Decoma Announces Financial Results for Second Quarter and First Half of Fiscal 2004
CONCORD, Ontario, August 4 --
- Strong sales and content growth in Europe from new facilities
- All figures in USD, unless otherwise stated.
Decoma International Inc. (TSX:DEC.A; NASDAQ:DECA) today announced its financial results for the second quarter and six months ended June 30, 2004.
Financial Highlights
--------------------
Three Months Six Months
Ended June 30, Ended June 30,
(US$, in millions except
per share figures) 2004 2003 2004 2003
Sales $ 668.2 $ 592.1 $1,370.6 $1,153.2
Operating income $ 41.2 $ 56.9 $ 87.8 $ 103.5
Net income $ 24.6 $ 33.8 $ 51.8 $ 60.9
Diluted earnings per share $ 0.24 $ 0.34 $ 0.51 $ 0.64
Weighted average diluted shares
outstanding (millions) 106.3 105.8 106.3 102.1
Commenting on the above results and the Company's outlook, Al Power, Decoma's President and Chief Executive Officer, noted: "We are pleased with our top line growth driven by strong sales increases in Europe. As expected, our earnings have been impacted by the investments we have made in new facility start-ups and new product launches. Earnings have also been impacted by continuing customer and competitive pricing pressures and by lower North American production sales after adjusting for translation. While overall market conditions remain challenging and are likely to continue to depress our margins in the second half of the year, we remain focused on continuous improvement and profitable long-term growth. In addition to a number of significant launches planned for the second half of the year, North American customers have begun to source front end module programs for 2007/2008 vehicles and, based on our success in Europe, we expect this to be a significant growth opportunity for Decoma. We remain optimistic about our long term growth opportunities and expect continued growth in both our core products and the successful commercialization of many new technologies."
Results of Operations
---------------------
Total 2004 sales increased 13% to $668.2 million for the second quarter and rose 19% to $1,371 million for the first half of fiscal 2004. Second quarter sales benefited $19.2 million from currency translation. Excluding the impact of currency translation, sales grew $56.9 million or 10% over the second quarter of 2003. Strong sales growth at newer European facilities accounted for most of the increase.
During the second quarter of 2004, vehicle production volumes remained essentially flat in North America and rose 2% in Europe. Decoma's production sales fell 1% to $391.8 million in North America but increased 44% to $220.9 million in Europe. Average content per vehicle declined $1 or 1% to $94 in North America and grew $15 or 43% to $50 in Europe.
North American sales were negatively impacted by end of production on the Ford Windstar program, the ramp up of the DaimlerChrysler LX program, recent incremental price concessions and lower volumes and installation rates on certain high content production programs. These factors were partially offset by the acquisition of Federal Mogul's original equipment automotive lighting operations which added $7 million to production sales and $2 to North American content per vehicle quarter over quarter. The translation of Canadian dollar sales into the Company's U.S. dollar reporting currency also added approximately $6.7 million to production sales and $2 to North American content per vehicle.
In Europe, sales and content growth were driven by the ramp-up of new facilities, including the VW Group Golf program in Belgium. Sales at new European facilities collectively added approximately $41.9 million to production sales and $10 to European content per vehicle. European sales and content growth also benefited from the translation of Euro and British Pound sales into the Company's U.S. dollar reporting currency, which added approximately $10.4 million to European production sales and $2 to content per vehicle during the period.
Operating income in the second quarter of 2004 declined to $41.2 million. North American operating income declined as a result of lower production volumes on certain high-content programs, incremental customer pricing pressures, lower installation rates of select trim products and planned spending increases at Decostar. Operating losses in Europe improved from the levels in each of the three previous quarters but rose from the second quarter of 2003. The increased loss as compared to the second quarter of 2003 reflects the start up of the Belplas paint line as well as inefficiencies being addressed through the Company's European paint capacity consolidation plan.
Operating income for the first six months of fiscal 2004 declined to $87.8 million from $103.6 million for the same period last year.
Net income for the second quarter of 2004 declined to $24.6 million ($0.24 per diluted share) from $33.8 million ($0.34 per diluted share) for the same period last year.
Net income for the first six months of 2004 decreased to $51.8 million ($0.51 per diluted share), compared with $60.9 million ($0.64 per diluted share) for the same period in 2003. Diluted earnings per share declined in the first half of 2004, primarily as a result of lower operating income and an increase in the average number of diluted Class A Subordinate Voting and Class B Shares outstanding as compared with the same period in 2003.
Quarterly Dividend
------------------
Decoma's Board of Directors has declared a second quarter 2004 dividend of US$0.07 per share on Class A Subordinate Voting and Class B shares payable on September 15, 2004 to shareholders of record on August 31, 2004.
Outlook
-------
The Company's outlook for full year vehicle production remains unchanged from prior guidance. As previously announced, Decoma's North American content per vehicle for fiscal 2004 is expected to be between $97 and $100, while European content per vehicle is expected to be between $52 and $56. Total sales are expected to range between $2.6 billion and $2.8 billion. These figures are based on estimated 2004 light vehicle production of 16.0 million vehicles in North America and 16.4 million vehicles in Western Europe. The Company's outlook also assumes that average exchange rates for the Canadian dollar, Euro and British Pound relative to the U.S. dollar will approximate the average exchange rates experienced in the second quarter of 2004.
Forward Looking Information
---------------------------
This press release contains "forward looking statements" within the meaning of applicable securities legislation. Readers are cautioned that such statements are only predictions and involve important risks and uncertainties that may cause actual results or anticipated events to be materially different from those expressed or implied herein. In this regard, readers are referred to the Company's Annual Information Form for the year ended December 31, 2003, filed with the Canadian securities commissions and as an annual report on Form 40-F with the United States Securities and Exchange Commission, and subsequent public filings, and the discussion of risks and uncertainties set out in the "Forward Looking Statements" section of the MD&A for the three and six month periods ended June 30, 2004, which is attached to this press release. The Company disclaims any intention and undertakes no obligation to update or revise any forward looking statements to reflect subsequent information, events or circumstances or otherwise.
About the Company
-----------------
Decoma designs, engineers and manufactures automotive exterior components and systems which include fascias (bumpers), front and rear end modules, liftgates and running boards, plastic body panels, roof modules, exterior trim components, sealing and greenhouse systems and lighting components for cars and light trucks (including sport utility vehicles and mini-vans). Decoma has approximately 15,500 employees in 50 manufacturing, engineering and product development facilities in Canada, the United States, Mexico, Germany, Belgium, England, France, Austria, Poland, the Czech Republic and Japan.
Conference Call
---------------
-------------------------------------------------------------------------
Decoma management will hold a conference call to discuss its first
quarter results for 2004 on Thursday, August 5, 2004 at 9:30 a.m. EST. The
dial-in numbers for the conference call are (416) 640-4127 (local) or
1 (800) 814-4853 for out of town callers, with call-in required 10 minutes
prior to the start of the conference call. The conference call will be
recorded and copies of the recording will be made available on request. The
conference call will also be available by live webcast at
www.newswire.ca/webcast and will be available for a period of 90 days.
-------------------------------------------------------------------------
Contact Information
-------------------
For further information please contact S. Randall Smallbone, Executive Vice President, Finance and Chief Financial Officer of Decoma at (905) 669-2888.
For further information about Decoma, please visit the Company's website at www.decoma.com.
Readers are asked to refer to the Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") attached to this release for a more detailed discussion of the second quarter results for fiscal 2004.
DECOMA INTERNATIONAL INC.
Consolidated Balance Sheets
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at As at
June 30, December 31,
2004 2003
(restated -
(U.S. dollars in thousands) see note 5)
-------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 115,080 $ 93,545
Accounts receivable 440,998 395,040
Inventories 229,456 216,502
Income taxes receivable 23,981 4,015
Prepaid expenses and other 21,938 18,267
-------------------------------------------------------------------------
831,453 727,369
-------------------------------------------------------------------------
Investments (note 5) 21,794 20,773
-------------------------------------------------------------------------
Fixed assets, net (note 5) 685,786 682,294
-------------------------------------------------------------------------
Goodwill, net 69,796 71,106
-------------------------------------------------------------------------
Future tax assets 7,980 10,556
-------------------------------------------------------------------------
Other assets 14,909 18,390
-------------------------------------------------------------------------
$1,631,718 $1,530,488
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
Bank indebtedness (note 6(b)) $ 191,847 $ 177,288
Accounts payable 267,687 226,114
Accrued salaries and wages 70,982 68,298
Other accrued liabilities 100,304 77,260
Long-term debt due within one year 4,354 4,856
Debt due to Magna and its affiliates
within one year (note 6(c)) 134,918 141,804
Convertible Series Preferred Shares,
held by Magna (note 6(a)) 149,007 150,572
-------------------------------------------------------------------------
919,099 846,192
-------------------------------------------------------------------------
Long-term debt 10,466 11,194
-------------------------------------------------------------------------
Other long-term liabilities (note 5) 11,835 10,784
-------------------------------------------------------------------------
Future tax liabilities (note 5) 50,700 49,879
-------------------------------------------------------------------------
Shareholders' equity:
Convertible Debentures (note 12) 66,748 66,127
Convertible Series Preferred Shares (note 7) 6,334 8,826
Class A Subordinate Voting Shares (note 7) 287,146 287,137
Class B Shares (note 7) 30,594 30,594
Contributed surplus (note 5) 459 267
Deferred compensation (note 8(b)) (4,087) -
Retained earnings 192,373 155,975
Currency translation adjustment (note 5) 60,051 63,513
-------------------------------------------------------------------------
639,618 612,439
-------------------------------------------------------------------------
$1,631,718 $1,530,488
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Income and Retained Earnings
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars, in
thousands except per
share figures)
-------------------------------------------------------------------------
2004 2003 2004 2003
(restated - (restated -
see note 5) see note 5)
-------------------------------------------------------------------------
Sales $ 668,207 $ 592,084 $1,370,616 $1,153,227
-------------------------------------------------------------------------
Cost of goods sold 551,912 465,221 1,130,060 912,896
Depreciation and
amortization 23,850 21,826 47,948 42,146
Selling, general and
administrative
(notes 5 and 9) 45,104 41,598 91,370 81,965
Affiliation and social
fees 6,891 6,494 14,188 12,674
Other charge adjustment
(note 11) (728) - (728) -
-------------------------------------------------------------------------
Operating income 41,178 56,945 87,778 103,546
Equity income (731) (591) (1,334) (1,020)
Interest expense, net 2,892 2,528 5,582 5,277
Amortization of discount
on Convertible Series
Preferred Shares,
held by Magna 1,196 2,255 2,408 4,301
Other income (note 13) - - - (1,387)
-------------------------------------------------------------------------
Income before income
taxes 37,821 52,753 81,122 96,375
Income taxes 13,246 18,959 29,337 35,519
-------------------------------------------------------------------------
Net income $ 24,575 $ 33,794 $ 51,785 $ 60,856
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing charges on
Convertible Series
Preferred Shares held
by Magna and
Convertible Debentures,
net of taxes (note 12) $ (2,139) $ (2,487) $ (3,696) $ (3,951)
-------------------------------------------------------------------------
Net income attributable
to Class A Subordinate
Voting and Class B
Shares 22,436 31,307 48,089 56,905
Retained earnings,
beginning of period 175,782 133,092 156,984 111,450
Dividends on Class A
Subordinate Voting
and Class B Shares (5,845) (4,084) (11,691) (8,168)
Adjustment for change
in accounting
policies (note 5) - (863) (1,009) (735)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 192,373 $ 159,452 $ 192,373 $ 159,452
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting or
Class B Share
Basic (note 16) $ 0.27 $ 0.46 $ 0.58 $ 0.84
Diluted (note 16) $ 0.24 $ 0.34 $ 0.51 $ 0.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
(in thousands)
Basic (note 16) 83,350 68,136 83,429 68,100
Diluted (note 16) 106,331 105,779 106,331 102,113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
2004 2003 2004 2003
(restated - (restated -
(U.S. dollars in thousands) see note 5) see note 5)
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income $ 24,575 $ 33,794 $ 51,785 $ 60,856
Items not involving
current cash flows 21,134 21,394 49,737 41,478
-------------------------------------------------------------------------
45,709 55,188 101,522 102,334
Changes in non-cash
working capital (22,611) (58,613) (13,143) (62,106)
-------------------------------------------------------------------------
23,098 (3,425) 88,379 40,228
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Fixed asset additions (28,425) (42,679) (60,633) (70,243)
Increase in investments
and other assets (700) (623) (1,333) (1,325)
Business acquisitions
(note 15) - (8,276) - (8,276)
Proceeds from disposition
of fixed and other assets 19 84 91 334
-------------------------------------------------------------------------
(29,106) (51,494) (61,875) (79,510)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness 55,931 (28,323) 17,692 (47,990)
Repayments of
long-term debt (253) (421) (866) (832)
Repayments of debt due to
Magna and its affiliates (35) (26) (3,604) (51)
Issuance of Convertible
Debentures (note 12) - - - 66,128
Convertible Debenture
interest payments (2,386) (1,252) (2,386) (1,252)
Issuances of Class A
Subordinate Voting
Shares (note 7) 7 4,715 7 4,715
Dividends on Convertible
Series Preferred Shares (2,129) (3,442) (4,291) (6,583)
Dividends on Class A
Subordinate Voting and
Class B Shares (5,845) (4,084) (11,691) (8,168)
-------------------------------------------------------------------------
45,290 (32,833) (5,139) 5,967
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents 627 4,109 170 6,430
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents
during the period 39,909 (83,643) 21,535 (26,885)
Cash and cash equivalents,
beginning of period 75,171 138,817 93,545 82,059
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 115,080 $ 55,174 $ 115,080 $ 55,174
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three and six month periods ended June 30, 2004 and 2003
-------------------------------------------------------------------------
1. The Company
Decoma International Inc. ("Decoma" or the "Company") is a full service
supplier of exterior vehicle appearance systems for the world's
automotive industry. Decoma designs, engineers and manufactures
automotive exterior components and systems which include fascias
(bumpers), front and rear end modules, liftgates and running boards,
plastic body panels, roof modules, exterior trim components, sealing and
greenhouse systems and lighting components for cars and light trucks
(including sport utility vehicles and mini vans).
