2002.
2. ACCOUNTING CHANGE
Stock-Based Compensation
In November 2003, the Canadian Institute of Chartered Accountants
("CICA") amended Handbook Section 3870 "Stock-Based Compensation and
Other Stock-Based Payments" ("CICA 3870"). The revised standard
requires the use of the fair value method for all stock-based
compensation paid to employees. As permitted by CICA 3870, the
Company adopted these new recommendations prospectively without
restatement of any comparable period, effective January 1, 2003. For
awards granted prior to January 1, 2003, the Company continues to use
the intrinsic value method.
3. 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 The Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3475, "Disposal of Long-Lived Assets
and Discontinued Operations" ("CICA 3475"), the Company
recognised 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 4). 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) Cash Distribution
Dividends as presented in the consolidated statement of cash
flows include US$19 million with respect to the MID distribution,
which represents the amount of cash held by MID on
August 29, 2003.
4. DISCONTINUED OPERATIONS - MEC
The Company's revenues and expenses, cash flows, and assets,
liabilities and equity related to MEC are as follows:
Statements of income:
Three Eight
months months Year
ended ended ended
Dec. 31 Aug. 29 Dec. 31
2002 2003 2002
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Sales US$ 107 US$ 525 US$ 549
Costs and expenses 147 520 572
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Operating income (loss) (40) 5 (23)
Impairment loss recorded on
distribution (note 3) - (68) -
Dilution loss (a) - - (11)
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Loss before income taxes and
minority interest (40) (63) (34)
Income taxes (16) 3 (9)
Minority interest (10) 1 (9)
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Net loss US$ (14) US$ (67) US$ (16)
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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 recognised a loss of US$11 million
from its ownership dilution arising from the issue. The loss
incurred was not subject to income taxes as the issue was
completed on a primary basis by MEC.
Statements of cash flows:
Three Eight
months months Year
ended ended ended
Dec. 31 Aug. 29 Dec. 31
2002 2003 2002
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Cash provided from (used for):
OPERATING ACTIVITIES
Net loss US$ (14) US$ (67) US$ (16)
Items not involving current
cash flows 10 92 36
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(4) 25 20
Changes in non-cash working capital 16 (7) (1)
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12 18 19
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INVESTMENT ACTIVITIES
Fixed asset (additions) disposals 7 (45) (65)
Increase in other assets (14) (16) (27)
Proceeds from disposition of
investments and other 3 2 12
Business acquisitions (146) - (146)
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(150) (59) (226)
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FINANCING ACTIVITIES
Net issue (repayment) of debt 45 (46) 35
Issues of subordinated debentures 72 145 72
Issues of Class A Subordinate
Voting Stock - - 142
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117 99 249
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Effect of exchange rate changes
on cash and cash equivalents 2 3 6
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Net increase (decrease) in cash and
cash equivalents during the period (19) 61 48
Cash and cash equivalents,
beginning of period 125 106 58
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Cash and cash equivalents,
end of period US$ 106 US$ 167 US$ 106
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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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5. GOODWILL AND OTHER INTANGIBLE ASSETS
In accordance with CICA Handbook Section 3062, the Company completed
its initial impairment review of goodwill during 2002. Based on this
review, the Company recorded a goodwill write-down of US$51 million,
of which US$15 million related to Decoma International Inc.'s
("Decoma") 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
write-down of US$51 million, US$42 million was charged against January
1, 2002 opening retained earnings, representing Magna's ownership
interest in the write-downs of Decoma and Intier. The balance of the
goodwill write-down of US$9 million was reflected as a reduction in
January 1, 2002 opening minority interest.
In conjunction with the Company's annual goodwill and indefinite life
intangible asset impairment analysis, and other indicators of
impairment, the Company also assessed the recoverability of its
long-lived assets at certain operations. As a result of this
analysis, the Company has recorded impairment charges during 2003 and
2002 as follows:
2003 2002
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Impairment of goodwill - Intier US$ - US$ 4
Impairment of capital assets
Decoma 17 -
Intier - 20
Tesma - 12
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US$ 17 US$ 36
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(a) Decoma
Upon completion of its 2004 business planning process, Decoma
identified a number of indicators of United Kingdom long-lived
asset impairment, including the continuation of budgeted
operating losses, uncertain long-term production volumes for the
United Kingdom market in general which affect certain of Decoma's
existing programs, and excess paint capacity in the United
Kingdom market. These and other indicators of impairment required
Decoma 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 US$12 million of certain of the assets of Decoma's
Sybex facility.
During 2003, Decoma completed, and committed to, a plan to
consolidate its continental Europe paint capacity. This plan
entails shutting down Decoma's Decoform paint line in Germany and
transferring Decoform's painted trim and fascia business to
Decoma's newer paint lines in Germany and Belgium. The
consolidation required the write-down of the carrying value of
the Decoform paint line by US$5 million.
As a result of cumulative losses in the United Kingdom and
Germany, these impairment charges have not been tax benefited.
(b) Intier
Intier completed its annual goodwill impairment test as at
December 31, 2002, after the annual forecasting process had been
completed. As a result of this analysis, Intier determined that
goodwill of US$4 million relating to one reporting unit in its
Interiors Europe reporting segment was impaired under the new
rules. The impairment loss has been recorded in operating income
as a charge against earnings in 2002. There was no tax recovery
recorded on this charge to earnings.
In conjunction with the review of goodwill, Intier also assessed
the recoverability of its long-lived assets in the same reporting
unit in its Interiors Europe reporting segment. Discounted cash
flows were used to determine fair value. As a result of this
review, the Company reduced the carrying value of machinery and
equipment, leasehold improvements and buildings by US$20 million.
The US$20 million write-down of long-lived assets has been
recorded in operating income as a charge against earnings in 2002.
Net tax assets of US$2 million associated with these operations
were charged against earnings in 2002.
(c) Tesma
During 2002, as a result of current and historical operating
losses and projected future losses following the launch of new
business at its German die-casting facility, Tesma International
Inc. ("Tesma") initiated and completed a review for impairment of
the approximate US$21 million carrying value of capital and other
long-lived assets ("asset group") of this subsidiary, which
consisted mainly of machinery, equipment, land and buildings. The
estimated fair value of the asset group was determined primarily
using a market-based approach which estimates value based on
market prices in actual transactions and on asking prices for
currently available assets that are in a similar state and
condition. The remaining assets, for which the market approach
was not possible, were valued using a cost approach. Utilising
these approaches, the fair value of the asset group was
determined to be approximately US$9 million. As a result, Tesma
recorded a US$12 million write-down of the carrying value of the
respective assets.
6. INCOME TAXES
During the fourth quarter of fiscal 2003, the Company recorded a
future income tax charge of US$10 million related to the increase in
enacted income tax rates in Ontario, Canada.
7. OTHER INCOME (LOSS)
Other income for 2003 includes US$6 million of impairment losses
related to certain real estate properties of MID (note 3).
In July 2002, Tesma completed a public offering by issuing
2.85 million of its Class A Subordinate Voting Shares for aggregate
cash consideration, net of share issue expenses, of US$62 million.
Magna recognised a gain of US$13 million from its ownership dilution
arising from the issue.
In July 2002, Decoma issued 451,400 shares of its Class A Subordinate
Voting Stock to satisfy its obligations under Decoma's Deferred
Profit Sharing Plan. Magna recognised a gain of US$2 million from its
ownership dilution arising from the issue.
The gains recognised were not subject to income taxes as the issues
were completed on a primary basis by Tesma and Decoma, respectively.
8. 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.
9. 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 balance of 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.
10. 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 year 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
certain executives. During 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 3).
(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 December 31, 2003 were
exercised:
Class A Subordinate Voting and Class B Shares
outstanding at December 31, 2003 96.4
Stock options 3.0
-----------------------------------------------------------------
99.4
-----------------------------------------------------------------
-----------------------------------------------------------------
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.
11. STOCK BASED COMPENSATION
(a) The following is a continuity schedule of options outstanding
(number of options in the table below are expressed in whole
numbers and have not been rounded to the nearest million):
Options outstanding
-----------------------
Weighted
average Number
Number exercise of options
of options price exercisable
-----------------------------------------------------------------
-----------------------------------------------------------------
Outstanding at
December 31, 2002 3,377,875 Cdn$89.19 1,958,375
Granted 320,000 Cdn$93.19 -
Exercised (36,850) Cdn$66.55 (36,850)
Vested - - 65,000
-----------------------------------------------------------------
Outstanding at
March 31, 2003 3,661,025 Cdn$89.77 1,986,525
Granted 40,000 Cdn$93.17 -
Exercised (64,150) Cdn$68.46 (64,150)
Cancelled (115,000) Cdn$104.08 (42,000)
Vested - - 8,000
-----------------------------------------------------------------
Outstanding at June 30, 2003 3,521,875 Cdn$89.73 1,888,375
Exercised (621,025) Cdn$74.83 (621,025)
Vested - - 25,000
Anti-dilution adjustment
related to MID
distribution (b) - (Cdn$11.98) -
-----------------------------------------------------------------
Outstanding at
September 30, 2003 2,900,850 Cdn$80.74 1,292,350
Granted 225,000 Cdn$105.05 -
Exercised (79,400) Cdn$89.51 (79,400)
Vested - - 779,000
-----------------------------------------------------------------
Outstanding at
December 31, 2003 3,046,450 Cdn$82.31 1,991,950
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) As a result of the dilutive impact of the MID distribution
(note 3), all issued but unexercised options for Magna Class A
Subordinate Voting Shares were adjusted down by Cdn$11.98 in
accordance with the adjustment mechanism prescribed by the TSX.
