Decoma announces financial results for third quarter and year-to-date fiscal 2004 and the appointment of a special committee
CONCORD, ON, Nov. 1, 2004 -- Decoma International Inc. (TSX:DEC.A; NASDAQ:DECA) today announced its financial results for the third quarter and nine months ended September 30, 2004.
Financial Highlights
--------------------
Three Months Nine Months
Ended September 30, Ended September 30,
(US$, in millions except
per share figures) 2004 2003 2004 2003
Sales $620.1 $556.4 $1,990.7 $1,709.7
Operating income $ 10.2 $ 28.7 $ 97.9 $ 132.3
Net income $ 3.5 $ 14.6 $ 55.3 $ 75.5
Diluted earnings per share $ 0.02 $ 0.16 $ 0.55 $ 0.79
Weighted average diluted shares
outstanding (millions) 83.6 106.4 106.3 103.5
Commenting on the above results, Al Power, Decoma's President and Chief Executive Officer, noted: "We continued our top line growth in the quarter and despite a difficult industry environment, Decoma has a strong book of future business. We are disappointed with our earnings in the quarter which were significantly impacted by new facility and program launches, operating losses at certain divisions in both North America and Europe, continuing customer pricing pressures and increases in raw material costs, primarily steel. We are taking active steps to address losses at our underperforming divisions and, with the majority of our new program launches and new facility investments behind us, our long-term prospects remain positive."
Results of Operations ---------------------
Total sales increased 11% to $620.1 million for the third quarter of fiscal 2004 and rose 16% to $1,990.7 million for the year to date. Third quarter sales benefited $30.1 million from currency translation. Excluding the impact of currency translation, sales grew $33.6 million or 6% over the third quarter of 2003. Strong growth at new facility start ups in Europe accounted for much of the increase.
During the third quarter of 2004, vehicle production volumes declined 1% in North America and rose 2% in Europe. Decoma's production sales grew 5% to $360.8 million in North America and increased 36% to $206.6 million in Europe. Average content per vehicle grew $5 to $99 in North America and $13 or 31% to $55 in Europe.
North American sales benefited from the ramp up of the DaimlerChrysler LX program and sales on other programs launched during or subsequent to the third quarter of fiscal 2003. These factors were partially offset by the end of production on the Ford Windstar program, recent incremental customer pricing concessions and lower volumes on certain high Decoma content SUV and light truck programs. The translation of Canadian dollar sales into the Company's U.S. dollar reporting currency also added approximately $12.0 million to production sales and $3 to North American content per vehicle.
In Europe, sales and content growth were driven by the ramp-up of sales at recent new facility start-ups, including the VW A5 (Golf) program at Belplas in Belgium and the launch of the DaimlerChrysler Mercedes A Class program at Innoplas in Germany. Sales at new European facilities collectively added approximately $36.4 million to production sales and $9 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 $14.5 million to European production sales and $4 to content per vehicle during the period.
Operating income in the third quarter of 2004 declined to $10.2 million. North American operating income of $26.7 million was significantly impacted by increases in start up costs at Decostar and at the Company's new specialty vehicle facility in Shreveport, Louisiana. In addition, launch costs at the Company's Co-ex-tec facility and increased losses at the Company's Anotech anodizing facility contributed to the decline. Operating losses in Europe rose to $13.8 million from the third quarter of 2003. The increased loss as compared to the third quarter of 2003 largely reflects challenges at the Company's Belplas facility, including continued paint line performance issues, launch issues related to various Porsche fascia programs and lower than anticipated production volumes on the VW A5 (Golf) program.
Operating income for the nine months of fiscal 2004 declined to $97.9 million from $132.3 million for the same period last year.
Net income for the third quarter of 2004 declined to $3.5 million ($0.02 per diluted share) from $14.6 million ($0.16 per diluted share) for the same period last year, reflecting the aforementioned factors, as well as an increase in the Company's effective tax rate to 48.0%, compared to 39.8% last year.