2. Basis of Presentation
The unaudited interim consolidated financial statements of Decoma have
been prepared in U.S. dollars in accordance with Canadian generally
accepted accounting principles ("GAAP"), except that certain disclosures
required for annual financial statements have not been included.
Accordingly, the unaudited interim consolidated financial statements
should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 2003 (the Company's
"annual financial statements") which were included in the Company's
annual report to shareholders for the year then ended.
The unaudited interim consolidated financial statements have been
prepared on a basis that is consistent with the accounting policies set
out in the Company's annual financial statements except for those
accounting policy changes described in note 5.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring items, necessary to present fairly the financial
position of the Company as at June 30, 2004 and the results of its
operations and cash flows for the three and six month periods ended
June 30, 2004 and 2003.
3. Cyclicality of Operations
Substantially all revenue is derived from sales to the North American and
European facilities of the major automobile manufacturers. The Company's
operations are exposed to the cyclicality inherent in the automotive
industry and to changes in the economic and competitive environments in
which the Company operates. The Company is dependent on continued
relationships with the major automobile manufacturers.
4. Use of Estimates
The preparation of the unaudited interim consolidated financial
statements in conformity with GAAP requires management to make estimates
and assumptions that affect: the reported amounts of assets and
liabilities; the disclosure of contingent assets and liabilities at the
date of the unaudited interim consolidated financial statements; and the
reported amounts of revenue and expenses during the period. Management
believes that the estimates utilized in preparing its unaudited interim
consolidated financial statements are reasonable and prudent; however,
actual results could differ from these estimates.
5. Accounting Policy Changes
Stock-based Compensation
As provided for by new accounting recommendations of The Canadian
Institute of Chartered Accountants (the "CICA"), the fair value of stock
options granted, modified or settled on or after January 1, 2003 is
recognized on a straight-line basis over the applicable stock option
vesting period as compensation expense in selling, general and
administrative expenses in the consolidated statements of income. For
stock options granted prior to January 1, 2003 which are not accounted
for at fair value, pro forma earnings disclosure showing the impact of
fair value accounting is included in note 8. The impact of this
accounting policy change on reported net income and earnings per share is
as follows:
-------------------------------------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars, in thousands
except per share figures) 2004 2003 2004 2003
-------------------------------------------------------------------------
Increase in selling, general
and administrative expenses $ 117 $ 67 $ 192 $ 134
-------------------------------------------------------------------------
Reduction of net income $ 117 $ 67 $ 192 $ 134
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reduction of earnings per
Class A Subordinate Voting
or Class B Share
Basic $ - $ - $ - $ -
Diluted $ - $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Asset Retirement Obligations
As provided for by new accounting recommendations of the CICA, the
Company is required to estimate and accrue for the present value of its
obligations to restore leased premises at the end of the lease. At lease
inception, the present value of this obligation is recognized as other
long-term liabilities with a corresponding amount recognized in fixed
assets. The fixed asset amount is amortized, and the liability amount is
accreted, over the period from lease inception to the time the Company
expects to vacate the premises resulting in both depreciation and
additional rent in cost of sales in the consolidated statements of
income.
These requirements were adopted by the Company on January 1, 2004 with
retroactive restatement. As a result, for the three month period ended
June 30, 2003 opening retained earnings was reduced by $796,000 and net
income was reduced by $69,000. Basic and diluted earnings per share were
unchanged. For the six month period ended June 30, 2003 opening retained
earnings was reduced by $735,000 and net income was reduced by $130,000.
Basic and diluted earnings per share were unchanged.
At December 31, 2003 investments were reduced by $8,000, fixed assets
were increased by $1,797,000, other long term liabilities were increased
by $3,322,000, future tax liabilities were reduced by $335,000, retained
earnings was reduced by $1,009,000 and the currency translation
adjustment account decreased by $189,000.
Net income for the three and six month periods ended June 30, 2004 were
reduced by $82,000 and $165,000, respectively.
Separately Priced Tooling Contracts
The Company adopted CICA Emerging Issues Committee Abstract No. 142,
"Revenue Arrangements with Multiple Deliverables" (EIC-142),
prospectively for new revenue arrangements with multiple deliverables
entered into by the Company on or after January 1, 2004. The Company
enters into such multiple element arrangements where it has separately
priced tooling contracts that are entered into at the same time as
contracts for subsequent parts production. EIC-142 addresses how a vendor
determines whether an arrangement involving multiple deliverables
contains more than one unit of accounting and also addresses how
consideration should be measured and allocated to the separate units of
accounting in the arrangement. Separately priced tooling can be accounted
for as a separate revenue element only in circumstances where the tooling
has value to the customer on a standalone basis and there is objective
and reliable evidence of the fair value of the subsequent parts
production. The adoption of EIC-142 did not have a material effect on the
Company's revenue or earnings for the three and six month periods ended
June 30, 2004.
6. Debt
(a) Convertible Series Preferred Shares
The liability amounts for the Series 4 and 5 Convertible Series Preferred
Shares are presented as current liabilities. The Series 4 Convertible
Series Preferred Shares are retractable at any time by Magna
International Inc. ("Magna") at their aggregate face value of
Cdn$100 million and the Series 5 Convertible Series Preferred Shares are
retractable by Magna at their aggregate face value of Cdn$100 million
commencing December 31, 2004.
These shares are also convertible by Magna into the Company's Class A
Subordinate Voting Shares at a fixed conversion price of Cdn$13.20 per
share and are redeemable by the Company commencing December 31, 2005.
(b) Credit Facility
At June 30, 2004 the Company had lines of credit totaling $314.8 million.
Of this amount, $300 million is represented by an extendible, revolving
credit facility that expires on September 30, 2004. The unused and
available lines of credit at June 30, 2004 were approximately
$108.2 million.
(c) Debt Due to Magna and its Affiliates
The Company's debt due to Magna and its affiliates consists of the
following:
-------------------------------------------------------------------------
June 30, December 31,
(U.S. dollars in thousands) 2004 2003
-------------------------------------------------------------------------
Debt denominated in Canadian dollars(i) $ 45,276 $ 46,512
Debt denominated in Euros(ii) 88,577 94,128
Capital lease obligation denominated in Euros 1,065 1,164
-------------------------------------------------------------------------
134,918 141,804
Less due within one year 134,918 141,804
-------------------------------------------------------------------------
$ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Notes:
(i) This debt initially bore interest at 7.5% and was repayable in
2001. In addition to the maturity date, the interest rate on
this debt was subsequently renegotiated quarterly. The interest
rate was 3.85% effective January 1, 2003, 4.25% effective
April 1, 2003, 4.19% effective July 1, 2003, 3.86% effective
October 1, 2003, 3.65% effective January 1, 2004, 3.07%
effective April 1, 2004 and 3.09% effective July 1, 2004. The
maturity date of the Cdn$60 million debt has been extended to
September 30, 2004.
(ii) This debt, comprised of three tranches, initially bore interest
at 7.0%, 7.0% and 7.5%, respectively, and was repayable
October 1, 2002, October 1, 2003 and December 31, 2004,
respectively. The maturity date and the interest rate on the
first tranche was renegotiated to 4.29% effective
October 2, 2002, 3.86% effective January 2, 2003, 3.51%
effective April 2, 2003, 3.14% effective July 2, 2003 and 3.32%
effective October 2, 2003. The maturity date and the interest
rate on the second tranche was renegotiated to 3.32% effective
October 2, 2003. Substantially all of the first and second
tranches were repaid in December 2003. The remaining portions of
the first and second tranches outstanding at December 31, 2003
were repaid in January 2004. The third and final tranche of this
debt, totaling Euro 72.0 million, continues to be due
December 31, 2004 and bears interest at its original rate of
7.5%.
7. Capital Stock
Class and Series of Outstanding Securities
For details concerning the nature of the Company's securities, refer to
note 11, "Convertible Series Preferred Shares Held by Magna", and
note 14, "Capital Stock", of the Company's annual financial statements.
The following table summarizes the outstanding share capital of the
Company:
-------------------------------------------------------------------------
Authorized Issued
-------------------------------------------------------------------------
Convertible Series Preferred Shares
(Convertible into Class A
Subordinate Voting Shares) 3,500,000 2,000,000
Preferred Shares, issuable in series Unlimited -
Class A Subordinate Voting Shares Unlimited 51,599,778
Class B Shares
(Convertible into Class A Subordinate
Voting Shares) Unlimited 31,909,091
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Maximum Shares
The following table presents the maximum number of shares that would be
outstanding if all of the outstanding options, Convertible Series
Preferred Shares and Convertible Debentures issued and outstanding as at
June 30, 2004 were exercised or converted:
-------------------------------------------------------------------------
Number of Shares
-------------------------------------------------------------------------
Class A Subordinate Voting Shares outstanding
at June 30, 2004 51,599,778
Class B Shares outstanding at June 30, 2004 31,909,091
Options to purchase Class A Subordinate Voting Shares 2,854,000
Convertible Debentures, convertible by the
holders at Cdn$13.25 per share 7,547,019
Convertible Series Preferred Shares,
convertible at Cdn$13.20 per share 15,151,516
-------------------------------------------------------------------------
109,061,404
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The above amounts include shares issuable if the holders of the
Convertible Debentures exercise their conversion option but exclude
Class A Subordinate Voting Shares issuable, only at the Company's option,
to settle interest and principal related to the Convertible Debentures.
The number of Class A Subordinate Voting Shares issuable at the Company's
option is dependent on the trading price of Class A Subordinate Voting
Shares at the time the Company elects to settle Convertible Debenture
interest and principal with shares.
8. Stock-based Compensation
(a) Incentive Stock Options
Information concerning the Company's Incentive Stock Option Plan is
included in note 15, "Incentive Stock Options", of the Company's annual
financial statements. The following is a continuity schedule of options
outstanding:
-------------------------------------------------------------------------
Weighted
Average Number of
Exercise Options
Number Price Exercisable
-------------------------------------------------------------------------
Outstanding at December 31, 2003 2,640,000 Cdn$13.02 1,779,000
Granted 330,000 Cdn$11.79 -
Exercised (1,000) Cdn $9.50 (1,000)
Cancelled (115,000) Cdn$13.06 (57,000)
Vested 285,000
-------------------------------------------------------------------------
Outstanding at June 30, 2004 2,854,000 Cdn$12.88 2,006,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The maximum number of shares reserved to be issued for stock options is
4,100,000 Class A Subordinate Voting Shares. The number of reserved but
unoptioned shares at June 30, 2004 is 1,193,750. The total number of
shares issued from exercised stock options, from the inception date of
the plan, is 52,250.
The fair value of stock options is estimated at the grant date using the
Black-Scholes option pricing model using the following weighted average
assumptions for stock options issued in each period indicated (no stock
options were issued during the three month periods ended June 30, 2004
and June 30, 2003):
-------------------------------------------------------------------------
Six Month Periods
Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars in thousands) 2004 2003
-------------------------------------------------------------------------
Risk free interest rate 2.8% 3.0%
Expected dividend yield 3.0% 3.2%
Expected volatility 37% 39%
Expected life of options 5 years 5 years
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options granted prior to January 1, 2003 are not accounted for at
fair value. Had these stock options been accounted for at fair value, the
Company's net income attributable to Class A Subordinate Voting and
Class B Shares would have been:
-------------------------------------------------------------------------
Three Month Six Month
Periods Ended Periods Ended
June 30, June 30,
-------------------------------------------------------------------------
(U.S. dollars, in thousands
except per share figures) 2004 2003 2004 2003
-------------------------------------------------------------------------
Net income attributable to
Class A Subordinate Voting
and Class B Shares $ 22,436 $ 31,307 $ 48,089 $ 56,905
Pro forma adjustments for
the fair value of stock
options granted prior to
January 1, 2003 (215) (239) (323) (452)
-------------------------------------------------------------------------
Pro forma net income
attributable to Class A
Subordinate Voting and
Class B Shares $ 22,221 $ 31,068 $ 47,766 $ 56,453
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro forma earnings per
Class A Subordinate
Voting or Class B Share
Basic $ 0.27 $ 0.46 $ 0.57 $ 0.83
Diluted $ 0.24 $ 0.34 $ 0.51 $ 0.63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Restricted Share Agreement
During the three month period ended June 30, 2004, the Company entered
into a new employment agreement and long term retention arrangement with
its CEO. The CEO was paid a special bonus of $1.9 million. In addition,
restricted shares were sold to the CEO. Provided the CEO remains with
Decoma until December 31, 2007 and certain other conditions are met, the
restricted shares will be released to the CEO over the period from
January 1, 2008 to December 31, 2017 in annual increments provided he
continues to comply with certain conditions under the arrangement.