The adjustment mechanism is intended to ensure that the
difference between the fair market value of a Class A Subordinate
Voting Share and the exercise price of the stock options after
the MID distribution is not greater than the difference between
the fair market value of a Class A Subordinate Voting Share and
the exercise price of the stock options immediately before the
MID distribution.
(c) Prior to 2003, the Company did not recognise compensation expense
for its outstanding fixed price stock options. Effective
January 1, 2003, the Company adopted the fair value recognition
provisions of CICA 3870 "Stock-Based Compensation and Other
Stock-Based Payments" for all stock options granted after
January 1, 2003. The fair value of stock options is estimated at
the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions:
Date of Grant
-----------------------------------
December January January
2003 2003 2002
-----------------------------------------------------------------
Risk free interest rate 3.75% 4.25% 5%
Expected dividend yield 1.30% 2.12% 1.45%
Expected volatility 32% 28% 24%
Expected time until exercise 4 years 4 years 4 years
-----------------------------------------------------------------
-----------------------------------------------------------------
For the year ended December 31, 2003, the compensation expense
recognised in selling, general and administration expense related
to the Company's outstanding fixed price stock options amounted
to approximately US$4 million or US$0.04 per share.
For purposes of pro forma disclosures, the Company's net income
and basic and diluted earnings per Class A Subordinate Voting or
Class B Share for the three months and year ended
December 31, 2003 and 2002 would have been as follows:
Three months ended Year ended
December 31, December 31,
2003 2002 2003 2002
-----------------------------------------------------------------
Pro forma net income US$ 138 US$ 109 US$ 518 US$ 539
Pro forma earnings per
Class A Subordinate
Voting or Class B Share
Basic US$ 1.38 US$ 1.09 US$ 5.19 US$ 5.68
Diluted US$ 1.37 US$ 1.09 US$ 5.17 US$ 5.66
-----------------------------------------------------------------
-----------------------------------------------------------------
The weighted average fair value of options granted during the
year ended December 31, 2003 was Cdn$24.13 (2002 - Cdn$24.50).
(d) The Company has awarded to three executives an entitlement to
Class A Subordinate Voting Shares of the Company and its public
subsidiaries in the form of restricted stock. Such shares become
available to the executive, subject to acceleration on death and
disability, on December 31, 2006, provided certain conditions are
met and are to be released in equal amounts over a ten-year
period commencing January 1, 2007, subject to forfeiture under
certain circumstances. The fair value of the restricted stock
grant is amortised to compensation expense from the effective
date of the grant to the final vesting date. At December 31,
2003, unamortised compensation expense related to the restricted
stock arrangements was US$16 million.
12. SEGMENTED INFORMATION
Three months ended Three months ended
December 31, 2003 December 31, 2002
------------------------------------------ --------------------------
Fixed Fixed
Total Operating assets, Total Operating assets,
sales income net sales income net
------------------------------------------ --------------------------
Public Automotive
Operations
Decoma
International
Inc. US$ 663 US$ 16 US$ 684 US$ 542 US$ 39 US$ 529
Intier
Automotive
Inc. 1,421 39 544 1,055 16 460
Tesma
International
Inc. 299 32 305 248 16 275
Wholly Owned
Automotive
Operations
Magna Steyr 1,016 24 545 488 2 609
Other
Automotive
Operations 1,264 100 1,156 1,130 115 985
Corporate and
other (40) 49 66 (20) 30 805
------------------------------------------ --------------------------
Total
reportable
segments US$4,623 US$ 260 3,300 US$3,443 US$ 218 3,663
Current assets 5,371 4,369
Investments,
goodwill and
other assets 1,145 1,025
Discontinued
operations
long-term
assets - 1,096
------------------------------------------ --------------------------
Consolidated
total assets US$9,816 US$10,153
------------------------------------------ --------------------------
------------------------------------------- -------------------------
Year ended Year ended
December 31, 2003 December 31, 2002
------------------------------------------ --------------------------
------------------------------------------ --------------------------
Fixed Fixed
Total Operating assets, Total Operating assets,
sales income net sales income net
------------------------------------------ --------------------------
Public
Automotive
Operations
Decoma
International
Inc. US$2,426 US$ 142 US$ 684 US$2,125 US$ 170 US$ 529
Intier
Automotive
Inc. 4,654 124 544 3,862 114 460
Tesma
International
Inc. 1,102 110 305 926 83 275
Wholly Owned
Automotive
Operations
Magna Steyr 2,719 47 545 1,959 13 609
Other
Automotive
Operations 4,591 421 1,156 3,643 382 985
Corporate and
other (147) 196 66 (93) 185 805
------------------------------------------ --------------------------
Total
reportable
segments US$15,345 US$1,040 3,300 US$12,422 US$947 3,663
Current assets 5,371 4,369
Investments,
goodwill and
other assets 1,145 1,025
Discontinued
operations
long-term
assets - 1,096
------------------------------------------ --------------------------
Consolidated
total assets US$9,816 US$10,153
------------------------------------------ --------------------------
------------------------------------------ --------------------------
Substantially all of MID's automotive real estate assets that were
distributed to shareholders on September 2, 2003 (note 3) were
previously included in the Corporate and other segment.
13. SUBSEQUENT EVENTS
On January 2, 2004, Tesma completed the acquisition of Davis
Industries, Inc. ("Davis"). Davis produces stamped powertrain
components and assemblies at three manufacturing facilities in the
United States. For the fiscal year ended September 30, 2003, Davis
reported sales of approximately US$130 million.
The total consideration for the acquisition of Davis amounted to
approximately US$75 million, consisting of US$45 million paid in cash
and US$30 million of assumed debt. At December 31, 2003, Tesma
deposited the US$45 million cash payment into an escrow account to be
released on closing. This amount has been included in other assets.
14. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current period's method of presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
For the three months and year ended December 31, 2003
------------------------------------------------------------------------
All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular amounts are in millions of U.S. dollars, except per share figures and content per vehicle, unless otherwise noted. This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements for the three months and year ended December 31, 2003, which are prepared in accordance with Canadian generally accepted accounting principles. Where we say "we", "us", "our" or "Magna", we mean Magna International Inc. and its subsidiaries.
OVERVIEW
We are the most diversified automotive supplier in the world. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Mexico, South America and Asia. We supply our products and services through the following global product groups:
Public Subsidiaries
- Decoma International Inc. ("Decoma")
- 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
- Intier Automotive Inc. ("Intier")
- interior and closure components, systems and modules
- Tesma International Inc. ("Tesma")
- powertrain (engine, transmission, and fuel) components, modules
and systems
Wholly Owned Subsidiaries
- Magna Steyr
- complete vehicle engineering and assembly of low volume
derivative, niche and other vehicles; and
- complete drivetrain technologies
- Other Automotive Operations
- Cosma International - stamped, hydroformed and welded metal body
systems, components, assemblies and modules
- Magna Donnelly - exterior and interior mirror, interior lighting
and engineered glass systems, including advanced electronics
HIGHLIGHTS
2003 proved to be another successful year for us. During the year ended
December 31, 2003, we posted strong financial results, including:
- Record sales of US$15.3 billion;
- Operating income exceeded US$1 billion for the first time;
- Net income from continuing operations of US$589 million; and
- Diluted earnings per share from continuing operations of US$5.91
Other significant developments during 2003 and in early 2004 included the
following:
- On August 19, 2003, the distribution of 100% of the outstanding
shares of MI Developments Inc. ("MID") was approved by our
shareholders (the "MID distribution"). MID owns substantially all of
what was previously our automotive real estate and our former
controlling interest in Magna Entertainment Corp. ("MEC"). On
September 2, 2003, we distributed 100% of MID's Class A Subordinate
Voting and Class B Shares to our shareholders of record as of the
close of business on August 29, 2003 and, as a result, we no longer
have any ownership interest in MID or MEC.