Net income for the first nine months of 2004 decreased to $55.3 million ($0.55 per diluted share), compared with $75.5 million ($0.79 per diluted share) for the same period in 2003.
Quarterly Dividend ------------------
Decoma's Board of Directors has declared a third quarter 2004 dividend of US$0.07 per share on Class A Subordinate Voting and Class B shares payable on December 15, 2004 to shareholders of record on November 30, 2004.
Outlook -------
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 15.9 million vehicles in North America and 16.2 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 third quarter of 2004.
As a result of ongoing efforts to reduce or delay capital spending, capital spending for 2004 is expected to be between $125 million and $140 million.
Appointment of Special Committee --------------------------------
Decoma also announced today that its Board of Directors has appointed a special committee of independent directors to consider the previously announced privatization proposal received from Magna International Inc. (the "Magna Offer"). The Special Committee's mandate encompasses a review of the Magna Offer and will include a consideration of the effect of the Magna Offer on Decoma's other stakeholders, including its employees, so as to ensure that their interests are properly protected in accordance with all applicable legal and regulatory requirements.
The Special Committee will make a recommendation respecting the Magna Offer to Decoma's Board of Directors following the completion of its review process.
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 nine month periods ended September 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, 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 16,000 employees in 52 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 third quarter results for 2004 on Tuesday, November 2, 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 third quarter results for fiscal 2004.
DECOMA INTERNATIONAL INC.
Consolidated Balance Sheets
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at As at
September 30, December 31,
2004 2003
(restated -
(U.S. dollars in thousands) see note 5)
-------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 73,270 $ 93,545
Accounts receivable 476,651 395,040
Inventories 233,341 216,502
Income taxes receivable 29,977 4,015
Prepaid expenses and other 21,356 18,267
-------------------------------------------------------------------------
834,595 727,369
-------------------------------------------------------------------------
Investments (note 5) 22,523 20,773
-------------------------------------------------------------------------
Fixed assets, net (note 5) 698,270 682,294
-------------------------------------------------------------------------
Goodwill, net 71,677 71,106
-------------------------------------------------------------------------
Future tax assets 9,304 10,556
-------------------------------------------------------------------------
Other assets 15,490 18,390
-------------------------------------------------------------------------
$1,651,859 $1,530,488
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Current liabilities:
Current bank indebtedness (note 6(b)) $ - $ 177,288
Accounts payable 289,290 226,114
Accrued salaries and wages 72,376 68,298
Other accrued liabilities 87,438 77,260
Long-term debt due within one year 5,107 4,856
Debt due to Magna and its affiliates
within one year (note 6(c)) 137,780 141,804
Convertible Series Preferred Shares, held
by Magna (note 6(a)) 157,655 150,572
-------------------------------------------------------------------------
749,646 846,192
-------------------------------------------------------------------------
Long-term bank indebtedness (note 6(b)) 191,358 -
-------------------------------------------------------------------------
Long-term debt 5,999 11,194
-------------------------------------------------------------------------
Other long-term liabilities (note 5) 12,774 10,784
-------------------------------------------------------------------------
Future tax liabilities (note 5) 56,274 49,879
-------------------------------------------------------------------------
Shareholders' equity:
Convertible Debentures (note 12) 68,313 66,127
Convertible Series Preferred Shares (note 7) 5,343 8,826
Class A Subordinate Voting Shares (note 7) 287,153 287,137
Class B Shares (note 7) 30,594 30,594
Contributed surplus (note 5) 581 267
Deferred compensation (note 8(b)) (4,005) -
Retained earnings 187,814 155,975
Currency translation adjustment (note 5) 60,015 63,513
-------------------------------------------------------------------------
635,808 612,439
-------------------------------------------------------------------------
$1,651,859 $1,530,488
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See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Income and Retained Earnings
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods Nine Month Periods