451,685 Class A Subordinate Voting Shares, which were acquired on the
open market at a cost of $4.1 million, were sold to the CEO under the
arrangement. The purchase price paid by the CEO was at a discount to the
acquisition cost of $4.1 million which was determined with reference to
the nature and duration of the restrictions.
The total net cost to the Company of these arrangements is being
amortized to compensation expense from the award date through
December 31, 2017.
451,685 Class A Subordinate Voting Shares, which have not yet been
released to the CEO, and unamortized compensation expense of $4.1 million
at June 30, 2004 have been presented as a reduction of shareholders'
equity. In addition, these shares have been excluded in the calculation
of basic earnings per share but have been included in the calculation of
diluted earnings per share.
9. Additional Expense Information
Selling, general and administrative expenses are net of earnings (losses)
resulting from foreign exchange of:
-------------------------------------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars in thousands) 2004 2003 2004 2003
-------------------------------------------------------------------------
Foreign exchange income
(losses) $ 797 $ (2,268) $ 1,036 $ (4,900)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As disclosed in Note 12, "Employee Future Benefit Plans", to the
Company's annual financial statements, the Company sponsors certain
defined benefit pension and post-retirement medical benefit arrangements.
The aggregate amount expensed for these arrangements was as follows:
-------------------------------------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars in thousands) 2004 2003 2004 2003
-------------------------------------------------------------------------
Net expense $ 1,419 $ 1,050 $ 2,458 $ 2,019
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. Contingencies
(a) In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers, suppliers
and former employees and for environmental remediation costs. Management
believes that adequate provisions have been recorded in the accounts
where required. Although it is not possible to estimate the extent of
potential costs and losses, if any, management believes, but can provide
no assurance, that the ultimate resolution of such contingencies would
not have a material adverse effect on the financial position and results
of operations of the Company.
(b) Ford Motor Company ("Ford") recently updated its Production
Purchasing Global Terms and Conditions (the "Global Terms") effective for
shipments from Decoma International Corp. ("DIC") and its subsidiaries
(collectively the "Supplier") to Ford on or after January 1, 2004. DIC is
a direct significant subsidiary of Decoma International Inc. Under the
Global Terms, Ford and its "related companies" (collectively the "Ford
Group" or the "Buyer") have the right to set off against the Supplier's
receivables from the Ford Group amounts owing to the Ford Group by the
Supplier's "related companies". "Related companies" is defined under the
Global Terms to include any parent company of the Buyer or the Supplier,
as appropriate, and any subsidiary or affiliate in which any of them owns
or controls at least 25% of the voting stock, partnership interest or
other ownership interest.
Where DIC acts as a "Supplier", Decoma interprets the Global Terms to
mean that "related companies" would include Decoma International Inc. (as
the parent company of DIC) and its direct and indirect subsidiaries and
at least 25% owned entities (collectively the "Decoma Group") but would
not include Magna and its direct and indirect subsidiaries and at least
25% owned entities other than the Decoma Group (collectively the "Magna
Group").
Ford may assert that the term "related companies" includes, in relation
to DIC or other Suppliers in the Decoma Group, the Magna Group and
attempt to set off a Magna Group liability against a Decoma Group
receivable. To date, Ford has not attempted to take such action against
Decoma. If the Ford Group took such an action against Decoma in respect
of a material liability of the Magna Group, such action could have a
material adverse impact on Decoma's financial condition and liquidity.
Any such action by Ford would be contested by Decoma at such time.
(c) The Company's Anotech division in North America is currently
incurring operating losses as a result of the underutilization of its
anodizing assets. The Company is currently reviewing the long term
prospects for these assets which had a net book value of approximately
$12.0 million at June 30, 2004. As a result of these circumstances and
prior to completion of the analysis currently underway, the
recoverability of this net book value amount is subject to measurement
uncertainty. Readers are asked to refer to the Company's Management's
Discussion and Analysis of Results of Operations and Financial Position
which is included elsewhere herein for further discussion regarding
Anotech.
11. Continental Europe Paint Capacity Consolidation Charges
During the three month period ended December 31, 2003, the Company
completed, and committed to, a plan to consolidate its continental Europe
paint capacity. This plan entails mothballing the Company's Decoform
paint line in Germany and transferring Decoform's painted trim and fascia
business to the Company's newer paint lines at its Decorate and Belplas
facilities in Germany and Belgium, respectively. Decoform will continue
to mold and assemble products for the Company's Decorate facility.
The consolidation will result in severance costs associated with a
reduction of the Decoform workforce. Severance costs for 284 employees
were accrued in the three month period ended December 31, 2003.
Decoform employees have a contractual notice period of up to two quarters
following the quarter in which individual notice is given. The
consolidation plan envisions substantially all employees working through
their contractual notice periods with paint line production transfers
completed by the end of 2004.
The severance accrual has been reduced by $0.7 million to reflect the
Company's current best estimate of costs. This reduction primarily
reflects the benefits of being able to retain more Decoform employees
than originally planned as a result of increases in expected future mold
and assembly volumes at Decoform.
A continuity of the severance accrual related to this consolidation plan
is as follows:
(U.S. dollars, in thousands)
-------------------------------------------------------------------------
Balance, December 31, 2003 $ 6,799
Payments (50)
Currency translation (258)
-------------------------------------------------------------------------
Balance, March 31, 2004 6,491
Payments (65)
Adjustments (728)
Currency translation 94
-------------------------------------------------------------------------
Balance, June 30, 2004 $ 5,792
-------------------------------------------------------------------------
-------------------------------------------------------------------------
12. Convertible Debentures
On March 27, 2003, the Company issued Cdn$100 million of unsecured,
subordinated Convertible Debentures bearing interest at 6.5% and maturing
March 31, 2010. See note 13 to the Company's annual financial statements
for further discussion on the Convertible Debentures.
13. Other Income
During the first quarter of 2003, the Company permanently repatriated
$75 million from its United States operations. This repatriation gave
rise to the recognition of a pro rata amount of the Company's cumulative
translation adjustment account. This amount, totaling $1.4 million, has
been included in other income and is not subject to tax.
14. Segmented Information
The Company operates in one industry segment, the automotive exteriors
business. As at June 30, 2004, the Company had 27 manufacturing
facilities in North America and 15 in Europe. In addition, the Company
had 8 product development and engineering centres.
The Company's European divisions operate separately from the Company's
North American divisions as a result of differences in customer mix and
business environment. The Company's internal financial reports, which are
reviewed by executive management including the Company's President and
Chief Executive Officer, segment divisional results between North America
and Europe. This segmentation recognizes the different geographic
business risks faced by the Company's North American and European
divisions, including vehicle production volumes in North America and
Europe, foreign currency exposure, differences in OEM customer mix, the
level of customer outsourcing and the nature of products and systems
outsourced.
The accounting policies of each segment are consistent with those used in
the preparation of the unaudited interim consolidated financial
statements. Inter-segment sales and transfers are accounted for at fair
market value. The following tables show certain information with respect
to segment disclosures.
-------------------------------------------------------------------------
Three Month Period Ended June 30, 2004
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 422,021 $ 246,659 $ - $ 668,680
Inter-segment sales (18) (455) - (473)
-------------------------------------------------------------------------
Sales to external
customers $ 422,003 $ 246,204 $ - $ 668,207
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 16,441 $ 7,409 $ - $ 23,850
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other charge adjustment
(note 11) $ - $ (728) $ - $ (728)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (loss) $ 49,845 $ (5,237) $ (3,430) $ 41,178
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (731) $ - $ - $ (731)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 12,905 $ 2,363 $ (12,376) $ 2,892
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
held by Magna $ - $ - $ 1,196 $ 1,196
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 447,256 $ 238,530 $ - $ 685,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 20,386 $ 8,039 $ - $ 28,425
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 49,359 $ 20,437 $ - $ 69,796
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Period Ended June 30, 2003
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 412,346 $ 180,442 $ - $ 592,788
Inter-segment sales (189) (515) - (704)
-------------------------------------------------------------------------
Sales to external
customers $ 412,157 $ 179,927 $ - $ 592,084
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 15,266 $ 6,560 $ - $ 21,826
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (loss) $ 62,476 $ (156) $ (5,375) $ 56,945
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (591) $ - $ - $ (591)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 7,262 $ 4,489 $ (9,223) $ 2,528
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
held by Magna $ - $ - $ 2,255 $ 2,255
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 410,605 $ 190,345 $ - $ 600,950
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 27,150 $ 15,529 $ - $ 42,679
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 48,834 $ 19,311 $ - $ 68,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Month Period Ended June 30, 2004
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 880,535 $ 491,055 $ - $1,371,590
Inter-segment sales (24) (950) - (974)
-------------------------------------------------------------------------
Sales to external
customers $ 880,511 $ 490,105 $ - $1,370,616
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 33,265 $ 14,683 $ - $ 47,948
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other charge adjustment
(note 11) $ - $ (728) $ - $ (728)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (loss) $ 109,248 $ (15,949) $ (5,521) $ 87,778
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (1,334) $ - $ - $ (1,334)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 27,007 $ 4,437 $ (25,862) $ 5,582
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
held by Magna $ - $ - $ 2,408 $ 2,408
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 447,256 $ 238,530 $ - $ 685,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 35,554 $ 25,079 $ - $ 60,633
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 49,359 $ 20,437 $ - $ 69,796
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Six Month Period Ended June 30, 2003
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 807,144 $ 347,790 $ - $1,154,934
Inter-segment sales (391) (1,316) - (1,707)
-------------------------------------------------------------------------
Sales to external
customers $ 806,753 $ 346,474 $ - $1,153,227
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 29,440 $ 12,706 $ - $ 42,146
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (loss) $ 116,451 $ (2,968) $ (9,937) $ 103,546
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (1,020) $ - $ - $ (1,020)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 13,151 $ 8,825 $ (16,699) $ 5,277
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
held by Magna $ - $ - $ 4,301 $ 4,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other income (note 13) $ - $ - $ (1,387) $ (1,387)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 410,605 $ 190,345 $ - $ 600,950
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 47,964 $ 22,279 $ - $ 70,243
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 48,834 $ 19,311 $ - $ 68,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------
15. Business Acquisitions
Federal Mogul Lighting
During the second quarter of 2003, the Company entered into an agreement
to acquire Federal Mogul's original equipment automotive lighting
operations in Matamoras, Mexico, a distribution centre in Brownsville,
Texas, an assembly operation in Toledo, Ohio and certain of the
engineering operations, contracts and equipment at Federal Moguls'
original equipment automotive lighting operations in Hampton, Virginia.
The total purchase price was $10.4 million. The transaction closed on
April 14, 2003 with a transition of the Hampton, Virginia contracts and
assets over the balance of 2003.
The net effect of the transaction on the Company's consolidation balance
sheet was as follows:
Non-cash working capital $ 8,023
Fixed assets 2,338
-------------------------------------------------------------------------
Net assets acquired $ 10,361
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The acquisition has been accounted for by the purchase method in these
unaudited interim consolidated financial statements from the date of
transaction.
Decomex
In May 2001, the Company acquired the remaining 30% minority interest in
Decomex Inc. ("Decomex") from Corporation Activa, S.A. de C.V. Decomex
operates fascia moulding and finishing operations in Mexico.
Total consideration paid in connection with the acquisition amounted to
$7.8 million which gave rise to goodwill of $0.1 million. The purchase
price was satisfied with cash of $2.6 million and by the issuance of
$5.2 million of prime rate promissory notes which were repaid during 2002
and 2003.