In accordance with recommendations of the Canadian Institute of
Chartered Accountants, our results have been restated to reflect the
financial results of MEC as discontinued operations. However, because
we continue to occupy the automotive real estate 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 as continuing
operations in the consolidated financial statements until August 29,
2003.
- During 2003, we successfully launched a number of significant
production programs. In North America we launched the Chrysler
Pacifica (seats, hydroformed front and rear cradles) and Dodge
Durango (hydroformed frame) programs, the Ford Freestar and Mercury
Monterey (seats and interior components, Class A and various other
stampings) program and the Cadillac SRX (interior integration, front
and rear fascias, exterior mirrors, engine and transmission
components) program. In Europe we launched the Nissan Micra (cockpit)
program and Toyota Avensis (door panels) program.
In addition, at Magna Steyr in Europe we successfully launched two
major assembly programs, the Saab 93 Convertible and the BMW X3 in
the third and fourth quarter, respectively.
- 2003 proved to be our most successful year in terms of business
awards, with over US$6 billion awarded. In North America we were
awarded the frame for the Ford Explorer program; the transfer case
for General Motors' next generation full size pick ups and sport
utilities program; and complete seat programs in North America. In
Europe, we were awarded metal stampings and sub-assemblies for a
French-based OEM and the exterior mirrors for the DaimlerChrysler C
Class and Volkswagen Passat programs.
- These new business awards, along with the significant programs
launched in 2003 and launching in 2004, will allow us to continue our
historical track record of strong revenue growth, and are expected to
provide strong profit growth.
- In association with the award of the transfer case on the General
Motors' next generation full size pick ups and sport utilities
program, we recently established our seventh group, Magna Drivetrain.
Magna Drivetrain will provide highly engineered drivetrain products
(transfer cases, balance shafts and other drivetrain components) to
customers in North America and Europe and combines the existing Magna
Steyr Powertrain business with the new transfer case on the General
Motors' next generation full size pick ups and sport utilities
program.
- We have significantly strengthened our presence in the Asia Pacific
Basin. In Japan, we increased the size of our engineering, program
management and sales staff, moving into a larger office in Tokyo. In
addition, we established sales and engineering offices in Nagoya,
Japan and Seoul, Korea. Major awards for new business have included
an engine module program in Korea, engineering contracts for seating
and interior components in Japan and Korea and engineering contracts
for safety systems and vehicle engineering with several Japanese
customers.
- On January 2, 2004, Tesma completed the acquisition of Davis
Industries Inc. ("Davis"). This acquisition increases Tesma's
presence in the United States with a product base that is
complementary to Tesma's existing transmission product offerings and
other stamped components. The total consideration paid for the
acquisition of Davis amounted to approximately US$75 million,
consisting of US$45 million paid in cash, and of US$30 million of
assumed debt.
INDUSTRY TRENDS AND RISKS
A number of trends have had a significant impact on the global automotive
industry in recent years, including:
- increasing pressure by automobile manufacturers on automotive
suppliers to reduce their prices;
- globalization and consolidation of the automotive industry, including
both automobile manufacturers and automotive component suppliers;
- the evolving role of independent automotive component suppliers and
their progression up the "value chain";
- increasing out sourcing and modularization of vehicle production;
- increasing prevalence of lower volume "niche" vehicles built off high
volume global vehicle platforms; and
- growth of North American subsidiaries of foreign based automobile
manufacturers.
The following are some of the more significant risks and trends relating
to the automotive industry that could affect our ability to achieve our
desired results:
- An economic downturn could reduce or eliminate our profitability. The
global automotive industry is cyclical and is sensitive to changes in
economic conditions such as interest rates, consumer demand, oil and
energy prices and international conflicts.
- Increasing price reduction pressures from our customers could reduce
profit margins. In the past, we entered into, and will continue to
enter into, long term supply arrangements with automobile
manufacturers, which provide for, among other things, price
concessions over the supply term. To date, these concessions have
been somewhat offset by cost reductions arising principally from
product and process improvements and price reductions from our
suppliers. However, the competitive automotive industry environment
in both North America and Europe has caused these pricing pressures
to intensify. A number of our customers continue to demand additional
price reductions beyond existing contractual commitments, which could
have an adverse impact on our future profit margins. To the extent
that these price reductions are not offset through cost reductions,
our future profit margins would be adversely affected.
- We are under increasing pressure to absorb more costs related to
product design and engineering and tooling, as well as other items
previously paid for directly by automobile manufacturers. In
particular, some automobile manufacturers have requested that we pay
for design and engineering and tooling costs that are incurred up to
the start of production and recover these costs through increasing
the unit price of the particular products. If estimated production
volumes are not achieved, the design and engineering and tooling
costs incurred by us may not be fully recovered.
- Although we supply parts to most of the leading automobile
manufacturers for a wide variety of vehicles produced in North
America and Europe, we do not supply parts for all vehicles produced,
nor is the number or value of parts evenly distributed among the
vehicles for which we do supply parts. Shifts in market share among
vehicles could have an adverse effect on our sales and profit
margins.
- Although our financial results are reported in U.S. dollars, a
significant portion of our sales and operating costs are realised in
Canadian dollars, euros, British pounds and other currencies. Our
profitability is affected by movements of the U.S. dollar against the
Canadian dollar, the British pound, the euro or other currencies in
which we generate our revenues.
- Our customers are increasingly requesting that each of their
suppliers bear the cost of the repair and replacement of defective
products which are either covered under automobile manufacturer's
warranty or are the subject of a recall by the customer and which
were improperly designed, manufactured or assembled by their
suppliers. The obligation to repair or replace such parts could have
a negative impact on our results. We are also subject to the risk of
exposure to product liability claims in the event that the failure of
our products results in bodily injury and/or property damage. We may
experience material product liability losses in the future and may
incur significant costs to defend such claims. Currently, we have
product liability coverage under insurance policies. This coverage
will continue until August 2004, subject to renewal on an annual
basis. A successful claim against us in excess of our available
insurance coverage may have an adverse effect on our operations and
financial condition.
RESULTS OF OPERATIONS
Accounting Changes
Stock Based Compensation
In November 2003, the Canadian Institute of Chartered Accountants ("CICA") amended Handbook Section 3870 "Stock Based Compensation and Other Stock Based Payments" ("CICA 3870"). The revised standard requires the use of the fair value method for all stock based compensation paid to employees. The revised standard only applies to awards granted after January 1, 2002. As permitted by CICA 3870, effective January 1, 2003, we adopted these new recommendations prospectively without restatement of any comparable period. For awards granted prior to January 1, 2003, we continue to use the intrinsic value method. During 2003, we recorded stock option compensation expense in selling, general and administrative expenses of US$4 million, which had a negative impact on diluted earnings per Class A Subordinate Voting or Class B Share of US$0.04.
Average Foreign Exchange
For the For the three
year ended months ended
December 31, December 31,
---------------- ----------------
2003 2002 Change 2003 2002 Change
-------------------------------------------------------------------------
1 Canadian dollar equals
U.S. dollars 0.716 0.637 + 12% 0.760 0.638 + 19%
1 Euro equals
U.S. dollars 1.132 0.946 + 20% 1.192 1.000 + 19%
1 British pound equals
U.S. dollars 1.635 1.503 + 9% 1.708 1.572 + 9%
-------------------------------------------------------------------------
The preceding table reflects the average foreign exchange rates between the most common currencies in which we conduct business and our U.S. dollar reporting currency. The significant changes in these foreign exchange rates for the year and three months ended December 31, 2003 impacted the reported U.S. dollar amounts of our sales, expenses and income.
The results of foreign operations are translated into U.S. dollars using the average exchange rates in the table above for the relevant period. Throughout this MD&A, reference is made to the impact of translation of foreign operations on reported U.S. dollar amounts where relevant.
In addition to the impact of movements in exchange rates on translation of foreign operations into U.S. dollars, our results can also be affected by the impact of movements in exchange rates on foreign currency transactions (such as raw material purchases denominated in foreign currencies). However, as a result of historical hedging programs employed by us, foreign currency transactions in the current period have not been fully impacted by the recent movements in exchange rates. We record foreign currency transactions at the hedged rate.
Finally, holding gains and losses on foreign currency denominated monetary items, which are recorded in selling, general and administrative expenses, impact reported results. This MD&A makes reference to the impact of these amounts where relevant.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED DECEMBER 31, 2003
Sales
For the three
months ended
December 31,
---------------------
2003 2002 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 3.898 3.865 + 1%
Europe 4.155 4.185 - 1%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America US$ 603 US$ 500 + 21%
Europe US$ 418 US$ 255 + 64%
-------------------------------------------------------------------------
Sales
North American Production US$ 2,349 US$ 1,931 + 22%
European Production and Assembly 1,736 1,068 + 63%
Tooling, Engineering and Other 538 444 + 21%
-------------------------------------------------------------------------
Total Sales US$ 4,623 US$ 3,443 + 34%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total sales reached a record level in the fourth quarter of 2003, increasing 34% or US$1.2 billion to US$4.6 billion for the fourth quarter of 2003.