Ended September 30, Ended September 30,
-------------------------------------------------------------------------
(U.S. dollars, in 2004 2003 2004 2003
thousands except per (restated - (restated -
share figures) see note 5) see note 5)
-------------------------------------------------------------------------
Sales $ 620,065 $ 556,444 $1,990,681 $1,709,671
-------------------------------------------------------------------------
Cost of goods sold 533,588 457,450 1,663,648 1,370,346
Depreciation and
amortization 24,485 22,304 72,433 64,450
Selling, general and
administrative
(notes 5 and 9) 45,768 42,281 137,138 124,246
Affiliation and social fees 6,073 5,663 20,261 18,337
Other charge adjustment
(note 11) - - (728) -
-------------------------------------------------------------------------
Operating income 10,151 28,746 97,929 132,292
Equity income (536) (405) (1,870) (1,425)
Interest expense, net 2,743 2,551 8,325 7,828
Amortization of discount on
Convertible Series Preferred
Shares, held by Magna 1,267 2,316 3,675 6,617
Other income (note 13) - - - (1,387)
-------------------------------------------------------------------------
Income before income taxes 6,677 24,284 87,799 120,659
Income taxes 3,205 9,661 32,542 45,180
-------------------------------------------------------------------------
Net income $ 3,472 $ 14,623 $ 55,257 $ 75,479
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing charges on
Convertible Series Preferred
Shares held by Magna and
Convertible Debentures,
net of taxes (note 12) $ (2,185) $ (2,459) $ (5,881) $ (6,410)
-------------------------------------------------------------------------
Net income attributable to
Class A Subordinate Voting
and Class B Shares 1,287 12,164 49,376 69,069
Retained earnings, beginning
of period 192,373 160,451 156,984 111,450
Dividends on Class A
Subordinate Voting and
Class B Shares (5,846) (4,802) (17,537) (12,970)
Adjustment for change in
accounting policies
(note 5) - (999) (1,009) (735)
-------------------------------------------------------------------------
Retained earnings,
end of period $ 187,814 $ 166,814 $ 187,814 $ 166,814
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A
Subordinate Voting
and Class B Share
Basic (note 16) $ 0.02 $ 0.17 $ 0.59 $ 0.99
Diluted (note 16) $ 0.02 $ 0.16 $ 0.55 $ 0.79
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares outstanding
(in thousands)
Basic (note 16) 83,058 73,195 83,305 69,798
Diluted (note 16) 83,568 106,397 106,308 103,530
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-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Periods Nine Month Periods
Ended September 30, Ended September 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 $ 3,472 $ 14,623 $ 55,257 $ 75,479
Items not involving
current cash flows 29,101 22,840 78,838 64,318
-------------------------------------------------------------------------
32,573 37,463 134,095 139,797
Changes in non-cash
working capital (26,942) (33,106) (40,085) (95,212)
-------------------------------------------------------------------------
5,631 4,357 94,010 44,585
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Fixed asset additions (24,844) (48,435) (85,477) (118,678)
Increase in investments
and other assets (1,354) (757) (2,687) (2,082)
Business acquisitions
(note 15) - (4,984) - (13,260)
Proceeds from disposition
of fixed and other assets 25 123 116 457
-------------------------------------------------------------------------
(26,173) (54,053) (88,048) (133,563)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) Increase in bank
indebtedness (9,729) 67,313 7,963 19,323
Repayments of long-term debt (3,765) (3,327) (4,631) (4,159)
Repayments of debt due to
Magna and its affiliates (29) (26) (3,633) (77)
Issuance of Convertible
Debentures (note 12) - - - 66,128
Convertible Debenture
interest payments - - (2,386) (1,252)
Issuances of Class A
Subordinate Voting
Shares (note 7) 7 - 14 4,715
Dividends on Convertible
Series Preferred Shares (2,176) (3,403) (6,467) (9,986)
Dividends on Class A
Subordinate Voting and
Class B Shares (5,846) (4,802) (17,537) (12,970)
-------------------------------------------------------------------------
(21,538) 55,755 (26,677) 61,722
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents 270 430 440 6,860
-------------------------------------------------------------------------
Net (decrease) increase in
cash and cash equivalents
during the period (41,810) 6,489 (20,275) (20,396)
Cash and cash equivalents,
beginning of period 115,080 55,174 93,545 82,059
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 73,270 $ 61,663 $ 73,270 $ 61,663
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
DECOMA INTERNATIONAL INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three and nine month periods ended September 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 September 30, 2004 and the results of its
operations and cash flows for the three and nine month periods ended