16. Earnings Per Share
-------------------------------------------------------------------------
Three Month Periods Six Month Periods
Ended June 30, Ended June 30,
-------------------------------------------------------------------------
(U.S. dollars, in thousands
except per share figures) 2004 2003 2004 2003
-------------------------------------------------------------------------
Basic earnings per Class A
Subordinate Voting and
Class B Share
Net income attributable to
Class A Subordinate Voting
and Class B Shares $ 22,436 $ 31,307 $ 48,089 $ 56,905
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares outstanding
during the period 83,508 68,136 83,508 68,100
Adjustments for:
Deferred compensation
(note 8(b)) (158) - (79) -
-------------------------------------------------------------------------
83,350 68,136 83,429 68,100
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per Class A
Subordinate Voting and
Class B Share $ 0.27 $ 0.46 $ 0.58 $ 0.84
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per Class A
Subordinate Voting and
Class B Share
Net income attributable to
Class A Subordinate Voting
and Class B Shares $ 22,436 $ 31,307 $ 48,089 $ 56,905
Adjustments (net of
related tax effects) for:
Amortization of discount
on Convertible Series
Preferred Shares 1,196 2,255 2,408 4,301
Financing charges on
Convertible Series
Preferred Shares,
held by Magna 1,131 1,522 1,651 2,940
Financing charges on
Convertible Debentures 1,008 965 2,045 1,011
-------------------------------------------------------------------------
$ 25,771 $ 36,049 $ 54,193 $ 65,157
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares outstanding
during the period 83,350 68,136 83,429 68,100
Adjustments for:
Class A Subordinate Voting
Shares issuable on
conversion of Convertible
Series Preferred Shares 15,152 30,047 15,152 30,047
Class A Subordinate Voting
Shares issuable on
conversion of Convertible
Debentures 7,547 7,547 7,547 3,898
Stock options determined
using the treasury stock
method 124 49 124 68
Deferred compensation
(note 8(b)) 158 - 79 -
-------------------------------------------------------------------------
106,331 105,779 106,331 102,113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per Class A
Subordinate Voting and
Class B Share $ 0.24 $ 0.34 $ 0.51 $ 0.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
DECOMA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations
and Financial Position
Three and six month periods ended June 30, 2004 and 2003
-------------------------------------------------------------------------
All amounts in this Management's Discussion and Analysis of Results of
Operations and Financial Position ("MD&A") are in U.S. dollars unless
otherwise noted. This MD&A is current as of August 4, 2004 and should be
read in conjunction with the Company's unaudited interim consolidated
financial statements for the three and six month periods ended June 30,
2004, included elsewhere herein, and the Company's consolidated financial
statements and MD&A for the year ended December 31, 2003, included in the
Company's Annual Report to Shareholders for 2003. Additional information
relating to the Company, including the Company's Annual Information Form,
is available on SEDAR at www.sedar.com.
Impact of Translation of Foreign Currency Results of Operations into the
Company's U.S. Dollar Reporting Currency
-------------------------------------------------------------------------
Three Month Periods Ended Six Month Periods Ended
June 30, June 30,
----------------------------------------------------
% %
2004 2003 Change 2004 2003 Change
-------------------------------------------------------------------------
1 Cdn dollar equals
U.S. dollars 0.735 0.717 2.5% 0.747 0.689 8.4%
1 Euro equals
U.S. dollars 1.206 1.139 5.9% 1.227 1.106 10.9%
1 British Pound
equals U.S. dollars 1.807 1.621 11.5% 1.824 1.611 13.2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The preceding table reflects the average foreign exchange rates between
the primary currencies in which the Company conducts business and its
U.S. dollar reporting currency. Significant changes in the exchange rates
of these currencies against the U.S. dollar impact the reported U.S.
dollar amounts of the Company's results of operations. The results of
foreign operations are translated into U.S. dollars using the average
exchange rates in the table above for the relevant period.
In addition to the impact of movements in exchange rates on translation
of foreign operations into U.S. dollars, the Company's results can also
be influenced 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 hedging programs employed by
the Company, foreign currency transactions in the current period have not
been fully impacted by the movements in exchange rates. The Company
records 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.
Throughout this MD&A reference is made to the impact of translation of
foreign operations, foreign currency transactions and holding gains and
losses on reported U.S. dollar amounts where significant.
OVERVIEW
Total sales grew to $668.2 million in the second quarter of 2004 compared
to $592.1 million for the second quarter of 2003. Total sales benefited
$19.2 million from translation. Excluding the impact of translation,
total sales increased $56.9 million or 10% over the second quarter of
2003 due primarily to sales at recent new European facility start ups and
an increase in global tooling and other sales. North American production
sales were down slightly quarter over quarter.
Diluted earnings per share declined to $0.24 in the second quarter of
2004 compared to $0.34 in the second quarter of 2003. This decline is
primarily attributable to a decline in North American operating income as
a result of lower production sales. The decline in North American
production sales is due primarily to:
- end of production on the Ford WIN 126 (Windstar) program and the
award of the replacement V229 (Freestar) fascia program to a
competitor;
- recent incremental customer pricing concessions; and
- lower production on certain high Decoma content programs due to a
combination of lower customer production volumes and lower
installation rates for certain of the Company's trim products.
In addition, North American operating income was negatively impacted by
operating losses in the current quarter at two of the Company's trim
product plants; planned increased costs at Decostar as it prepares for
start of production; and costs associated with the ramp up of the new
DaimlerChrysler LX (300 and Magnum) fascia and sealing programs.
Although European operating losses in the current quarter improved
significantly from the loss levels experienced in the third and fourth
quarters of 2003 and the first quarter of 2004, they increased over
losses experienced in the second quarter of 2003. This increase is
primarily attributable to:
- the start up of the Company's new Belplas paint line and excess paint
capacity costs which will continue until the Company's continental
Europe paint capacity consolidation plan is fully implemented;
- costs related to the insourcing of business for the Company's new
chrome line;
- design, engineering and other costs related to recent and pending
program launches; and
- lower than anticipated customer production volumes on the VW A5
(Golf) and T5 (Transit Van) front end module programs.
RESULTS OF OPERATIONS
Three Month Periods Ended June 30, 2004 and 2003
Sales
-------------------------------------------------------------------------
Three Month Periods Ended
June 30,
---------------------------------
%
2004 2003 Change
-------------------------------------------------------------------------
Light Vehicle Production Volumes
(in millions)
North America 4.176 4.157 -%
Western Europe 4.423 4.346 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle
(U.S. dollars)
North America $94 $95 (1%)
Europe 50 35 43%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales
(U.S. dollars in millions)
North America $391.8 $396.8 (1%)
Europe 220.9 153.2 44%
Global Tooling and Other Sales 55.5 42.1 32%
-------------------------------------------------------------------------
Total Sales $668.2 $592.1 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average content per vehicle in North America and in Europe has been
calculated by dividing the Company's North American and European
production sales by the industry's North American and western European
light vehicle production volumes, respectively. Excluding the effects of
translation, continued growth in average content per vehicle provides a
measure of the Company's ability to sell its products onto new vehicle
platforms and/or expand its sales onto existing vehicle platforms.
Increases in average content per vehicle may result from any one or more
of: the award of takeover business; the acquisition of competitors; the
expansion of the Company's existing product markets (i.e. the conversion
of bumpers from steel to plastic); and the introduction of new products.
North America
North American production sales declined by 1% to $391.8 million in the
second quarter of 2004. North American vehicle production volumes were
substantially unchanged. North American average content per vehicle
declined 1% to approximately $94.
Translation of Canadian dollar sales into the Company's U.S. dollar
reporting currency added approximately $6.7 million to production sales
and $2 to North American content per vehicle. In addition, the
acquisition of certain of Federal Mogul's original equipment automotive
lighting operations (the "FM Lighting Acquisition") during the second
quarter of 2003 added approximately $7.0 million to production sales and
$2 to North American content per vehicle.
The remaining net $18.7 million decrease in production sales and $5
decrease in North American content per vehicle was due to:
- end of production on the Ford WIN 126 (Windstar) program and the
award of the replacement V229 (Freestar) fascia program to a
competitor which resulted in a decline in production sales of
approximately $12.1 million or $3 in content per vehicle;
- recent incremental customer pricing concessions;
- end of production on the DaimlerChrysler LH (Concorde, Intrepid and
300M) program in the third quarter of 2003 and the ramp up of the
replacement LX (300 and Magnum) program during the current quarter;
- lower volumes on certain high Decoma content programs including the
General Motors GMX 220/222 (Le Sabre) and 820 C and D (Cadillac
Escalade and Denali SUV), the Ford U152 (Explorer) and EN114
(Crown Victoria, Grand Marquis) and the BMW E85 (Z4); and
- lower installation rates for certain of the Company's trim products
on certain high Decoma content Ford SUV and light truck programs.
These decreases were partially offset by:
- sales on programs that launched during or subsequent to the second
quarter of 2003 including the General Motors GMX 380 (Malibu) and GMT
265 (SRX) and the Cami GMT 191 (Equinox) programs;
- increased content and strong volumes on the Ford U204 (Escape)
refresh program; and
- strong volumes on other high content production programs including
the General Motors GMX 320 (Cadillac CTS) and the DaimlerChrysler DR
(Ram pickup) program.
Sequentially from the first to the second quarter of 2004, North American
production sales and average content per vehicle declined $28.9 million
and $8, respectively. $7.5 million of sales and $2 of content of this
decline is attributable to translation of Canadian dollar sales into the
Company's U.S. dollar reporting currency. In addition, incremental
customer price concessions and lower production on certain high Decoma
content programs, due to a combination of lower customer production
volumes and lower installation rates for certain of the Company's trim
products, contributed to the decline. Customer production volumes were
down on the General Motors GMX 220/222 (LeSabre), GMX 210 and 230 (Impala
and Monte Carlo) and the Ford EN114 (Crown Victoria, Grand Marquis) and
U152 (Explorer) programs, partially offset by the DaimlerChrysler LX
(300 and Magnum) ramp up and the Cami GMT 191 (Equinox) launch.
Europe
European production sales increased 44% to $220.9 million in the second
quarter of 2004 as a result of a 2% increase in European production
volumes and content growth. Increased production volumes added
approximately $2.9 million to sales. European average content per vehicle
grew $15 or 43% to approximately $50 for the second quarter of 2004.
Content growth was driven by the ramp up of sales at recent new facility
start ups including:
- the launch of the VW Group A5 (Golf) program in the fourth quarter of
2003, with fascia production at the Company's new Belplas paint line
and front end module assembly and sequencing at the Company's new
Brussels Sequencing Centre; and
- the ramp up of the VW Group T5 (Transit Van) and launch of the SLW
(City Car) fascia and front end module assembly and sequencing
programs at the Company's Modultec and Formatex facilities in Germany
and Poland.
Sales at new European facilities collectively added approximately
$41.9 million to production sales and $10 to European content per
vehicle.
Translation of Euro and British Pound sales into the Company's U.S.
dollar reporting currency also contributed to content growth adding
approximately $10.4 million to European production sales and $2 to
content per vehicle.
Production sales at Merplas also increased primarily as a result of
increased production volumes on the Jaguar X400 program with the
introduction of a wagon and diesel engine models. Adjusting to eliminate
the impact of translation of British Pound sales into U.S. dollars,
Merplas' sales increased $4.7 million which added $1 to European content
per vehicle.
The remaining net $7.8 million increase in production sales and $3
increase in content per vehicle is due to new program launches including
various Audi, Mercedes and Porsche programs.
Global Tooling and Other
Tooling and other sales on a global basis increased $13.4 million to
$55.5 million for the second quarter of 2004. The growth came in North
America and includes amounts for the Ford U364 (Mariner) and C/D 338
(Futura) and General Motors GMT 265 (Cadillac SRX) programs.
Gross Margin
Gross margin declined to $116.3 million in the second quarter of 2004
compared to $126.9 million in the second quarter of 2003. As a percentage
of total sales, gross margin declined to 17.4% for the current quarter
compared to 21.4% for the second quarter of 2003.
The gross margin percentage in North America declined to 24.2% in the
current quarter compared to 26.7% in the second quarter of 2003. Gross
margin was negatively impacted by:
- lower production sales as a result of end of production on the Ford
WIN 126 (Windstar) program;
- lower production on certain high Decoma content programs due to a
combination of lower customer production volumes and lower
installation rates for certain of the Company's trim products;
- incremental customer pricing concessions;
- operating losses in the current quarter at two of the Company's trim
product plants;
- planned increased spending at the Company's Decostar facility as it
prepares for launch; and
- increased design and engineering costs related to upcoming launches
particularly within the Company's systems integration and specialty
vehicle operations.
European gross margin declined to 6.0% in the second quarter of 2004
compared to 9.9% in the second quarter of 2003. The decline in the
European gross margin percentage is due primarily to the start up of the
Belplas paint line in the fourth quarter of 2003. Although yields and up
time continue to improve, the paint line has not yet achieved expected
performance levels. In addition, excess paint capacity costs will
continue until the Company's continental Europe paint capacity
consolidation plan is fully implemented. Gross margin was also negatively
impacted by:
- growth in front end module assembly and sequencing sales and the
lower margins associated with purchased components;
- costs to insource and launch various grille programs on the Company's
new chrome line;
- costs related to the DaimlerChrysler Mercedes A Class program which
will launch in the second half of 2004 including costs incurred to
ready Carmodul, the Company's new front end module assembly and
sequencing facility, for this launch;
- launch and design and engineering costs associated with various new
programs including programs for Audi, Mercedes and Porsche;
- OEM pricing concessions; and
- continued operating inefficiencies at the Company's Prometall
facility.