During the three months ended December 31, 2003, North American production sales increased by 22% or US$418 million over the three months ended December 31, 2002 to US$2.3 billion. This increase in production sales reflects a 21% increase in our North American average dollar content per vehicle, combined with a 1% increase in North American vehicle production volumes over the three months ended December 31, 2002.
The increase in the North American average dollar content per vehicle is primarily as a result of increased reported U.S. dollar sales as a result of the strengthening of the Canadian dollar against the U.S. dollar and due to programs launched in 2003 including the Ford Freestar and Mercury Monterey program, the Ford F-150 program, the Chrysler Pacifica program, the Cadillac SRX program, the GMC Canyon and Chevrolet Colorado program, the Chevrolet Malibu program, the Dodge Durango program and the Mitsubishi Endeavor program and higher content and/or production on several programs including the General Motors GMT800 series (full size pick up trucks and sport utilities) program and the Ford Escape and Mazda Tribute program. Partially offsetting these increase are lower production on the DaimlerChrysler Minivan program, the Ford Explorer program and the Ford Taurus and Mercury Sable program, as well as programs that balanced out in 2003 including the DaimlerChrysler LH (300M/Concorde/Intrepid) program.
During the three months ended December 31, 2003, European production and assembly sales increased by 63% or US$668 million over the three months ended December 31, 2002 to US$1.7 billion. This increase in production and assembly sales reflects a 64% increase in our European average dollar content per vehicle, offset in part by a 1% reduction in European vehicle production volumes from the three months ended December 31, 2002.
The increase in our European average dollar content per vehicle partially relates to the launch of new programs during or subsequent to the fourth quarter of 2002, including the SAAB 93 Convertible assembly program and the BMW X3 assembly program at Magna Steyr, the Nissan Micra program, the Toyota Avensis program, the Volkswagen Touareg program and the Porsche Cayenne program, and continued strong production volumes on the Mercedes E-Class program and the Mini program and the strengthening of the euro and British Pound, each against the U.S. dollar. Partially offsetting these increases are lower production volumes on the Mercedes G-Class program and the BMW 3-series program.
During the three months ended December 31, 2003, tooling, engineering and other sales increased by 21% or US$94 million over the three months ended December 31, 2002 to US$538 million. The increase relates primarily to strengthening of the Canadian dollar, euro and British pound, each against the U.S. dollar. Tooling, engineering and other sales continued to be strong, reflecting our continued involvement in new production and assembly programs.
Operating Income
Operating income increased by 19% or US$42 million from the three months ended December 31, 2002 to US$260 million in the three months ended December 31, 2003. Included in operating income in the three months ending December 31, 2003 and December 31, 2002 are US$17 million of non cash impairment charges for long lived assets and US$36 million of non cash impairment charges for long lived assets and goodwill, respectively. Excluding these non cash impairment charges, operating income for the three months ended December 31, 2003 increased US$23 million over the three months ended December 31, 2002 primarily as a result of higher gross margins generated by higher sales, offset in part by increases in SG&A spending and depreciation and amortisation and a decrease in net interest income.
Net Loss from Discontinued Operations - MEC
Effective with the MID distribution on September 2, 2003, we no longer have any ownership interest in MEC and as a result, our net income increased by US$14 million over the net loss from discontinued operations recorded in the three months ending December 31, 2002.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2003
Sales
2003 2002 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 15.864 16.323 - 3%
Europe 16.428 16.341 + 1%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America US$ 529 US$ 441 + 20%
Europe US$ 331 US$ 231 + 43%
-------------------------------------------------------------------------
Sales
North American Production US$ 8,398 US$ 7,200 + 17%
European Production and Assembly 5,431 3,769 + 44%
Tooling, Engineering and Other 1,516 1,453 + 4%
-------------------------------------------------------------------------
Total Sales US$15,345 US$12,422 + 24%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total sales reached a record level in 2003, increasing 24% or US$2.9 billion to US$15.3 billion.
North American Production Sales
North American production sales increased 17% or US$1.2 billion to US$8.4 billion for 2003. This increase in production sales reflects a 20% increase in our North American average dollar content per vehicle, offset in part by a 3% decline in North American vehicle production volumes from 2002.
In North America, our average dollar content per vehicle grew by 20% or US$88 to US$529 for 2003 compared to US$441 for 2002. The increase relates primarily to: increased content and/or production on several programs, related primarily to the launch of new programs during, or subsequent to the year ended December 31, 2002; an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar; and the acquisition of Donnelly Corporation ("Donnelly") on October 1, 2002. New programs launched include the Chrysler Pacifica program, the Ford Freestar and Mercury Monterey program, the BMW Z4 program, the Saturn Ion program, the Cadillac SRX program and the Mazda 6 program. Supplementing the new program launches was higher content and/or production on several programs, including the General Motors GMT800 series (full size pick up trucks and sport utilities) program. This increase in content was partially offset by the impact of lower volumes on certain high content programs, including the DaimlerChrysler Minivan program, programs that balanced out in 2003, including the DaimlerChrysler LH (300M/Concorde/Intrepid) program and the Ford Cal1 (Lincoln Blackwood) program, and customer price concessions.
European Production and Assembly Sales
European Production and Assembly sales increased 44% or US$1.7 billion to US$5.4 billion for 2003. This increase in sales reflects increases in our European average dollar content per vehicle combined with a 1% increase in European vehicle production volumes from 2002.
In Europe, our average dollar content per vehicle grew by 43% to US$331 for 2003 compared to US$231 for 2002. The increase in content reflects higher reported U.S. dollar sales due to the strengthening of the euro and the British pound, each against the U.S. dollar. Also increasing European content were: the launch of new programs during, or subsequent to, the year ended December 31, 2002, including the launch at Magna Steyr of the SAAB 93 Convertible in July 2003 and the BMW X3 in October 2003, the Nissan Micra program, the Toyota Avensis program, the Volkswagen Touareg program, the Porsche Cayenne program and the DaimlerChrysler S, E and C class sequencing program; higher content and/or production on several programs, including the Mini program; and additional sales arising from the acquisition of Donnelly. This increase in content was partially offset by a decrease in sales on the DaimlerChrysler G Class program and the BMW 3 series program, as well as customer price concessions.
Tooling, Engineering and Other
Tooling, engineering and other sales continued to be strong at US$1.5 billion for 2003, representing an increase of US$63 million over 2002. The increase was primarily the result of an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar, euro and British pound, each against the U.S. dollar. The level of tooling, engineering and other sales reflects our continued involvement in new production and assembly programs. In 2003, we completed tooling and engineering on the following programs: Dodge Magnum, Cadillac STS, GMC Canyon, Chevrolet Colorado, Chevrolet Equinox, Cadillac SRX, and Ford Freestar, all in North America; and the SAAB 93 Convertible and BMW X3 in Europe.
Refer also to the sales discussion in "SEGMENTS" below.
Gross Margin
Gross margin as a percentage of total sales for 2003 was 16.6% compared to 17.3% in 2002. Gross margin as a percentage of sales was negatively impacted by the strengthening of the euro and British pound, each against the U.S. dollar, since more of our consolidated gross margin was earned in Europe during 2003 compared to 2002 and certain of our European operations operate at margins that are currently lower than our average margin. Also negatively impacting gross margin were the launch of the SAAB 93 Convertible and the BMW X3 at Magna Steyr, since the costs of these vehicle assembly contracts are reflected on a full cost basis in the selling price of the vehicle (see "Magna Steyr" discussion in "SEGMENTS" below), the MID distribution which effectively added additional lease expense in the last four months of the year, increased launch costs related to the significant amount of business launched during 2003 and customer price concessions. Partially offsetting these decreases was the positive impact of improved performance and productivity at a number of divisions, cost savings, as well as the relatively unchanged level of tooling, engineering and other sales that earn low or no margins.
Depreciation and Amortization
Depreciation and amortisation costs increased 20% to US$505 million for 2003 compared to US$422 million for 2002. The increase in depreciation and amortisation in 2003 was primarily due to an increase in reported U.S. dollar depreciation and amortisation due to the strengthening of the euro, Canadian dollar and British pound, each against the U.S. dollar, the acquisition of Donnelly, and increased assets employed in the business to support future growth.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales increased to 6.6% for 2003 compared to 6.3% for 2002. SG&A expenses were US$1 billion for 2003, up from US$780 million for 2002. The increase in SG&A expenses for 2003 relates primarily to: an increase in reported U.S. dollar SG&A due to the strengthening of the euro, Canadian dollar and British pound, each against the U.S. dollar; additional SG&A expenses as a result of the acquisition of Donnelly; and higher infrastructure costs to support the increase in sales levels, including spending to support launches and new programs.