September 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 Nine Month Periods
Ended September 30, Ended September 30,
-------------------------------------------------------------------------
(U.S. dollars, in thousands
except per share figures) 2004 2003 2004 2003
-------------------------------------------------------------------------
Increase in selling, general
and administrative expenses $ 122 $ 66 $ 314 $ 200
-------------------------------------------------------------------------
Reduction of net income $ 122 $ 66 $ 314 $ 200
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reduction of earnings
per Class A Subordinate
Voting and 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
September 30, 2003 opening retained earnings was reduced by $865,000 and
net income was reduced by $70,000. Basic earnings per share was
unchanged, while diluted earnings per share was reduced by $0.01. For the
nine month period ended September 30, 2003 opening retained earnings was
reduced by $735,000 and net income was reduced by $200,000. Basic and
diluted earnings per share were reduced by $0.01.
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 nine month periods ended September 30, 2004
were reduced by $85,983 and $248,980, 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 nine month periods ended
September 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
During the current quarter, the Company replaced its $300 million 364 day
revolving credit facility with a $400 million three year term facility
maturing September 30, 2007 (the "New Facility").
Draws under the New Facility bear interest at prime plus nil% to 0.375%
depending on the Company's consolidated debt to capitalization position.
In addition, the Company pays a commitment fee of between 0.175% to 0.35%
of the undrawn portion of the New Facility again depending on the
Company's debt to capitalization position.
The New Facility contains a number of covenants including two financial
covenants: maximum indebtedness and minimum interest charge coverage,
each as defined in the agreement. These covenants are measured quarterly.
At September 30, 2004 the Company had cash on hand of $73.3 million and
$208.6 million of unused and available credit representing the unused and
available portion of the New Facility.
(c) Debt Due to Magna and its Affiliates
The Company's debt due to Magna and its affiliates consists of the
following:
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September 30, December 31,
(U.S. dollars in thousands) 2004 2003
-------------------------------------------------------------------------
Debt denominated in Canadian dollars (i) $ 47,506 $ 46,512
Debt denominated in Euros (ii) 89,230 94,128
Capital lease obligation denominated in Euros 1,044 1,164
-------------------------------------------------------------------------
137,780 141,804
Less due within one year 137,780 141,804
-------------------------------------------------------------------------
$ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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, 3.09% effective July 1, 2004
and 3.375% effective October 1, 2004. The maturity date of
the Cdn$60 million debt has been extended to
December 31, 2004.
(ii) This debt, comprised of three tranches, initially bore
interest at 7.0%, 7.0% and 7.5%, respectively, and was
repayable October 1, 2002, October 1, 2003 and
December 31, 2004, respectively. The maturity date and the
interest rate on the first tranche was renegotiated to 4.29%
effective October 2, 2002, 3.86% effective January 2, 2003,
3.51% effective April 2, 2003, 3.14% effective July 2, 2003
and 3.32% effective October 2, 2003. The maturity date and
the interest rate on the second tranche was renegotiated to
3.32% effective October 2, 2003. Substantially all of the
first and second tranches were repaid in December 2003. The
remaining portions of the first and second tranches
outstanding at December 31, 2003 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 51,600,778
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
September 30, 2004 were exercised or converted:
-------------------------------------------------------------------------
Number of Shares
-------------------------------------------------------------------------
Class A Subordinate Voting Shares outstanding
at September 30, 2004 51,600,778
Class B Shares outstanding at September 30, 2004 31,909,091
Options to purchase Class A Subordinate Voting Shares 2,853,000
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 (2,000) Cdn $9.50 (2,000)
Cancelled (115,000) Cdn$13.06 (57,000)
Vested 330,000
-------------------------------------------------------------------------
Outstanding at September 30, 2004 2,853,000 Cdn$12.88 2,050,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 September 30, 2004 is 1,193,750. The total number of
shares issued from exercised stock options, from the inception date of
the plan, is 53,250.