These negative impacts were partially offset by improvements at Merplas
and the Company's paint operations at its Decorate trim facility and by
the settlement in the current period of certain open financial issues
with customers.
Depreciation and Amortization
Depreciation and amortization costs increased to $23.9 million for the
second quarter of 2004 from $21.8 million for the comparative prior year
period. Of this increase, $0.7 million is attributable to the translation
of Canadian dollar, Euro and British Pound depreciation expense into the
Company's U.S. dollar reporting currency. The Company's ongoing capital
spending program also contributed to increased depreciation expense
including the commencement of depreciation at the Company's new Belplas
paint line in the fourth quarter of 2003. These increases were partially
offset by a reduction in Sybex depreciation expense as a result of the
United Kingdom impairment charge taken in the fourth quarter of 2003
which is expected to reduce full year 2004 depreciation expense by
approximately $2.5 million. Readers are asked to refer to the Company's
MD&A for the year ended December 31, 2003 for further discussion
regarding the United Kingdom impairment charge.
Depreciation as a percentage of total sales declined to 3.6% in the
current quarter compared to 3.7% for the second quarter of 2003.
Depreciation on capital invested at Decostar will commence with the start
of commercial production in early 2005.
Selling, General and Administrative ("S,G&A")
S,G&A costs were $45.1 million for the second quarter of 2004, up from
$41.6 million for the second quarter of 2003. This increase reflects the
translation of Canadian dollar, Euro and British Pound S,G&A costs into
the Company's U.S. dollar reporting currency which increased reported
S,G&A costs by $1.2 million. This increase was partially offset by a
$3.1 million decline in foreign exchange losses which were high in 2003
as a result of U.S. dollar denominated monetary items held in Canada and
the strengthening of the Canadian dollar relative to the U.S. dollar.
The remaining $5.4 million increase in S,G&A expense is related primarily
to increased costs within the Company's systems integration and specialty
vehicle operations as a result of growth in specialty vehicle enhancement
contracts and increased front end and lift gate module program quoting
activity. The increase in S,G&A was also the result of the FM Lighting
Acquisition, a planned increase in Decostar costs, costs related to new
European facilities and the new chrome line, increased regulatory
compliance costs including costs with respect to section 404 of the
Sarbanes-Oxley Act, and costs to support the Company's higher sales
level.
As a percentage of total sales, S,G&A declined to 6.8% for the current
quarter compared to 7.0% for the second quarter of 2003.
In addition to the benefits provided by Magna to Decoma under the
affiliation agreement noted below, Magna, through its subsidiary Magna
Services Inc. ("MSI"), provides certain management and administrative
services to the Company in return for a specific amount negotiated
between the Company and Magna. This amount includes an allocated share of
the facility and overhead costs dedicated to providing such services.
Services include specialized legal, environmental, immigration, tax,
treasury, information systems (including wide area network infrastructure
and support services) and employee relations services (including
administration of Decoma's Employee Equity Participation and Profit
Sharing Program). The Company is currently in discussions with Magna with
respect to a possible long-term agreement detailing these arrangements.
Certain services previously provided through MSI are now secured directly
by the Company. As a result, the cost of management and administrative
services provided by MSI and included in S,G&A declined to $0.6 million
compared to $1.1 million for the second quarters of 2004 and 2003,
respectively.
Affiliation and Social Fees
The Company is party to an affiliation agreement with Magna that provides
for the payment by Decoma of an affiliation fee. The affiliation
agreement provides the Company with, amongst other things, certain
trademark rights, access to Magna's management and to its operating
principles and policies, internal audit services, Tier 1 development
assistance, global expansion assistance, vehicle system integration and
modular product strategy assistance and sharing of best practices in
areas such as new management techniques, employee benefits and programs,
marketing and technology development initiatives.
Affiliation fees payable under the affiliation agreement are 1% of
Decoma's consolidated net sales (as defined in the agreement) less a fee
holiday on 100% of consolidated net sales derived from future business
acquisitions in the calendar year of the acquisition and 50% of
consolidated net sales derived from future business acquisitions in the
second calendar year following the year of acquisition.
In addition, Decoma's corporate constitution specifies that the Company
will allocate a maximum of 2% of its profit before tax to support social
and charitable activities. The Company pays 1.5% of its consolidated
pretax profits to Magna which in turn allocates such amount to social and
other charitable programs on behalf of Magna and its affiliated
companies, including Decoma.
Affiliation and social fees expense increased to $6.9 million from
$6.5 million for the second quarters of 2004 and 2003, respectively. The
increase in affiliation and social fees expense is the result of an
increase in consolidated net sales on which the affiliation fees are
calculated.
As a percentage of total sales, affiliation and social fee expense
declined to 1.0% in the current quarter compared to 1.1% in the second
quarter of 2003 due to the affiliation fee holiday described above on
consolidated net sales derived from business acquisitions.
Operating Income
-------------------------------------------------------------------------
Three Month Periods
Ended June 30,
-------------------------------
%
(U.S. dollars in millions) 2004 2003 Change
-------------------------------------------------------------------------
Operating Income
North America $49.8 $62.5 (20%)
Europe, before continental Europe
paint capacity consolidation
charge adjustment (5.9) (0.2)
Continental Europe paint capacity
consolidation charge adjustment 0.7 -
Corporate (3.4) (5.4)
-------------------------------------------------------------------------
Total Operating Income $41.2 $56.9 (28%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a percentage of total sales, operating income was 6.2% for the second
quarter of 2004 compared to 9.6% for the second quarter of 2003.
The decline in the corporate segment operating loss is attributable to a
$3.1 million reduction in foreign exchange losses which were high in 2003
as a result of U.S. dollar denominated monetary items held in Canada and
the strengthening of the Canadian dollar relative to the U.S. dollar.
North America
North American operating income decreased to $49.8 million from
$62.5 million for the second quarters of 2004 and 2003, respectively. As
a percentage of total North American sales, North American operating
income was 11.8% in the current quarter compared to 15.2% in the second
quarter of 2003.
The 3.4% decline in North American operating income as a percentage of
total sales is the result of:
- the 2.5% decline in gross margin explained above; and
- a 0.9% increase in S,G&A expenses from $26.0 million or 6.3% as a
percentage of total sales in the comparative quarter to $30.4 million
or 7.2% of total sales in the current quarter primarily as a result of
increased costs within the Company's systems integration and specialty
vehicle operations, costs as a result of the FM Lighting Acquisition
and the planned increase in Decostar costs. In addition, translation
of SG&A costs into the Company's U.S. dollar reporting currency added
$0.6 million to SG&A and foreign exchange losses increased
by $0.5 million.
A portion of the North American operating income decline is the result of
losses at two trim product plants, Co-ex-tec and Anotech. Losses at
Co-ex-tec relate to sealing systems development and the launch and ramp
up of the DaimlerChrysler LX (300 and Magnum) sealing and other General
Motors programs. Co-ex-tec's performance is expected to improve over the
coming quarters.
Anotech operates both a metal stamping operation and an anodizing line.
Although Anotech's stamping assets are well utilized, its anodizing line
has been operating at well below capacity since the end of production of
the DaimlerChrysler LH (Concorde, Intrepid, 300M) program during the
third quarter of 2003. Contrary to prior expectations, the door design on
the new DaimlerChrysler LX (300 and Magnum) program did not include an
anodized window surround. Anotech lost $3.3 million in the current
quarter compared to a profit of $0.4 million in the second quarter of
2003.
In addition to the bright ecoseal finishing process currently running on
the anodizing line, Anotech is aggressively pursuing a new generation
black ecoseal finishing process to run on the same line and improve its
utilization. The Company has been awarded business scheduled to launch in
2006 that will utilize the black ecoseal finishing process. However,
initial testing indicates further process development is required in
order to satisfy customer specifications. As a result, the Company is
continuing to work with its customer and material suppliers to further
develop this process.
Although the Company expects to ultimately be successful in developing
this new generation process, the initial testing results have caused the
Company to re-evaluate the long term market for Anotech's anodizing line
and to re-examine the current quality and cost competitiveness of
competing processes such as paint and powder coat.
The Company expects to conclude this analysis and reach a determination
regarding the future plans for Anotech's anodizing assets by the end of
the year. Anotech's anodizing assets currently employ approximately
60 people and have a net book value of approximately $12 million. As a
result of the circumstances described above and prior to completion of
the analysis currently underway, the recoverability of this net book
value amount is subject to measurement uncertainty.
Europe
Although European operating losses, before the continental Europe paint
capacity consolidation charge adjustment, improved from the loss levels
experienced in the third and fourth quarters of 2003 and the first
quarter of 2004 of $9.0 million, $10.4 million and $10.7 million,
respectively, they increased over losses experienced in the second
quarter of 2003.
European operating losses, before the continental Europe paint capacity
consolidation charge adjustment, were $5.9 million in the current quarter
compared to $0.2 million in the second quarter of 2003.
This increase is primarily attributable to the start up of the Company's
new Belplas paint line and associated excess paint capacity costs.
Operating losses at Belplas and the related Brussels Sequencing Centre
increased $5.3 million in the current quarter as compared to the second
quarter of 2003.
The Company launched the Belplas paint line in the fourth quarter of 2003
to supply the VW Group A5 (Golf) fascia program for VW's Brussels
assembly plant. Although improving, first run yields are currently below
standard. In addition, this paint line has significant open capacity
which has been compounded by lower than anticipated customer production
volumes on the VW Group A5 (Golf) program. The Company's continental
Europe paint capacity consolidation plan, announced in the fourth quarter
of 2003, is expected to significantly improve the utilization of the
Belplas paint line in 2005. Readers are asked to refer to the
"Continental Europe Paint Capacity Consolidation Plan" section of this
MD&A for further discussion.
Operating results were also negatively impacted by:
- grille program insourcing costs related to the Company's new chrome
line;
- lower than anticipated customer production volumes on the VW Group T5
(Transit Van) program serviced by Modultec;
- costs associated with the DaimlerChrysler Mercedes A Class fascia and
front end module program which will launch in the second half of 2004
including costs to ready the Company's new Carmodul facility for this
launch; and
- new program design and engineering and launch costs including costs
associated with various Porsche programs launched and launching at a
new assembly and sequencing facility in Zuffenhausen, Germany with
fascia and related trim production currently at the Company's
Decoform facility and third parties (Decoform Porsche production was
shifted to Belplas subsequent to the quarter end as part of the
Company's continental Europe paint capacity consolidation plan);
The above costs were partially offset by:
- the ramp up of the Company's new Formatex moulding and front end
module assembly and sequencing facility located in Poland which is
currently supplying fascias and front end modules for the VW Group T5
(Transit Van) and the SLW (City Car) programs;
- improvements at the Company's other European facilities, most notably
within the paint operations at its Decorate trim facility in Germany;
- lower depreciation expense at Sybex as a result of the United Kingdom
impairment charge taken in the fourth quarter of 2003; and
- lower operating losses at Merplas which improved to $1.9 million from
$2.9 million for the second quarters of 2004 and 2003, respectively.
Adjusting to eliminate the impact of translation of British Pound
operating losses into U.S. dollars, Merplas' operating loss improved
$1.4 million. The improvement is the result of higher sales and the
impact of significant performance improvements implemented over the
last two years.
European operating income continues to be negatively impacted by
operating efficiency issues at the Company's Prometall facility. This is
a metal trim facility located in Germany which, amongst other processes,
anodizes parts. As a result of a significant increase in business
volumes, primarily new Audi business, Prometall's operations were
transferred to a new and larger facility in 2003. Prometall continues to
incur significant costs to polish and rework anodized parts and continues
to outsource a significant volume of anodized production due to a current
over capacity condition due to anodizing yields being below standard.
Operating losses at the Company's Prometall facility in the current
quarter of $3.1 million were substantially level with losses incurred in
the second quarter of 2003 and were improved over losses incurred in the
first quarter of 2004 of $4.9 million. A substantial portion of the
operating loss improvement over the first quarter of 2004 is attributable
to the favourable settlement in the current quarter of open customer
financial issues. In addition, the Company is making some progress in
addressing the current operating issues at this facility. However, we
expect only a modest improvement in Prometall's operating losses in the
near term.
Interest Expense
Interest expense was $2.9 million in the current quarter compared to
$2.5 million for the second quarter of 2003. Interest capitalized on the
Company's Decostar and Belplas paint line projects was $0.4 million and
$0.3 million in the second quarters of 2004 and 2003, respectively.
Reduced interest expense as a result of the repayment of debt due to
Magna with lower cost bank borrowings was offset by an increase in
average net debt balances.
Interest on debt due to Magna and its affiliates and included in reported
interest expense amounted to $2.0 million compared to $3.0 million for
the second quarters of 2004 and 2003, respectively. The original interest
rate on the first and second tranches of Euro denominated debt due to
Magna was 7.0%. The first and second tranches were due October 1, 2002
and October 1, 2003, respectively. However, since their original maturity
dates, the Company, with Magna's consent, had been extending the
repayment of this debt at 90 day intervals at market interest rates
ranging from 3.14% to 4.29%. This debt was repaid in December 2003 and
January 2004 through draws on the Company's bank credit facility.