Impairment Charges
In accordance with the recommendations of the CICA, we completed our annual impairment review of goodwill in the fourth quarter of 2003. In conjunction with this analysis, and other indicators of impairment, we also assessed the recoverability of our long lived assets at certain operations. As a result of this analysis, we have recorded impairment charges during 2003 amounting to US$17 million. The impairment charges reflect a write down of fixed assets for certain of Decoma's European operations. During 2002, we recorded impairment charges amounting to US$36 million reflecting write downs of goodwill and fixed assets at certain of Intier's European operations of US$4 million and US$20 million, respectively, and a US$12 million write down of fixed assets at Tesma's German die casting facility. These impairment charges reduced diluted earnings per share for 2003 and 2002 by US$0.13 and US$0.29, respectively.
Operating Income
Operating income was a record US$1.040 billion for 2003 compared to US$947 million for 2002. The 10% growth in operating income is the result of higher margins generated from increased sales and lower impairment charges, partially offset by lower equity income and higher SG&A spending and depreciation and amortisation expense in 2003.
Other Income (Loss)
As required by the CICA, we recognised a non cash impairment loss at the date of the MID distribution equal to the excess of our carrying value of the distributed assets over their fair values on the distribution date. We recorded an impairment loss of 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. We also recorded an impairment loss in discontinued operations which was based on an assessment of the fair value of MID's controlling interest in MEC (see "Net Loss from Discontinued Operations - MEC" below).
In July 2002, Tesma completed a public offering by issuing 2.85 million of its Class A Subordinate Voting Shares for aggregate cash consideration, net of share issue expenses, of US$62 million. We recognised a gain of US$13 million from our ownership dilution arising from the issue. Also in July 2002, Decoma issued 451,400 shares of its Class A Subordinate Voting Shares to satisfy its obligations under Decoma's Deferred Profit Sharing Plan. We recognised a gain of US$2 million from our ownership dilution arising from the issue. The gains recognised were not subject to income taxes as the issues were completed on a primary basis by each of Tesma and Decoma.
Income Taxes
Our effective income tax rate on operating income (excluding equity income and other income (loss)) increased to 36.0% for 2003 from 33.9% in 2002. The increase in the effective tax rate is primarily the result of an increase in future income tax rates in Ontario, Canada, resulting in a revaluation of our net future tax liabilities and a future income tax charge of US$10 million, as well as impairment charges and losses that have not been tax effected.
Minority Interest
Net income for Minority
the year ended Interest as at
December 31, December 31,
--------------------- ---------------------
2003 2002 2003 2002
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Decoma US$ 76 US$ 104 26% 31%
Intier 62 50 13% 11%
Tesma 74 56 56% 56%
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US$ 212 US$ 210
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Minority interest expense increased by US$6 million to US$72 million for 2003 compared to US$66 million for 2002. The increase in minority interest expense is primarily due to higher earnings at Tesma and Intier, coupled with a marginally higher minority interest percentage at Intier offset by lower earnings and minority interest percentage at Decoma. The decrease in minority interest percentage at Decoma is a result of our conversion of Decoma's series 1, 2 and 3 Convertible Preferred Shares into 14,895,729 Decoma Class A Subordinate Voting Shares. The increase in the minority interest percentage for Intier is a result of the issuance of Intier Class A Subordinate Voting Shares to the Intier employee deferred profit sharing plan.
Net Income From Continuing Operations
For 2003, net income from continuing operations of US$589 million increased US$19 million or 3% over 2002 net income from continuing operations of US$570 million. Included in net income from continuing operations are the following items which have been described above:
2003 2002 Change
-------------------------------------------------------------------------
Impairment charges (net of minority
interest) US$ 13 US$ 27
Other loss (income) 6 (15)
Future income tax charge related to
tax rate change 10 -
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US$ 29 US$ 12 US$ 17
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Excluding these items, net income from continuing operations increased by US$36 million as a result of increases in gross margin of US$391 million, partially offset by increases in SG&A spending of US$227 million, depreciation and amortisation of US$83 million, income taxes of US$37 million and minority interest of US$10 million and a decrease in equity income of US$7 million.
Net Loss From Discontinued Operations - MEC
Net loss from discontinued operations consists of the results of our former controlling interest in MEC. As required by the CICA, we recognised a US$68 million non cash impairment loss at the date of the MID distribution equal to the excess of the carrying value of our investment in MEC over the fair value of MID's controlling interest in MEC on the distribution date.
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, resulting in an US$11 million dilution loss on our investment in MEC. In December 2002, MEC completed its annual indefinite life intangible asset impairment analysis, represented by racing licences. In conjunction with this analysis, MEC also assessed the recoverability of its long lived assets at Great Lakes Downs and Remington Park. As a result of this analysis, MEC recorded impairment charges of US$3 million related to racing licences and US$15 million relating to fixed assets.
Excluding the impairment charges and dilution losses, the net loss from discontinued operations was unchanged from 2002.
Earnings per Share
2003 2002 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate
Voting or Class B Share from
continuing operations
Basic US$ 5.93 US$ 6.02 - 1%
Diluted US$ 5.91 US$ 5.99 - 1%
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Earnings per Class A Subordinate Voting
or Class B Share
Basic US$ 5.23 US$ 5.83 - 10%
Diluted US$ 5.21 US$ 5.82 - 10%
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares outstanding
Basic 95.9 88.7 + 8%
Diluted 96.3 92.0 + 5%
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Diluted earnings per share from continuing operations for 2003 were US$5.91, a decrease of US$0.08 over 2002 diluted earnings per share from continuing operations. The impairment charges, other loss (income) and future income tax charge described above had a negative impact on diluted earnings per share of US$0.16. Excluding these items, the remaining US$0.08 increase in net income from continuing operations was a result of the increase in net income from continuing operations (excluding the items listed above), offset in part by an increase in the weighted average number of shares outstanding during the year, substantially as a result of the Class A Subordinate Voting Shares issued to acquire Donnelly.
SEGMENTS
Refer to Note 27 of our 2002 audited consolidated financial statements, which explains the basis of segmentation. The segments below do not include the results of our discontinued operations.
2003 2002
--------------------- ---------------------
Total Operating Total Operating
Sales Income Sales Income
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Public Operations
Decoma International Inc. US$ 2,426 US$ 142 US$ 2,125 US$ 170
Intier Automotive Inc. 4,654 124 3,862 114
Tesma International Inc. 1,102 110 926 83
Wholly Owned Operations
Magna Steyr 2,719 47 1,959 13
Other Automotive Operations 4,591 421 3,643 382
Corporate and Other (147) 196 (93) 185
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US$15,345 US$ 1,040 US$12,422 US$ 947
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The sales amounts in the following segmented discussion are before
intersegment eliminations.
Decoma International Inc.
Sales
Decoma's sales increased by US$301 million or 14% to US$2.4 billion for 2003. The increase in sales reflects increases in Decoma's North American and European average dollar content per vehicle, and a modest increase in European vehicle production volumes, offset in part by a 3% reduction in North American vehicle production volumes. Decoma's sales also benefited from an increase in tooling, engineering and other sales, primarily related to the strengthening of the Canadian dollar, euro and British Pound, each against the U.S. dollar and to the Ford Escape refresh program in North America and the Volkswagen Golf program in Europe.
In North America, the increase in Decoma's dollar content per vehicle was primarily attributable to an increase in Decoma's reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar and the acquisition of certain of Federal Mogul Corporation's original equipment automotive lighting operations in the second quarter of 2003, offset in part by customer price concessions.
In Europe, content growth was attributable to: program launches at new facilities in the latter part of 2002 and during 2003, including the Volkswagen Transit Van program, the DaimlerChrysler E Class 4MATIC front end module program and the Volkswagen Golf fascia and front end module programs; and to the increase in reported U.S. dollar sales due to the strengthening of the euro and British pound, each against the U.S. dollar.
Operating Income
Decoma's operating income decreased US$28 million or 16% to US$142 million for 2003. This decrease is largely attributable to the impairment and restructuring charge recorded in the United Kingdom and in Germany during 2003. In addition, an increase in European operating losses and the impact of foreign exchange losses on U.S. dollar denominated monetary items held in Canada contributed to the decline. North American operating income growth was partially offset by the impact of the changeover of a number of large production programs; lower North American production volumes overall and on certain high content programs; costs associated with the Company's new mould and paint facility currently under construction in the United States; and customer price concessions.
Intier Automotive Inc.
Sales
Intier's sales increased by US$792 million or 21% to US$4.7 billion for 2003. The increase in sales reflects increases in Intier's average dollar content per vehicle in both North America and Europe and a modest increase in European vehicle production volumes, offset in part by a 3% reduction in North American vehicle production volumes, including lower vehicle production volumes on certain of Intier's high content programs. Sales also benefited from a US$65 million increase in tooling, engineering and other sales.