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
September 30, 2004 and 2003):
-------------------------------------------------------------------------
Nine Month Periods
Ended September 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 Periods Nine Month Periods
Ended September 30, Ended September 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 $ 1,287 $ 12,164 $ 49,376 $ 69,069
Pro forma adjustments for
the fair value of stock
options granted prior to
January 1, 2003 (150) (243) (474) (694)
-------------------------------------------------------------------------
Pro forma net income
attributable to Class A
Subordinate Voting and
Class B Shares $ 1,137 $ 11,921 $ 48,902 $ 68,375
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro forma earnings per
Class A Subordinate Voting
and Class B Share
Basic $ 0.01 $ 0.16 $ 0.59 $ 0.98
Diluted $ 0.01 $ 0.16 $ 0.55 $ 0.79
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 $4.0 million
at September 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 Nine Month Periods
Ended September 30, Ended September 30,
-------------------------------------------------------------------------
(U.S. dollars in thousands) 2004 2003 2004 2003
-------------------------------------------------------------------------
Foreign exchange (losses)
income $ (746) $ (1,351) $ 290 $ (6,250)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 Nine Month Periods
Ended September 30, Ended September 30,
-------------------------------------------------------------------------
(U.S. dollars in thousands) 2004 2003 2004 2003
-------------------------------------------------------------------------
Net expense $ 1,257 $ 1,112 $ 3,715 $ 3,131
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 is currently reviewing its long term plans for its
Anotech anodizing business and its Prometall and Decotrim facilities. As
a result of these circumstances, the recoverability of certain fixed
assets at these facilities with a net book value of approximately
$ 39 million 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.
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.
The severance accrual was reduced by $0.7 million in the three month
period ended June 30, 2004 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
Payments (287)
Currency translation 39
-------------------------------------------------------------------------
Balance, September 30, 2004 $ 5,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 September 30, 2004, the Company had 28 manufacturing
facilities in North America and 16 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 September 30, 2004
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 397,105 $ 224,858 $ - $ 621,963
Inter-segment sales (1,535) (363) - (1,898)
-------------------------------------------------------------------------
Sales to external
customers $ 395,570 $ 224,495 $ - $ 620,065
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 16,848 $ 7,637 $ - $ 24,485
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (loss) $ 26,728 $ (13,890) $ (2,687) $ 10,151
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (536) $ - $ - $ (536)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 13,270 $ 2,316 $ (12,843) $ 2,743
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
Held by Magna $ - $ - $ 1,267 $ 1,267
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 457,079 $ 241,191 $ - $ 698,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 15,703 $ 9,141 $ - $ 24,844
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 50,830 $ 20,847 $ - $ 71,677
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Month Period Ended September 30, 2003
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $ 373,358 $ 183,738 $ - $ 557,096
Inter-segment sales (136) (516) - (652)
-------------------------------------------------------------------------
Sales to external
customers $ 373,222 $ 183,222 $ - $ 556,444
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 15,806 $ 6,498 $ - $ 22,304
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (loss) $ 42,868 $ (9,056) $ (5,066) $ 28,746
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (405) $ - $ - $ (405)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 7,762 $ 4,557 $ (9,768) $ 2,551
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
Held by Magna $ - $ - $ 2,316 $ 2,316
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 424,906 $ 203,826 $ - $ 628,732
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 29,559 $ 18,876 $ - $ 48,435
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 48,711 $ 19,345 $ - $ 68,056
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Month Period Ended September 30, 2004
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $1,277,640 $ 715,913 $ - $1,993,553
Inter-segment sales (1,559) (1,313) - (2,872)
-------------------------------------------------------------------------