The third tranche of Euro denominated debt due to Magna, totalling
$88.6 million, continues to be due December 31, 2004 and bears interest
at its original rate of 7.5%. Canadian dollar denominated debt due to
Magna totalling $45.3 million is due September 30, 2004 and bears
interest at 3.09%.
Amortization of Discount on Convertible Series Preferred Shares
The Company's amortization of the discount on the portion of the
Convertible Series Preferred Shares held by Magna classified as debt
decreased to $1.2 million for the current quarter compared to
$2.3 million for the second quarter of 2003. Amortization in 2004 is
limited to amortization on the Series 5 Convertible Series Preferred
Shares as the Series 4 Convertible Series Preferred Shares were fully
amortized as of December 31, 2003.
Income Taxes
The Company's effective income tax rate decreased to 35.0% from 35.9% for
the second quarters of 2004 and 2003, respectively.
The reduction in the Company's effective tax rate is the result of an
increase in income generated in lower tax rate jurisdictions and recent
business reorganizations which contributed to a reduction in the
effective rate, partially offset by an increase in Belgium losses which
are not being tax benefited and an increase in statutory Ontario, Canada
tax rates.
Cumulative unbenefited tax loss carryforwards, primarily in the United
Kingdom, Germany, Belgium and Poland, total approximately $162 million.
Substantially all of these losses have no expiry date and will be
available to shelter future taxable income in these jurisdictions. The
Company's effective tax rate in future periods could be negatively
impacted if losses in the United Kingdom, Germany, Belgium and Poland
grow or could benefit if the Company is able to utilize unbenefited
losses to shelter future income.
Net Income
As a result of the reductions in operating income described above, net
income declined to $24.6 million compared to $33.8 million for the second
quarters of 2004 and 2003, respectively.
Financing Charges
Financing charges on the Convertible Series Preferred Shares held by
Magna (comprised of dividends declared on the Convertible Series
Preferred Shares less the reduction of the Convertible Series Preferred
Shares dividend equity component) decreased to $1.1 million for the
current quarter from $1.5 million for the comparable prior year period.
The decrease reflects the conversion of the Series 1, 2 and 3 Convertible
Series Preferred Shares into the Company's Class A Subordinate Voting
Shares in August 2003.
Financing charges, net of income tax recoveries, related to the
Convertible Debentures were substantially unchanged in the current
quarter at $1.0 million.
Readers are asked to refer to the Company's consolidated financial
statements and MD&A for the year ended December 31, 2003 for a discussion
of the accounting for the Convertible Series Preferred Shares and
Convertible Debentures.
Diluted Earnings Per Share
-------------------------------------------------------------------------
Three Month Periods
Ended June 30,
-------------------------------
%
2004 2003 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share (U.S. dollars)
Basic $0.27 $0.46 (41%)
Diluted 0.24 0.34 (29%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares outstanding
(in millions)
Basic 83.4 68.1 22%
Diluted 106.3 105.8 -%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in the weighted average number of basic Class A Subordinate
Voting and Class B Shares outstanding is due to the issuance of
14,895,729 Class A Subordinate Voting Shares on conversion of the
Series 1, 2 and 3 Convertible Series Preferred Shares during the third
quarter of 2003. This transaction negatively impacted basic earnings per
share but had no impact on diluted shares outstanding or diluted earnings
per share.
Diluted earnings per share for the current quarter declined to $0.24.
Excluding the continental Europe paint capacity consolidation charge
adjustment, diluted earnings per share for the current quarter were also
$0.24.
The maximum number of shares that would be outstanding if all of the
Company's stock options, Convertible Series Preferred Shares and
Convertible Debentures issued and outstanding as at June 30, 2004 were
exercised or converted would be 109.1 million. Readers are asked to refer
to note 7 of the Company's unaudited interim consolidated financial
statements for the three and six month periods ended June 30, 2004,
included elsewhere herein, for further discussion.
Six Month Periods Ended June 30, 2004 and 2003
Sales
-------------------------------------------------------------------------
Six Month Periods
Ended June 30,
---------------------------------
%
2004 2003 Change
-------------------------------------------------------------------------
Light Vehicle Production Volumes
(in millions)
North America 8.310 8.309 -%
Western Europe 8.765 8.625 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Content Per Vehicle
(U.S. dollars)
North America $ 98 $ 91 8%
Europe 51 35 46%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Production Sales
(U.S. dollars in millions)
North America $ 812.5 $ 756.4 7%
Europe 446.3 299.7 49%
Global Tooling and Other Sales 111.8 97.1 15%
-------------------------------------------------------------------------
Total Sales $1,370.6 $1,153.2 19%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating Income
(U.S. dollars in millions)
North America $ 109.2 $ 116.4 (6%)
Europe, before continental Europe
paint capacity consolidation
charge adjustment (16.6) (3.0)
Continental Europe paint capacity
consolidation charge adjustment 0.7 -
Corporate (5.5) (9.9)
-------------------------------------------------------------------------
Total Operating Income $ 87.8 $ 103.5 (15%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A Subordinate
Voting or Class B Share (U.S. dollars)
Basic $ 0.58 $ 0.84 (31%)
Diluted 0.51 0.64 (20%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares Outstanding
(in millions)
Basic 83.4 68.1 23%
Diluted 106.3 102.1 4%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales
North America
North American production sales grew by 7% to $812.5 million in the first
half of 2004. North American vehicle production volumes were
substantially unchanged. However, North American content per vehicle grew
$7 or 8% to approximately $98.
Translation of Canadian dollar sales into the Company's U.S. dollar
reporting currency added approximately $41.0 million to production sales
and $5 to North American content per vehicle. In addition, the FM
Lighting Acquisition added approximately $25.3 million to production
sales and $3 to North American content per vehicle.
The remaining $10.2 million decrease in North American production sales
and $1 decrease in North American content per vehicle is the result of:
- end of production on the Ford WIN 126 (Windstar) program and the
award of the replacement V229 (Freestar) fascia program to a
competitor;
- end of production on the DaimlerChrysler LH (Concorde, Intrepid and
300M) program in the third quarter of 2003 and the ramp up of the
replacement LX (300 and Magnum) program during the first half of
2004;
- recent incremental customer pricing concessions; and
- lower customer production volumes, and lower installation rates for
certain of the Company's trim products, on certain high Decoma
content programs.
These decreases were partially offset by:
- sales on programs that launched during or subsequent to the first
half of 2003 including the General Motors GMX 380 (Malibu) and
GMT 265 (SRX) and the Cami GMT 191 (Equinox) programs;
- increased content and strong volumes on the Ford U204 (Escape)
refresh program; and
- strong volumes on other high content production programs.
Europe
European production sales increased 49% to $446.3 million in the first
half of 2004. European vehicle production volumes grew 2% adding
$5.4 million to production sales and European content per vehicle grew
$16 or 46% to approximately $51.
Content growth was driven by sales at recent new facility startups, which
collectively added approximately $96.6 million to production sales and
$11 to European content per vehicle, and by translation of Euro and
British Pound sales into the Company's U.S. dollar reporting currency
which added approximately $33.8 million to production sales and $4 to
European content per vehicle.
Production sales at Merplas were also up primarily as a result of
increased production volumes on the Jaguar X400 program. Adjusting to
eliminate the impact of translation of British Pound sales into
U.S. dollars, Merplas' sales increased $10.2 million which added $1 to
European content per vehicle.
Sales by Customer
The Company's sales by customer breakdown for the six month periods ended
June 30, 2004 and 2003 were as follows:
-------------------------------------------------------------------------
Six Month Period Ended Six Month Period Ended
June 30, 2004 June 30, 2003
------------------------ ------------------------
North North
America Europe Global America Europe Global
Traditional "Big 3"
Brands
Ford 21.6% 1.7% 23.3% 26.9% 1.8% 28.7%
GM / Opel / Vauxhall 23.1% 2.4% 25.5% 22.1% 2.1% 24.2%
Chrysler 11.2% 0.7% 11.9% 13.7% 0.9% 14.6%
-------------------------------------------------------------------------
55.9% 4.8% 60.7% 62.7% 4.8% 67.5%
VW Group - 12.9% 12.9% 0.1% 7.1% 7.2%
Mercedes - 7.7% 7.7% - 8.7% 8.7%
BMW 0.3% 1.9% 2.2% 0.8% 1.7% 2.5%
Ford Premier Automotive
Group ("Ford PAG") 0.1% 2.6% 2.7% - 1.9% 1.9%
Renault Nissan 1.8% 0.5% 2.3% 1.2% 0.6% 1.8%
Other 6.1% 5.4% 11.5% 5.0% 5.4% 10.4%
-------------------------------------------------------------------------
64.2% 35.8% 100.0% 69.8% 30.2% 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Included above are
sales to Asian new
domestics 4.4% 0.3% 4.7% 3.6% 0.1% 3.7%
The Company continues to grow its sales with original equipment
manufacturer ("OEM") customers outside the traditional "Big 3" automotive
brands.
The growth in sales to the VW Group is the result of the ramp up of the
VW Group T5 (Transit Van) and the launch of the A5 (Golf) and SLW (City
Car) fascia and front end module programs noted above and the recent
launch of a number of new Audi programs. Sales to Mercedes are expected
to grow with the launch of both the A Class front end module program in
the second half of 2004 at Carmodul with related fascia production at
Innoplas and the launch of the Mercedes W/X 164 and V/W 251 programs in
early 2005 at Decostar.
The Company's largest production sales programs for 2004 in each of North
America and Europe are expected to include:
North America
- Ford U152 (Explorer)
- General Motors GMX 210 (Impala)
- DaimlerChrysler LX (Magnum and 300)
- DaimlerChrysler JR (Stratus, Sebring and Sebring Convertible)
- Ford EN114 (Crown Victoria and Grand Marquis)
Europe
- VW Group T5 (Transit Van) (front end module)
- VW Group A5 (Golf) (front end module)
- DaimlerChrysler Mercedes C Class
- Opel Epsilon
- VW Group SLW (City Car) (front end module)
As noted above, the Company launched a number of significant programs in
the first half of 2004 including the Daimler-Chrysler LX (300 and Magnum)
fascia and sealing programs, the General Motors GMT 265 (Cadillac SRX)
fascia program and the Cami GMT 191 (Equinox) fascia and trim programs in
North America and the VW SLW (City Car) fascia and front end module
program and a number of Audi, Mercedes and Porsche fascia and trim
programs in Europe.
The Company will launch a significant number of additional programs in
the second half of the year. In North America, these programs include the
Ford D219/258/333 (Cross Trainer, Five Hundred and Montego) trim and the
U364 (Mercury SUV) fascia programs, the DaimlerChrysler WK (Cherokee)
fascia program, the General Motors GMX 001 (Cavalier) and GMT 355
(Canyon/Colorado) fascia and trim programs and various specialty vehicle
enhancement programs amongst others. In addition, the Company is
commencing run flat tire insert production for a significant OEM customer
program.
In Europe, the Company will launch additional Mercedes programs including
the A Class fascia and front end module and Porsche programs in the
second half of the year. The Company also recently took over some Rover
and Opel contracts from a failed competitor in the UK. These programs
will launch at Merplas and Innoplas, respectively, in the third quarter
of 2004.
Earnings
Operating income declined in North America primarily because of
operating losses at two trim product plants, incremental customer pricing
concessions, end of production on the Ford WIN 126 (Windstar) fascia
program and costs associated with the ramp up the DaimlerChrysler LX (300
and Magnum) fascia and sealing programs. These declines were partially
offset by contributions from the FM Lighting Acquisition.
European operating losses increased primarily as a result of the start up
of the Belplas paint line and the Company's new chrome line, increased
losses at Prometall and costs associated with new launches. These costs
were partially offset by improved performance at Merplas and the
continued strong performance of the Company's Decorate facility.
Corporate segment losses improved primarily as a result of foreign
exchange losses in the first half of 2003 on U.S. dollar monetary items
held in Canada and the strengthening of the Canadian dollar relative to
the U.S. dollar.