In North America, the increase in Intier's average dollar content per vehicle related primarily to: new product launches during 2002 and 2003, including the complete seats for the Saturn Ion program, the complete seats for the DaimlerChrysler Pacifica program, the complete seats, overhead system and interior trim for the Ford Freestar and Mercury Monterey program, the integration of the complete interior, excluding seats, for the Cadillac SRX program, the seat mechanisms for the Honda Accord and Honda Pilot programs, the door panels for the Chevrolet Malibu program, the cockpit module and seat tracks for the Chevrolet Colorado and GMC Canyon program and window regulators for the DaimlerChrysler Minivan program; an increase in Intier's reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar; partially offset by increased customer price concessions and lower volumes on certain of Intier's high content programs.
In Europe, the increase in Intier's average dollar content per vehicle related primarily to: increases in Intier's reported U.S. dollar sales due to the strengthening of the euro and British pound, each against the U.S. dollar; new products launched during 2002 and 2003 including the instrument panel and door panels for the Jaguar XJ Series program, door panels for the Toyota Avensis program, the cockpit module for the Nissan Micra program the complete interior, excluding seats, for the BMW 6 Series program, the cargo management system for the BMW X3, and the complete seats for the Volkswagen Portaro.
Operating Income
Intier's operating income increased US$10 million or 9% to US$124 million for 2003. This increase is largely attributable to the US$24 million non cash impairment charge recorded in Europe in 2002. Excluding the impact of the impairment charges in 2002, Intier's operating income decreased US$14 million. This decrease was primarily attributable to: increased customer price concessions; higher costs associated with new and existing facilities launching new products during 2003 and early in 2004; costs associated with the closure of one of Intier's European divisions; increased depreciation as a result of Intier's continuing investment in capital equipment to support new programs and facilities; increased affiliation fees and SG&A spending associated with the increase in sales; and higher interest costs. These additional costs were partially offset by higher gross margins generated by increased production sales from new program launches, operating improvements at certain facilities and increased reported U.S. dollar operating income as a result of the strengthening of the Canadian dollar against the U.S. dollar.
Tesma International Inc.
Sales
Tesma's sales increased by US$176 million or 19% to US$1.1 billion for 2003. The increase in sales reflects an increase in Tesma's average dollar content per vehicle in both North America and Europe and a modest increase in European vehicle production volumes, partially offset by a 3% reduction in North American vehicle volumes.
In North America, Tesma's content per vehicle increased largely due to the strengthening of the Canadian dollar against the U.S. dollar. Excluding the impact of foreign exchange, Tesma's growth in content per vehicle reflected new program launches and higher volumes on production ramp-ups of other recently launched programs, including an integrated front cover module for the General Motors High Feature V6 engine, balance shaft assemblies for the General Motors Line 4 and Line 5 engine programs, water pumps, camshaft phasers and housings for General Motors' premium V8 engine, and fuel filler pipe assemblies for DaimlerChrysler's Sebring car and Durango truck programs. In addition, Tesma experienced higher volumes on various programs including: oil pumps and other components supplied for Ford's 5R110 transmission; various products and components supplied to General Motors for their high volume L850 and Gen III engine programs; water pump assemblies supplied for the Honda Accord; and certain tensioner and alternator decoupler programs for Ford, General Motors, Honda and Volkswagen. These increases were partially offset by continued customer price concessions.
In Europe, the increase in content per vehicle was a result of: an increase in reported U.S. dollar sales due to the strengthening of the euro against the U.S. dollar; the launch a fuel filler pipe assembly for Ford's high volume C1 (Focus) program in the third quarter of 2003; higher volumes on other programs launched during 2003, including drive belt tensioners and other components for Volkswagen, General Motors and DaimlerChrysler and stainless steel fuel tank assemblies for the Volkswagen PQ34 program; increased volumes on fuel tank assemblies for Volvo's P2X and Audi's D3 programs and on the rear axle crossover component supplied to DaimlerChrysler; and a stronger demand for service parts.
Operating Income
Tesma's operating income increased by US$27 million or 33%, to US$110 million for 2003. Part of the increase in operating income can be attributed to the US$12 million write down of capital and other long-lived assets recorded in the fourth quarter of 2002. The remaining US$15 million increase in operating income is the result of a higher gross margin generated by increased sales and improved capacity utilisation, labour efficiencies and production efficiencies at certain facilities. These increases were partially offset by continued customer price concessions, increased costs incurred to support new business, higher depreciation charges and SG&A spending as Tesma continues to grow and invest for new business, and increased affiliation fees, all of which were significantly impacted by a strengthening of the Canadian dollar and euro, each against the U.S. dollar.
Magna Steyr
Sales
Magna Steyr's sales increased by 39% or US$760 million to US$2.7 billion for 2003. The increase in sales was due to an increase in reported U.S. dollar sales related to the strengthening of the euro against the U.S. dollar, an increase in assembly sales, including the launches of the SAAB 9(3) Convertible and BMW X3 programs in 2003 and an increase in the sales of the Drivetrain operations.
During 2003, Magna Steyr assembled the Mercedes E-Class 4X2 and E-Class 4MATIC, the Mercedes G-Class, the Chrysler Voyager, the Chrysler Jeep Grand Cherokee, the SAAB 9(3) Convertible and the BMW X3 vehicles, whereas in 2002, Magna Steyr assembled the Mercedes E-Class 4X2 and E-Class 4MATIC, the Mercedes G-Class, the Chrysler Voyager, the Chrysler Jeep Grand Cherokee and the Mercedes M-Class vehicles. During 2003, Magna Steyr launched the new versions of the E-Class 4x2 and E-Class 4MATIC, which resulted in lower volumes for these vehicles during the transition period than in the comparable period in 2002. During the third quarter of 2003, the SAAB 9(3) Convertible was launched and during the fourth quarter of 2003, the BMW X3 was launched.
Magna Steyr's vehicle assembly volumes for 2003 and 2002 were as follows:
Vehicle Assembly Volumes (Units) 2003 2002 Change
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Full-Costed
E-Class 23,630 25,813 - 8%
G-Class 7,146 9,075 - 21%
SAAB 9(3) 9,728 - n/a
BMW X3 8,770 - n/a
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49,274 34,888 + 41%
Value Added
Voyager 39,835 14,737 +170%
Jeep 29,698 30,398 - 2%
M-Class - 12,279 -100%
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69,533 57,414 + 21%
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118,807 92,302 + 29%
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The terms of Magna Steyr's various vehicle assembly contracts differ with respect to the ownership of components and supplies related to the assembly process and the method of determining the selling price to the OEM customer. Under certain contracts, Magna Steyr is acting as principal, and purchased components and systems in assembled vehicles are included in its inventory and cost of sales. These costs are reflected on a full cost basis in the selling price of the final assembled vehicle to the OEM customer. Contracts to assemble DaimlerChrysler E-Class and G-Class, SAAB 9(3) Convertible and BMW X3 vehicles are accounted for in this manner. Other contracts provide that third party components and systems are held on consignment by Magna Steyr, and the selling price to the OEM customer reflects a value added assembly fee only. Contracts to assemble DaimlerChrysler Voyager, Jeep and M-Class vehicles are accounted for in this manner.
Production levels of the various vehicles assembled by Magna Steyr have an impact on the level of its sales and profitability. In addition, the relative proportion of programs accounted for on a full cost basis and programs accounted for on a value added basis also impact Magna Steyr's levels of sales and operating margin percentage, but may not necessarily affect its overall level of profitability. Assuming no change in total vehicles assembled, a relative increase in the assembly of vehicles accounted for on a full cost basis has the effect of increasing the level of total sales and, because purchased components are included in cost of sales, profitability as a percentage of total sales is reduced. Conversely, a relative increase in the assembly of vehicles accounted for on a value added basis has the effect of reducing the level of total sales and increasing profitability as a percentage of total sales.
Assembly and engineering sales, as reported in U.S. dollars, increased US$711 million in 2003 to US$2,377 million. The increase in assembly and engineering sales was primarily due to an increase in reported U.S. dollar sales related to the strengthening of the euro against the U.S. dollar. Excluding the effect of foreign currency translation, assembly and engineering sales increased as a result of a 41% increase in the assembly volumes of full cost vehicles in 2003 over 2002, including assembly of the SAAB 9(3) Convertible and the BMW X3. Assembly and engineering sales also increased as a result of a 21% increase in value added assembly volumes in 2003 over 2002.