Sales to external
customers $1,276,081 $ 714,600 $ - $1,990,681
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 50,113 $ 22,320 $ - $ 72,433
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other charge adjustment
(note 11) $ - $ (728) $ - $ (728)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (loss) $ 135,976 $ (29,839) $ (8,208) $ 97,929
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (1,870) $ - $ - $ (1,870)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 40,277 $ 6,753 $ (38,705) $ 8,325
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
Held by Magna $ - $ - $ 3,675 $ 3,675
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 457,079 $ 241,191 $ - $ 698,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 51,257 $ 34,220 $ - $ 85,477
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 50,830 $ 20,847 $ - $ 71,677
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine Month Period Ended September 30, 2003
-------------------------------------------------------------------------
North
(U.S. dollars in thousands) America Europe Corporate Total
-------------------------------------------------------------------------
Sales $1,180,502 $ 531,528 $ - $1,712,030
Inter-segment sales (527) (1,832) - (2,359)
-------------------------------------------------------------------------
Sales to external
customers $1,179,975 $ 529,696 $ - $1,709,671
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation and
amortization $ 45,246 $ 19,204 $ - $ 64,450
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating income (loss) $ 159,319 $ (12,024) $ (15,003) $ 132,292
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Equity income $ (1,425) $ - $ - $ (1,425)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense
(income), net $ 20,913 $ 13,382 $ (26,467) $ 7,828
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Amortization of discount
on Convertible Series
Preferred Shares,
Held by Magna $ - $ - $ 6,617 $ 6,617
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other income (note 13) $ - $ - $ (1,387) $ (1,387)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, net $ 424,906 $ 203,826 $ - $ 628,732
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed asset additions $ 77,523 $ 41,155 $ - $ 118,678
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Goodwill, net $ 48,711 $ 19,345 $ - $ 68,056
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 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 Nine Month Periods
Ended September 30, Ended September 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 $ 1,287 $ 12,164 $ 49,376 $ 69,069
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares outstanding
during the period 83,510 73,195 83,509 69,798
Adjustments for:
Deferred compensation
(note 8(b)) (452) - (204) -
-------------------------------------------------------------------------
83,058 73,195 83,305 69,798
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic earnings per Class A
Subordinate Voting and
Class B Share $ 0.02 $ 0.17 $ 0.59 $ 0.99
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per Class
A Subordinate Voting and
Class B Share
Net income attributable to
Class A Subordinate Voting
and Class B Shares $ 1,287 $ 12,164 $ 49,376 $ 69,069
Adjustments (net of related
tax effects) for:
Amortization of discount
on Convertible Series
Preferred Shares - 2,316 3,675 6,617
Financing charges on
Convertible Series
Preferred Shares,
held by Magna - 1,472 2,771 4,412
Financing charges on
Convertible Debentures - 988 3,110 1,998
-------------------------------------------------------------------------
$ 1,287 $ 16,940 $ 58,932 $ 82,096
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares outstanding
during the period 83,058 73,195 83,305 69,798
Adjustments for:
Class A Subordinate Voting
Shares issuable on
conversion of Convertible
Series Preferred Shares - 25,464 15,152 28,519
Class A Subordinate Voting
Shares issuable on
conversion of Convertible
Debentures - 7,547 7,547 5,114
Stock options determined
using the treasury stock
method 58 191 100 99
Deferred compensation
(note 8(b)) 452 - 204 -
-------------------------------------------------------------------------
83,568 106,397 106,308 103,530
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted earnings per Class A
Subordinate Voting
and Class B Share $ 0.02 $ 0.16 $ 0.55 $ 0.79
-------------------------------------------------------------------------
-------------------------------------------------------------------------
17. Subsequent Event
The Board of Directors of the Company received a proposal to acquire all
the outstanding Class A Subordinate Voting Shares of Decoma not owned by
Magna. The Company's Board of Directors will review Magna's proposal and
will respond in due course having regard to all applicable legal and
regulatory requirements.
FIRST AND FINAL ADD TO FOLLOW