Diluted earnings per share declined to $0.51 for the first half of 2004
primarily as a result of lower operating income and an increase in the
average number of diluted Class A Subordinate Voting and Class B Shares
outstanding as a result of the issuance of Convertible Debentures at the
end of the first quarter of 2003 and the issuance of 548,600 Class A
Subordinate Voting Shares to the Decoma employee deferred profit sharing
program during the second quarter of 2003.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flows for the Three Month Periods Ended June 30, 2004 and 2003
-------------------------------------------------------------------------
Three Month Periods Ended
June 30,
-------------------------
(U.S. dollars in millions) 2004 2003
-------------------------------------------------------------------------
EBITDA
North America $66.3 $77.8
Europe 2.2 6.4
Corporate (3.4) (5.4)
-------------------------------------------------------------------------
65.0 78.8
Interest, cash taxes and other operating cash flows (19.3) (23.6)
-------------------------------------------------------------------------
Cash flow from operations before changes in
non-cash working capital 45.7 55.2
Cash invested in non-cash working capital (22.6) (58.6)
Fixed and other asset spending, net
North America (20.7) (27.0)
Europe (8.4) (16.2)
Acquisition spending - North America - (8.3)
Convertible Debenture interest payments (2.4) (1.2)
Dividends
Convertible Series Preferred Shares (2.1) (3.4)
Class A Subordinate Voting and Class B Shares (5.8) (4.1)
-------------------------------------------------------------------------
Cash shortfall to be financed (16.3) (63.6)
Issuance of Class A Subordinate Voting Shares - 4.7
Net decrease in long-term debt (0.3) (0.5)
Net increase (decrease) in bank indebtedness 55.9 (28.3)
Foreign exchange on cash and cash equivalents 0.6 4.1
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $39.9 ($83.6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company has presented EBITDA as supplementary information concerning
the cash flows of the Company and its operating segments. The breakdown
of both EBITDA and fixed and other asset spending by segment provides
readers with an indication of where cash is being generated and used. The
Company defines EBITDA (totalling $65.0 million and $78.8 million in the
second quarters of 2004 and 2003, respectively) as operating income
($41.2 million and $56.9 million in the second quarters of 2004 and 2003,
respectively) plus depreciation and amortization ($23.9 million and
$21.8 million in the second quarters of 2004 and 2003, respectively)
based on the amounts presented in the Company's unaudited interim
consolidated statements of income included elsewhere herein. However,
EBITDA does not have any standardized meaning under Canadian GAAP and is,
therefore, unlikely to be comparable to similar measures presented by
other issuers.
Cash invested in non-cash working capital, capital spending, Convertible
Debenture interest payments and dividends exceeded cash generated from
operations by $16.3 million for the second quarter of 2004 compared to
$63.6 million for the second quarter of 2003.
The improvement is due primarily to reductions in cash invested in
non-cash working capital and capital and acquisition spending partially
offset by lower EBITDA. Acquisition spending in the comparative prior
year period relates to the FM Lighting Acquisition and the repayment of a
promissory note related to the 2001 buyout of the minority interest in
the Company's Mexican operations.
Cash invested in non-cash working capital during the quarter is due
primarily to an increase in income taxes receivable and slight
deterioration in days in accounts receivable and days in accounts payable
from 47 and 53 at the end of the first quarter of 2004 to 52 and 50 at
the end of the current quarter.
Capital Spending
Capital spending on a global basis totalled $29.1 million in the second
quarter of 2004 compared to $43.2 million in the second quarter of 2003.
Capital spending in 2003 was high due to spending to complete the Belgium
paint line, Decostar spending and significant European spending related
to new facility and program launches.
Current period capital spending includes continued Decostar spending and
spending related to the DaimlerChrysler Mercedes A Class program
including spending to ready the Company's new Carmodul facility for the
launch of this program in the second half of 2004.
Dividends
Dividends paid on the Company's Convertible Series Preferred Shares were
$2.1 million for the current quarter down from $3.4 million in the
comparative prior year period due to the conversion of the Series 1, 2
and 3 Convertible Series Preferred Shares into Class A Subordinate Voting
Shares in August of 2003, partially offset by the translation of Canadian
dollar dividends into the Company's U.S. dollar reporting currency.
Dividends paid in the second quarters of 2004 and 2003 on Class A
Subordinate Voting and Class B Shares were US$0.07 and US$0.06 per share
in respect of the three month periods ended March 31, 2004 and 2003,
respectively.
Total dividends paid increased to $5.8 million in the current quarter
from $4.1 million in the comparable prior year period due to the increase
in the dividend rate and the number of shares outstanding primarily as a
result of the Series 1, 2 and 3 Convertible Series Preferred Share
conversion.
Subsequent to June 30, 2004, the board of directors of the Company
declared a dividend of US$0.07 per Class A Subordinate Voting and Class B
Share in respect of the three month period ended June 30, 2004.
Financing Activities
Bank indebtedness increased to $191.8 million at June 30, 2004 compared
to $135.4 million at March 31, 2004. Cash and cash equivalents at
June 30, 2004 were $115.1 million compared to $75.2 million at
March 31, 2004.
The Company's bank indebtedness is currently drawn substantially in
Canada. However, the Company held cash primarily in jurisdictions other
than Canada at the quarter end. Although there are no long-term
restrictions on the flow of funds from one jurisdiction to the other,
there may be costs, such as withholding taxes, to move funds between
jurisdictions. As a result, the Company is not always able to immediately
apply the cash held in certain jurisdictions against bank borrowings in
other jurisdictions.
Cash Flows for the Six Month Periods Ended June 30, 2004 and 2003
-------------------------------------------------------------------------
Six Month Periods Ended
June 30,
--------------------------
(U.S. dollars in millions) 2004 2003
-------------------------------------------------------------------------
EBITDA
North America $142.5 $145.9
Europe (1.3) 9.7
Corporate (5.5) (9.9)
-------------------------------------------------------------------------
135.7 145.7
Interest, cash taxes and other operating cash flows (34.2) (43.4)
-------------------------------------------------------------------------
Cash flow from operations before changes in
non-cash working capital 101.5 102.3
Cash invested in non-cash working capital (13.1) (62.1)
Fixed and other asset spending, net
North America (35.9) (47.8)
Europe (26.0) (23.4)
Acquisition spending - North America - (8.3)
Convertible Debenture interest payments (2.4) (1.2)
Dividends
Convertible Series Preferred Shares (4.3) (6.6)
Class A Subordinate Voting and Class B Shares (11.7) (8.2)
-------------------------------------------------------------------------
Cash generated and available for debt reduction
(shortfall to be financed) 8.1 (55.3)
Issuance of Convertible Debentures - 66.1
Issuance of Class A Subordinate Voting Shares - 4.7
Net decrease in long-term debt (0.9) (0.8)
Repayments of debt due to Magna (3.6) -
Net increase (decrease) in bank indebtedness 17.7 (48.0)
Foreign exchange on cash and cash equivalents 0.2 6.4
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents $21.5 ($26.9)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash generated from operations exceeded cash invested in non-cash working
capital, capital spending, Convertible Debenture interest payments and
dividends by $8.1 million for the first half of 2004.
Capital Spending
Capital spending for 2004 is expected to approximate $151 million.
Readers are asked to refer to the "Financial Condition, Liquidity and
Capital Resources - Unused and Available Financing Resources" section of
this MD&A for further discussion.
Consolidated Capitalization
-------------------------------------------------------------------------
June 30, December 31,
(U.S. dollars in millions) 2004 2003
-------------------------------------------------------------------------
Cash and cash equivalents $ (115.1) $ (93.5)
Bank indebtedness 191.8 177.3
-------------------------------------------------------------------------
76.8 83.8
Debt due within twelve months
Due to Magna, repaid in
January 2004 - 3.5
Due to Magna September 30, 2004
(previously due June 30, 2004) 45.3 46.5
Due to Magna December 31, 2004 88.6 90.6
Other 5.4 6.0
-------------------------------------------------------------------------
139.3 146.6
Long-term debt 10.5 11.2
-------------------------------------------------------------------------
Net Conventional Debt $ 226.5 22.3% $ 241.6 24.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liability portion of Series 4 and
5 Convertible Series Preferred
Shares, held by Magna
Current $ 149.0 14.7% $ 150.6 15.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shareholders' equity
Convertible Debentures $ 66.7 6.6% $ 66.1 6.6%
Other 572.9 56.4% 546.3 54.4%
-------------------------------------------------------------------------
$ 639.6 63.0% $ 612.4 61.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Capitalization $ 1,015.2 100.0% $ 1,004.6 100.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Convertible Debentures and the Series 4 and 5 Convertible Series
Preferred Shares are convertible into Class A Subordinate Voting Shares
at the holders' option at fixed prices (Cdn$13.25 per share in the case
of the Convertible Debentures and Cdn$13.20 per share in the case of the
Series 4 and 5 Convertible Series Preferred Shares). The Company's
Class A Subordinate Voting Shares closed at Cdn$12.23 on July 23, 2004,
and have traded between Cdn$11.31 and Cdn$14.95 over the 52 week period
ended July 23, 2004. As a result, it is possible that all, or a portion,
of the Convertible Debentures and the Series 4 and 5 Convertible Series
Preferred Shares will be settled with Class A Subordinate Voting Shares
if the holders exercise their fixed price conversion options. The
possible conversions of the Company's Convertible Debentures and Series 4
and 5 Convertible Series Preferred Shares into Class A Subordinate Voting
Shares is reflected in the Company's reported diluted earnings per share.
Readers are asked to refer to the company's MD&A for the year ended
December 31, 2003 for further discussion on the terms of the Convertible
Series Preferred Shares and Convertible Debentures.
The Company's Net Conventional Debt to Total Capitalization at June 30,
2004 was 22.3% compared to 24.0% at December 31, 2003. This measure
treats the Company's hybrid Convertible Debenture and Convertible Series
Preferred Share instruments like equity rather than debt given their
possible conversion into Class A Subordinate Voting Shares.
The Company's Net Conventional Debt plus the liability portions of the
Convertible Series Preferred Shares to Total Capitalization, has improved
to 37.0% at June 30, 2004 compared to 39.0% at December 31, 2003. This
measure treats the liability portions of the Convertible Series Preferred
Shares like debt rather than equity given their possible retraction for
cash. The Series 4 Convertible Series Preferred Shares are retractable
for cash at Magna's option at any time and the Series 5 Convertible
Series Preferred Shares are retractable commencing December 31, 2004.
The Company's Net Conventional Debt plus the liability portions of the
Convertible Series Preferred Shares plus the Convertible Debentures to
Total Capitalization was 43.6% at June 30, 2004 compared to 45.6% at
December 31, 2003. In addition to the liability portions of the
Convertible Series Preferred Shares, this measure treats the Convertible
Debentures like debt rather than equity given the possibility of settling
them for cash on maturity or redemption rather than for Class A
Subordinate Voting Shares.
The Canadian Institute of Chartered Accountants (the "CICA") recently
amended Handbook Section 3860, "Financial Instruments - Disclosure and
Presentation", to require certain obligations that may be settled with an
entity's own equity instruments to be reflected as a liability. The
amendments must be adopted in the Company's 2005 consolidated financial
statements with retroactive application. Upon adoption, the Convertible
Debentures currently presented entirely within equity on the consolidated
balance sheet will have to be presented in part as a liability and in
part as equity and the related liability carrying costs will be presented
as a charge to net income.
Unused and Available Financing Resources
At June 30, 2004 the Company had cash on hand of $115.1 million and
$108.2 million of unused and available credit representing the unused and
available portion of the Company's $300 million extendible, revolving
credit facility. This credit facility expired on May 27, 2004. Rather
than requesting a further revolving 364 day extension, the facility was
extended to September 30, 2004 in order to facilitate discussions between
the Company and its bank syndicate regarding the possible increase in the
principal amount and term, and amendments to the financial covenants, of
the current facility.
Debt, excluding bank indebtedness, that comes due in the next twelve
months totals $139.3 million including debt due to Magna of $45.3 million
due September 30, 2004 and $88.6 million due December 31, 2004.
Since the original maturity of the amount due September 30, 2004, the
Company, with Magna's consent, has been extending the repayment of this
debt at 90 day intervals at market interest rates. Although the Company
expects Magna to continue to extend the repayment date for this debt,
there can be no assurance that Magna will do so.
The Company anticipates that working capital investments, capital
expenditures and currently scheduled repayments of debt will exceed cash
generated from operations in 2004. As a result, the Company is dependent
on its lenders to renew the Company's existing credit facility. Although
the Company expects to successfully secure credit on favourable terms,
there can be no assurance that it will be able to do so. In addition, the
Company may seek additional debt or equity financing and/or pursue
further extensions of the maturity dates of debt due to Magna or work
with Magna to establish a new fixed long-term amortization schedule
related to this debt.
Off Balance Sheet Financing
The Company's off balance sheet financing arrangements are limited to
operating lease contracts.
A number of the Company's facilities are subject to operating leases with
Magna and with third parties. As of December 31, 2003, operating lease
commitments for facilities totalled $25.6 million for 2004 including
$13.1 million under lease arrangements with affiliates of Magna. For
2008, total operating lease commitments for facilities are $19.2 million
including $11.9 million under lease arrangements with affiliates of
Magna. In certain situations, the Company has posted letters of credit to
collateralize lease obligations.
The Company also has third party operating lease commitments for
equipment. These leases are generally of shorter duration. As of
December 31, 2003, operating lease commitments for equipment total
$8.2 million for 2004. For 2008, operating lease commitments for
equipment totalled $3.3 million.
Although the Company's consolidated contractual annual lease commitments
decline year by year, existing leases will either be renewed or replaced
resulting in lease commitments being sustained at current levels or the
Company will incur capital expenditures to acquire equivalent capacity.