Sales at Magna Steyr's Drivetrain operations increased by US$44 million to US$415 million for 2003. Excluding the effect of translation, Drivetrain sales decreased in both North America and Europe as a result of both lower volumes on the Pontiac Aztek program and lower all wheel drive installation rates on the Buick Rendezvous program. These decreases in sales were partially offset by an increase in reported U.S. dollar sales due to the strengthening of the euro against the U.S. dollar.
Operating Income
Magna Steyr's operating income increased by US$34 million to US$47 million for 2003. The increase in operating income is a result of the launch of several new programs during 2003, including the SAAB 9(3) Convertible and BMW X3 assembly programs, improved performance at Magna Steyr's Drivetrain and engineering facilities in Austria as well as an increase in reported U.S. dollar operating income as a result of the strengthening of the euro against the U.S. dollar, partially offset by launch costs incurred with respect to the launch of the new Mercedes E Class 4MATIC program, operational inefficiencies with respect to the S Class, E Class and C Class programs and planning and engineering costs associated with the newly awarded transfer case on General Motors' next generation full size pick ups and sport utilities program.
Other Automotive Operations
Sales
Our Other Automotive Operations' sales increased by 26% or US$948 million to US$4,591 million for 2003. The increase in sales reflects increases in the segment's North American and European average content per vehicle and a modest increase in European vehicle production volumes, offset in part by a 3% reduction in North American vehicle production volumes. The increase in production sales was partially offset by a US$28 million decrease in tooling and other sales.
In North America, the increase in content is primarily the result of the acquisition of Donnelly, an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar and continued strong volumes on certain high content programs.
In Europe, the increase in average content per vehicle is primarily the result of the acquisition of Donnelly, an increase in reported U.S. dollar sales due to the strengthening of the euro against the U.S. dollar and an increase in stamping sales in our Cosma operations.
Operating Income
Our Other Automotive Operations' operating income increased 10% or US$39 million to US$421 million for 2003. The increase in operating income is primarily the result of: higher gross margin generated by higher sales; the acquisition of Donnelly; and the termination of the Ford Cal1 (Lincoln Blackwood) program in 2002, which generated operating losses in 2002. These increases were partially offset by incremental launch costs, restructuring costs associated with the closure of a plant in North America, costs associated with establishing new plants in preparation for the launch of newly awarded business, customer price concessions and higher reported U.S. dollar depreciation and amortisation expense and SG&A spending partially due to the strengthening of the Canadian dollar against the U.S. dollar.
Corporate and Other
Corporate and Other operating income of US$196 million for 2003 increased 6% or US$11 million from 2002. The increase was primarily the result of additional affiliation fee income earned as a result of higher sales, offset in part by an increase in SG&A spending and lower intercompany interest income.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operations
2003 2002 Change
-------------------------------------------------------------------------
Net income from continuing operations US$ 589 US$ 570
Items not involving current cash flows 699 554
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US$ 1,288 US$ 1,124 US$ 164
Changes in non-cash working capital (82) 249
Increase in deferred revenue 10 68
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Cash provided from operating activities US$ 1,216 US$ 1,441 US$ (225)
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Overall, cash provided from operating activities for 2003 was US$1,216 million as compared to cash provided from operating activities of US$1,441 million for 2002, a decrease of US$225 million.
Cash flow from operations before changes in non cash working capital and deferred revenue increased by US$164 million over 2002 to US$1.3 billion for 2003. Cash flow from operations increased as a result of the US$19 million increase in net income from continuing operations as described above and a US$145 million increase in non cash items, including an US$83 million increase in depreciation and amortisation, a US$45 million increase in future taxes, a US$25 million increase in equity income and other, a US$5 million decrease in net gains on sales and issues of securities by subsidiaries and a US$6 million increase in minority interest, offset in part by a US$19 million decrease in non cash impairment charges.
Cash invested in non cash working capital for 2003 amounted to US$82 million, which was primarily attributable to a US$140 million increase in accounts receivable and a US$37 million increase in inventory, partially offset by a US$162 million increase in accounts payable and accrued liabilities, principally as a result of the increase in sales, including the launch of the SAAB 9(3) Convertible and BMW X3 programs. Also contributing to the investment in non cash working capital was a US$21 million increase in prepaid expenses and other and a US$46 million decrease in income taxes payable.
Capital and Investment Spending
2003 2002 Change
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Fixed assets, investments and
other additions US$(1,011) US$ (991)
Purchases of subsidiaries (41) 11
Proceeds from disposals 50 27
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Cash used in investing activities US$(1,002) US$ (953) US$ (49)
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We invested US$801 million in fixed assets in 2003. While moderate investments were made to refurbish or replace assets consumed in the normal course and for productivity improvements, most of the investment was for component manufacturing, painting and assembly equipment and facilities for programs launching in 2003 and future years including the following major programs: the Dodge Magnum, Chevrolet Equinox, Chevrolet Cobalt, Pontiac Pursuit, Ford Freestar and Mercedes M-Class in North America; and the DaimlerChrysler A-Class, Mini Convertible, BMW X3, SAAB 9(3) Convertible, Audi A6 and Volkswagen Golf in Europe.
We invested US$210 million in other assets in 2003 which represents a US$45 million payment made in escrow for the purchase of Davis (see "SUBSEQUENT EVENTS" below), US$117 million invested in other assets which includes planning costs for the SAAB 9(3) Convertible and BMW X3 programs at Magna Steyr and additional spending of US$48 million of long term tooling receivables primarily related to the Mercedes M Class tooling program.
For 2003, proceeds from disposals were US$50 million, reflecting proceeds from normal course fixed and other asset disposals and proceeds received on maturity of commercial investments held to partially fund certain Austrian lump sum termination and long service payment arrangements.
Financing
2003 2002 Change
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Issues of debt US$ 115 US$ 36
Repayments of debt (42) (165)
Issues of subordinated debentures
by subsidiary 66 -
Repayments of debentures' interest
obligations (6) (13)
Preferred Securities distributions (26) (24)
Issues of Class A Subordinate
Voting Shares 42 19
Issues of shares by subsidiaries 16 66
Repurchase of Class A Subordinate
Voting Shares - (2)
Dividends paid to minority interests (16) (14)
Dividends (147) (119)
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Cash provided from (used in)
financing activities US$ 2 US$ (216) US$ 218
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The issues of debt are primarily the result of borrowings from a customer's finance subsidiary (see "Capital and Investment Spending" above). These borrowings, which totaled approximately US$80 million during 2003 and US$26 million in 2002, were advanced to Magna Steyr to partially cover the planning costs that were incurred related to recently launched assembly programs.
The repayments of debt in 2003 reflect ordinary course term debt payments (see "Contractual Obligations" below). The repayments of debt in 2002 include US$98 million of repayments on bank indebtedness in addition to ordinary term debt payments.
In March 2003, Decoma issued Cdn$100 million of 6.5% convertible unsecured subordinated debentures, which mature on March 31, 2010.
During 2003, we issued US$42 million in Class A Subordinate Voting Shares on the exercise of stock options compared to US$19 million for 2002.
The issue of shares by our subsidiaries in 2003 is comprised primarily of the issue of US$5 million of Decoma Class A Subordinate Voting Shares to the Decoma employee deferred profit sharing plan and the issue of US$7 million in Intier Class A Subordinate Voting Shares to the Intier employee deferred profit sharing plan. The issue of shares by subsidiaries in 2002 is comprised primarily of the July 2002 Tesma public offering of its Class A Subordinate Voting Shares for aggregate cash consideration, net of share issue expenses, of approximately US$62 million.
Dividends in 2003 were US$147 million, including US$19 million with respect to the MID distribution, which represents the amount of cash held by MID as at August 29, 2003. Cash dividends paid during 2003 were US$1.36 per Class A Subordinate Voting or Class B Share, aggregating US$129 million. These payments relate to dividends declared in respect of the three month periods ended September 30, 2003, June 30, 2003 and March 31, 2003 and December 31, 2002. The increase in dividends paid for 2003 compared to 2002 is due to the increase in the aggregate number of Class A Subordinate Voting and Class B Shares outstanding arising from the issue of Class A Subordinate Voting Shares on the acquisition of Donnelly, on the exercise of stock options subsequent to the third quarter of 2002 and on the redemption of our 4.875% Convertible Subordinated Debentures in June of 2002.
Financing Resources
2003 2002 Change
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Liabilities
Bank indebtedness US$ 298 US$ 223
Long-term debt due within one year 35 36
Long-term debt 267 248
Debentures' interest obligation 41 39
Minority interest 626 410
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1,267 956
Shareholders' equity 4,930 5,421
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Total capitalisation US$ 6,197 US$ 6,377 US$ (180)
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Total capitalisation decreased in 2003 primarily as a result of the MID distribution. We recorded 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 on 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. Partially offsetting this reduction in equity was the increase in retained earnings as a result of net income less dividends paid to Class A and Class B shareholders, and an increase in the currency translation adjustment. The increase in liabilities is primarily the result of increased minority interest.
During 2003, Magna's cash resources increased by US$407 million to US$1.5 billion. In addition to its cash resources, Magna had unused and available operating lines of credit of US$266 million and term lines of credit of US$585 million. Of such amounts, our wholly owned operations had cash of US$1.0 billion and unused and available operating and term credit facilities of US$232 million at December 31, 2003, while our publicly traded operations had cash of US$476 million and unused and available operating and term credit facilities of US$619 million at December 31, 2003.
In addition to the above unused and available financing resources, we sponsor a tooling finance program for tooling suppliers to finance tooling under construction for use in our operations. The maximum facility amount is Cdn$100 million. As at December 31, 2003, Cdn$57 million had been advanced to tooling suppliers under this facility. This amount is included in accounts payable on our consolidated balance sheet.
On August 6, 2003, we announced that the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") had accepted notices of our intention to purchase for cancellation and/or for purposes of our long term retention (restricted share) program up to 3 million of our Class A Subordinate Voting Shares, representing less than 5% of our issued and outstanding Class A Subordinate Voting Shares, pursuant to a normal course issuer bid effected through the facilities of the TSX. All purchases of Class A Subordinate Voting Shares are made at the market price at the time of purchase in accordance with the by laws, rules and policies of the TSX, subject to a maximum aggregate expenditure of US$200 million. The actual number of Class A Subordinate Voting Shares and the timing of any purchases are determined by us. We will not purchase any of our Class B Shares pursuant to the bid.
Contractual Obligations and Off Balance Sheet Financing
At December 31, 2003, we had contractual obligations requiring annual payments as follows.
Less
than 1 - 3 4 - 5 After
1 year years years 5 years Total
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Operating leases with MID US$ 116 US$ 232 US$ 229 US$ 830 US$1,407
Operating leases with
third parties 103 164 120 138 525
Long-term debt 35 100 40 127 302
Debentures' interest
obligation 6 14 16 3 39
Purchase obligations(i)
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Total contractual
obligations US$ 260 US$ 510 US$ 405 US$1,098 US$2,273
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(i) We had no unconditional purchase obligations other than those related
to inventory, services, tooling and fixed assets in the ordinary
course of business
In addition to the above, our obligations with respect to employee future
benefit plans, which have been actuarially determined, were US$207 million at
December 31, 2003. These obligations are broken down as follows:
Termination
and Long
Service
Pension Retirement Arrange-
Liability Liability ments Total
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Projected benefit obligation US$ 252 US$ 61 US$ 122 US$ 435
Less plan assets 164 - - 164
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Unfunded amount 88 61 122 271
Unrecognised past service
costs and actuarial losses 24 27 13 64
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Amount recognised in other
long-term liabilities US$ 64 US$ 34 US$ 109 US$ 207
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Our off balance sheet financing arrangements are limited to operating lease contracts.
The majority of our facilities are subject to operating leases with MID or with third parties. Total operating lease payments for these facilities totaled US$82 million for 2003, including US$38 million paid to MID for the period subsequent to August 28, 2003. Operating lease commitments in 2004 for facilities leased from MID and third parties are expected to total US$116 million and US$49 million, respectively.
Most of our existing manufacturing facilities can be adapted to a variety of manufacturing processes without significant capital expenditures, other than for new equipment.
We also have operating lease commitments for equipment. These leases are generally of shorter duration. Operating lease payments for equipment totaled US$54 million for 2003, and are expected to total US$54 million in 2004.
Although our 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 we will incur capital expenditures to acquire equivalent capacity.
Long term receivables in other assets are reflected net of outstanding borrowings from a customer's finance subsidiary of US$95 million since we have a legal right of set off of its long term receivable against such borrowings and intend to settle the related amounts simultaneously.
Foreign Currency Activities
Our North American operations negotiate sales contracts with North American OEMs for payment in both U.S. and Canadian dollars. Materials and equipment are purchased in various currencies depending upon competitive factors, including relative currency values. The North American operations use labour and materials which are paid for in both U.S. and Canadian dollars. Our Mexican operations use the U.S. dollar as the functional currency.
Our European operations negotiate sales contracts with European OEMs for payment principally in euros and British pounds. The European operations' material, equipment and labour are paid for principally in euros and British pounds.
We employ hedging programs, primarily through the use of foreign exchange forward contracts, in an effort to manage the foreign exchange exposure, which arises when manufacturing facilities have committed to the delivery of products for which the selling price has been quoted in foreign currencies These commitments represent our contractual obligations to deliver products over the duration of the product programs, which can last for a number of years. The amount and timing of the forward contracts will be dependent upon a number of factors, including anticipated production delivery schedules and anticipated production costs, which may be paid in the foreign currency. Despite these measures, significant long term fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar, Canadian dollar, euro, or the British pound, could affect our results of operations (as discussed throughout this MD&A).
RETURN ON INVESTMENT
An important financial ratio that we use across all of our operating units to measure return on investment is return on funds employed. Return on funds employed from continuing operations ("ROFE") is defined as operating income less interest income or expense divided by the average funds employed for the past year. Funds employed is defined as long term assets, excluding future tax assets, plus non cash working capital. Non cash working capital is defined as the sum of accounts receivable, inventory and prepaid assets less the sum of accounts payable, accrued salaries and wages, other accrued liabilities and income taxes payable.
ROFE for 2003 was 19.9%, a decrease from 20.9% for 2002. ROFE was negatively impacted by the substantial investment in launches during 2003, which require infrastructure costs in advance of revenues and profits, the acquisition of Donnelly, the operations of which currently generate ROFE that is lower than our consolidated average ROFE, and the strengthening of the euro and British pound each against the U.S. dollar, since a larger proportion of operating income was earned in Europe, and European operations in aggregate generate ROFE that is lower than our consolidated average ROFE. Partially offsetting these decreases was the impact of the MID distribution, since MID generated ROFE below our consolidated average ROFE. The MID distribution positively impacted our ROFE in the fourth quarter of 2003 and this positive impact is expected to continue going forward.
RELATED PARTIES
Mr. Stronach, our Chairman of the Board and Interim President, and three members of his family are trustees of the Stronach Trust. The Stronach Trust controls us through the right to direct the votes attaching to 66% of our Class B Shares and also controls MID through the right to direct the votes attaching to 66% of MID's Class B Shares. We lease various land and buildings used in our operations from MID under operating lease agreements which we effected on normal commercial terms. Lease expense included in the consolidated statements of income with respect to MID for the period from August 29, 2003 to December 31, 2003 was US$38 million. Prior to the MID distribution on August 29, 2003, lease expense paid to MID was eliminated on consolidation. Included in accounts receivable are trade amounts due from MID and its subsidiaries in the amount of US$3 million at December 31, 2003. Included in accounts payable are trade amounts owing to MID and its subsidiaries in the amount of US$25 million at December 31, 2003.
We have agreements with an affiliate of the Chairman of the Board for the provision of business development and consulting services. In addition, we have an agreement with the Chairman of the Board for the provision of business development and other services. The aggregate amount expensed under these agreements with respect to 2003 and 2002 was US$36 million and US$33 million, respectively.
Certain trusts exist to make orderly purchases of our shares for transfer to the employee equity and profit participation plan or to recipients of either bonuses or rights to purchase such shares from the trusts. During 2003 and 2002, these trusts borrowed up to US$29 million and US$50 million, respectively, from us to facilitate the purchase of Class A Subordinate Voting Shares. At December 31, 2003 and December 31, 2002, the trusts' indebtedness to us was US$18 million and US$28 million, respectively.
Investments include US$2 million at December 31, 2003 and 2002, at cost, in respect of an investment in a company that was established to acquire our shares for sale to employees.
We have an access agreement with MEC for the use of their golf course and clubhouse meeting, dining and other facilities in Aurora, Ontario and in Oberwaltersdorf, Austria. The agreement for the Ontario facilities expired on December 31, 2003 and the agreement for the Austrian facilities expires on March 1, 2004. The expense included in the consolidated statements of income with respect to MEC for the period from August 29, 2003 to December 31, 2003 was US$2 million.
SUBSEQUENT EVENTS
On January 2, 2004, Tesma completed the acquisition of Davis. Davis produces stamped powertrain components and assemblies at three manufacturing facilities in the United States. For the fiscal year ended September 30, 2003, Davis reported sales of approximately US$130 million.
The total consideration for the acquisition of Davis amounted to approximately US$75 million, consisting of US$45 million paid in cash and US$30 million of assumed debt. On December 31, 2003, Tesma deposited the US$45 million cash payment into an escrow account to be released on closing.
COMMITMENTS AND CONTINGENCIES
From time to time, we may be contingently liable for litigation and other claims. Refer to Note 26 of our 2002 audited consolidated financial statements, which describe these claims.