Ford Production Purchasing Global Terms and Conditions
Ford Motor Company ("Ford") recently updated its Production Purchasing
Global Terms and Conditions (the "Global Terms") effective for shipments
from Decoma International Corp. ("DIC") and its subsidiaries
(collectively the "Supplier") to Ford on or after January 1, 2004. DIC is
a direct significant subsidiary of Decoma International Inc. Under the
Global Terms, Ford and its "related companies" (collectively the "Ford
Group" or the "Buyer") have the right to set off against the Supplier's
receivables from the Ford Group amounts owing to the Ford Group by the
Supplier's "related companies". "Related companies" is defined under the
Global Terms to include any parent company of the Buyer or the Supplier,
as appropriate, and any subsidiary or affiliate in which any of them owns
or controls at least 25% of the voting stock, partnership interest or
other ownership interest.
Where DIC acts as a "Supplier", Decoma interprets the Global Terms to
mean that "related companies" would include Decoma International Inc. (as
the parent company of DIC) and its direct and indirect subsidiaries and
at least 25% owned entities (collectively the "Decoma Group") but would
not include Magna and its direct and indirect subsidiaries and at least
25% owned entities other than the Decoma Group (collectively the "Magna
Group").
Ford may assert that the term "related companies" includes, in relation
to DIC or other Suppliers in the Decoma Group, the Magna Group and
attempt to set off a Magna Group liability against a Decoma Group
receivable. To date, Ford has not attempted to take such action against
Decoma. If the Ford Group took such an action against Decoma in respect
of a material liability of the Magna Group, such action could have a
material adverse impact on Decoma's financial condition and liquidity.
Any such action by Ford would be contested by Decoma at such time.
CONTINENTAL EUROPE PAINT CAPACITY CONSOLIDATION PLAN
During the fourth quarter of 2003 the Company completed, and committed
to, a plan to consolidate its continental Europe paint capacity. This
plan entails mothballing the Company's Decoform paint line in Germany and
transferring Decoform's painted trim and fascia business to the Company's
newer paint lines at its Decorate and Belplas facilities in Germany and
Belgium, respectively. Decoform will continue to mold and assemble
products for the Company's Decorate facility. Program transfers to
Decorate are progressing well. Transfers to Belplas, on the other hand,
are behind schedule as the ramp up of the Belplas paint line is taking
longer than anticipated. However, program transfers to Belplas are
expected to accelerate with the transfer of the first Porsche bumper
program subsequent to the end of the second quarter. The Company
continues to work toward full implementation of the plan by the end of
2004.
The consolidation will result in severance costs associated with a
reduction of the Decoform workforce. Severance costs for 284 employees
were accrued in the fourth quarter of 2003.
Decoform employees have a contractual notice period of up to two quarters
following the quarter in which individual notice is given. The
consolidation plan envisions substantially all employees working through
their contractual notice periods with paint line production transfers
completed by the end of 2004.
The severance accrual recorded in the fourth quarter of 2003 has been
reduced by $0.7 million to reflect the Company's current best estimate of
costs. This reduction primarily reflects the benefits of being able to
retain more Decoform employees than originally planned as a result of
increases in expected future mold and assembly volumes at Decoform.
A continuity of the severance accrual related to this consolidation plan
is as follows:
(U.S. dollars, in thousands)
-------------------------------------------------------------------------
Balance, December 31, 2003 $ 6,799
Payments (50)
Currency translation (258)
-------------------------------------------------------------------------
Balance, March 31, 2004 6,491
Payments (65)
Adjustments (728)
Currency translation 94
-------------------------------------------------------------------------
Balance, June 30, 2004 $ 5,792
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ACCOUNTING POLICY CHANGES
Stock-based Compensation
As provided for by new accounting recommendations of the CICA, the fair
value of stock options granted, modified or settled on or after
January 1, 2003 is recognized on a straight-line basis over the
applicable stock option vesting period as compensation expense in S,G&A.
The impact of this accounting policy change on reported net income and
earnings per share was not significant. Readers are asked to refer to
note 5 to the Company's unaudited interim consolidated financial
statements included elsewhere herein for further discussion.
Asset Retirement Obligations
As provided for by new accounting recommendations of the CICA, the
Company is required to estimate and accrue for the present value of its
obligations to restore leased premises at the end of the lease. At lease
inception, the present value of this obligation is recognized as other
long-term liabilities with a corresponding amount recognized in fixed
assets. The fixed asset amount is amortized, and the liability amount is
accreted, over the period from lease inception to the time the Company
expects to vacate the premises resulting in both depreciation and
additional rent in cost of sales in the consolidated statements of
income.
These requirements were adopted by the Company on January 1, 2004 with
retroactive restatement. The impact of this accounting policy change on
reported net income and earnings per share was not significant. However,
this policy change did result in an increase in other long-term
liabilities of $3.4 million, an increase in fixed assets of $1.7 million
and reductions in future tax liabilities of $0.4 million, the currency
translation adjustment of $0.2 million and retained earnings of
$1.0 million at June 30, 2004. Readers are asked to refer to note 5 to
the Company's unaudited interim consolidated financial statements
included elsewhere herein for further discussion.
Separately Priced Tooling Contracts
The Company adopted CICA Emerging Issues Committee Abstract No. 142,
"Revenue Arrangements with Multiple Deliverables" (EIC-142),
prospectively for new revenue arrangements with multiple deliverables
entered into by the Company on or after January 1, 2004. The Company
enters into such multiple element arrangements where it has separately
priced tooling contracts that are entered into at the same time as
contracts for subsequent parts production. EIC-142 addresses how a vendor
determines whether an arrangement involving multiple deliverables
contains more than one unit of accounting and also addresses how
consideration should be measured and allocated to the separate units of
accounting in the arrangement. Separately priced tooling can be accounted
for as a separate revenue element only in circumstances where the tooling
has value to the customer on a standalone basis and there is objective
and reliable evidence of the fair value of the subsequent parts
production. The adoption of EIC-142 did not have a material effect on the
Company's revenue or earnings for the six month period ended
June 30, 2004.
While the application of EIC-142 must be based on the facts and
circumstances of new revenue arrangements, the Company anticipates that
substantially all of its multiple element arrangements involving the sale
of both tooling and subsequent parts production will result in tooling
being accounted for on a gross basis as a separate revenue element, which
accounting treatment is consistent with the Company's historic revenue
recognition practices.
OTHER SELECTED FINANCIAL INFORMATION
The Company is required to disclose material changes in its contractual
obligations from the amounts disclosed as of December 31, 2003 in the
Company's MD&A for the year ended December 31, 2003. There have been no
material changes in the Company's contractual obligations during the
first six months of 2004 that are outside the ordinary course of
business.
OUTLOOK
Second Half of 2004
Decoma expects that, in addition to the normal seasonal effects of lower
production in the second half of 2004, certain of the negative trends
experienced in North America in the second quarter will continue. In
particular, North American sales and earnings in the second half of 2004
will continue to be negatively impacted by recent incremental customer
price concessions.
In general, management believes the Company's gross margins will continue
to come under pressure as the competitive environment within the
automotive industry continues to cause the Company's customers to
increase demands for price concessions on existing programs. In addition,
new business awards are subject to significant price competition and
pressure to finance or absorb more engineering costs related to product
design, tooling costs and certain capital and other items. Although the
Company has been largely successful in the past in responding to these
pressures through improved operating efficiencies and cost reductions,
customer pressure for price concessions and price competition on new
programs has intensified in recent quarters and has had a negative impact
on the Company's margins. The Company remains highly focused on
continuous improvement activities. However, continued significant
incremental price pressures could have further adverse impacts on the
Company's gross margin percentage and could impact the Company's ability
to secure key future programs.
In addition, Decoma expects the third quarter to be negatively impacted
by longer than originally planned customer summer vacation and inventory
correction production shutdowns on certain high Decoma content SUV and
light truck programs. Finally, operating losses at our Anotech facility
are expected to continue and, as planned, Decostar costs will continue to
increase as it prepares for start of production. These negative impacts
will be partially offset by expected strong second half volumes on the
recently launched DaimlerChrysler LX (300 and Magnum) and Cami GMT 191
(Equinox) programs and by a number of new program launches in the second
half of 2004 including the Ford D219/258/333 (Cross Trainer, Five Hundred
and Montego) trim programs amongst others.
Our outlook for Europe remains cautiously optimistic. Although we expect
that the positive performance trend experienced in the second quarter
will continue, particularly the positive trends at our Decorate and
Merplas facilities, this will be tempered by continued lower than
anticipated customer production volumes on our VW front end module
programs and by costs associated with the implementation of the Company's
continental Europe paint capacity consolidation plan. A portion of the
benefits of this plan were originally expected to be realized in the
second half of the year. However, as described above, the ramp up of the
Belplas paint line to required operating levels is taking longer than
originally anticipated. Therefore, excess paint capacity costs are likely
to continue through the fourth quarter and the full benefits of the
consolidation plan, scheduled to be implemented by the end of 2004, will
not be realized until 2005.
2005 Forward
Looking beyond 2004, although progress at our European operations has
been slower than expected, we continue to be encouraged by the early
results of the steps we have taken to date to restructure our operations.
The Company is firmly entrenched as one of Europe's leading exterior
suppliers with world class capabilities in front end modules, fascias and
exterior trim.
In North America, the ramp up of the Decostar facility in Georgia will
further diversify the Company's customer base and will become a critical
part of the Company's strategy to grow its North American new domestic
business. The Company also continues to develop new products that are
gaining momentum at all of our customers. This includes products such as
roof racks, automated running boards, specialty vehicle enhancements and
more recently a serious interest in front end and liftgate modules. Our
North American OEM customers will be sourcing front end module programs
within the next quarter for vehicles in the 2007/2008 timeframe.
Consistent with our prior expectations, North American front end module
programs represent a significant growth opportunity for the Company.
FORWARD LOOKING STATEMENTS
The contents of this MD&A contain statements which, to the extent that
they are not recitations of historical fact, constitute "forward looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. The words "estimate", "anticipate", "believe",
"expect" and similar expressions are intended to identify forward looking
statements. Persons reading this MD&A are cautioned that such statements
are only predictions and that the Company's actual future results or
performance may be materially different. In evaluating such forward
looking statements readers should specifically consider the various risk
factors which could cause actual events or results to differ materially
from those indicated by such forward looking statements. These risks and
uncertainties include, but are not limited to, specific risks relating to
the Company's relationship with its customers, the automotive industry in
general and the economy as a whole. Such risks specifically include,
without limitation; the Company's reliance on its major OEM customers;
increased pricing concession and cost absorption pressures from the
Company's customers; the impact of production volumes and product mix on
the Company's financial performance, including changes in the actual
customer production volumes compared to original planning volumes;
program delays and/or cancellations; the extent, nature and duration of
purchasing or leasing incentive programs offered by automotive
manufacturers and the impact of such programs on future consumer demand;
warranty, recall and product liability costs and risks; the continuation
and extent of automotive outsourcing by automotive manufacturers; changes
in vehicle pricing and the resulting impact on consumer demand; the
Company's operating and/or financial performance, including the effect of
new accounting standards that are promulgated from time to time (such as
the ongoing requirement for impairment testing of long-lived assets) on
the Company's financial results; the Company's ability to finance its
business requirements and access capital markets; the Company's continued
compliance with credit facility covenant requirements; trade and labour
issues or disruptions impacting the Company's operations and those of its
customers; the Company's ability to identify, complete and integrate
acquisitions and to realize projected synergies relating thereto; the
impact of environmental related matters including emission regulations;
risks associated with the launch of new facilities, including cost
overruns and construction delays; technological developments by the
Company's competitors; fluctuations in fuel prices and availability;
material, electricity and natural gas cost volatility; government and
regulatory policies and the Company's ability to anticipate or respond to
changes therein; the Company's relationship with Magna; currency exposure
risk; fluctuations in interest rates; changes in consumer and business
confidence levels; consumer personal debt levels; disruptions to the
economy relating to acts of terrorism or war; and other changes in the
competitive environment in which the Company operates. In addition, and
without limiting the above, readers are cautioned that the specific
forward looking statements contained herein relating to the Company's
ability to offset customer price concession and competitive price
pressures and to secure key future contracts; the Company's ability to
successfully implement European improvement plans; the cost and timing of
completion of the continental Europe paint capacity consolidation plan;
the possible conversion of the Company's Convertible Debentures and
Convertible Series Preferred Shares to Class A Subordinate Voting Shares;
the Company's ability to raise necessary future financing; capital
spending estimates; and the recoverability of the Company's remaining
goodwill and other long lived assets, are all subject to significant risk
and uncertainty. Readers are also referred to the discussion of "Other
Factors" set out in the Company's Annual Information Form dated May 19,
2004, wherein certain of the above risk factors are discussed in further
detail. The Company expressly disclaims any intention and undertakes no
obligation to update or revise any forward looking statements contained
in this MD&A to reflect subsequent information, events or circumstances
or otherwise.
For further information: please contact S. Randall Smallbone, Executive Vice President, Finance and Chief Financial Officer of Decoma at +1-905-669-2888