Tesma announces 2004 third quarter results
CONCORD, ON, Nov. 1, 2004 -- Tesma International Inc. (TSX:TSM.A; NASDAQ:TSMA), a global supplier of highly-engineered engine, transmission and fuel system components, modules and systems for the automotive industry, today reported financial results for the third quarter and nine-month period ended September 30, 2004.
Three months ended Nine months ended
September 30 September 30
(U.S. dollars in millions except
per share and share figures)
2004 2003 2004 2003
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Sales $ 323.5 $ 254.3 $1,025.3 $ 800.5
Income before income taxes $ 20.3 $ 21.5 $ 93.1 $ 77.1
Net income $ 12.3 $ 15.9 $ 63.2 $ 53.5
Operating cash flow $ 34.3 $ 30.4 $ 126.1 $ 99.1
Diluted earnings per share $ 0.38 $ 0.49 $ 1.93 $ 1.64
Weighted average number of
shares outstanding on a
diluted basis (in millions) 32.7 32.6 32.7 32.5
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Third Quarter Operating Highlights
----------------------------------
Our consolidated sales in the quarter increased 27% to $323.5 million from $254.3 million in the same quarter last year. Of this increase, approximately $17 million, or one quarter of the overall growth, is the result of higher translated sales on the strengthening of the Canadian dollar and euro relative to the U.S. dollar, $33 million is attributable to the acquisition of Davis Industries, Inc. ("Davis") and the balance of $19 million represents organic growth. All of these factors contributed to the 30% increase in our North American content per vehicle in the quarter to $56 from $43 in the same period last year. Our European content increased 6% to (euro) 19 in the quarter largely due to increased volumes and additional launches of Tesma Fuel Technologies programs.
Profitability levels during the third quarter were severely impacted by the escalation in steel prices. These cost increases drove up our cost of sales in the quarter by over $7 million as we were unable, in any meaningful way, to pass these additional costs through to our customers. In addition, given the tight supply of steel in North America and the impact of prolonged higher prices on smaller suppliers and resellers, we are now paying significant surcharges on steel purchases even though we have existing long term supply agreements. We estimate the impact on our gross margin of these additional steel costs to be 2.5% in the quarter (1.3% reduction year-to- date). As a result, our income before income taxes in the quarter decreased by 6% to $20.3 million from $21.5 million in the same period a year ago. In addition, losses incurred in the quarter in certain jurisdictions that were not tax-benefited (compared with recoveries recognized in the prior year on future tax deductible amounts) resulted in our effective tax rate increasing to 39.3%, (from 25.9% in the prior year). The combination of lower pretax levels and the significantly higher tax rate caused our net income and diluted earnings per share to decrease by 22% to $12.3 million and $0.38, respectively, from $15.9 million and $0.49, respectively, in the same periods a year ago.
We generated operating cash flow of $34.3 million in the quarter, up 13% over the same period in the prior year in spite of our lower net income.
A more detailed discussion of our consolidated results for the third quarter and nine-month period ended September 30, 2004 is contained in the attached Management's Discussion and Analysis which follows the unaudited interim consolidated financial statements and notes thereto.
"As announced last week, we received a privatization proposal from Magna that, if approved by our shareholders, may impact the way, Tesma is structured and capitalized. However, from an operations perspective, it is business as usual." stated Klaus Blickle, Tesma's President. "Our immediate focus is on the significant items challenging our business, namely steel pricing and the operating issues at one of the acquired Davis facilities. As the numbers indicate, escalating steel prices have created a large burden for us to absorb. We have approached our customers on this issue, but have yet to see any meaningful relief. We intend to continue to pursue steel cost issue as part of the ongoing pricing concession discussions with our customers. We are also attacking the operating issues at the Davis facility in Tennessee. Our management team is focusing on the action plans necessary to correct the quality and launch issues at this plant on a priority basis."
Dividends ---------
Today, our Board of Directors declared a dividend in respect of the quarter ended September 30, 2004 of Cdn $0.18 per share on our Class A Subordinate Voting and Class B Shares, payable on or after December 15, 2004 to shareholders of record on November 30, 2004.
Privatization Proposal ----------------------
As publicly announced on October 25, 2004, we received a proposal from Magna International Inc. to privatize Tesma by way of a court-approved plan of arrangement under Ontario law. Our Board of Directors has established a special committee of independent directors to review and consider the proposal and make recommendations to the Board regarding the proposal. In fulfilling its responsibility, the special committee will retain its own independent legal and financial advisors. The financial advisor will be retained to prepare a valuation of our Class A Subordinate Voting Shares and provide an opinion as to the fairness of the proposal to our minority shareholders. Additional information will be provided as the deliberations by the special committee and our Board are completed.
Outlook -------
For the full year ending December 31, 2004, we have reduced our estimate of production volumes in North America to approximately 15.9 million units, about equal with production in 2003. In Europe, we expect production of approximately 16.2 million units, 1% lower than the full year volumes experienced last year. Based on these forecasts, the inclusion of the Davis operations, our anticipated tooling and other automotive sales, our projected content per vehicle levels and the impact of foreign exchange at the current rates in effect, we continue to expect overall sales growth of approximately 25% for the year ending December 31, 2004.
Tesma employs over 5,700 skilled and motivated people in 28 manufacturing facilities in North and South America, Europe and Asia, and five focused tooling, design and R&D centres supporting our three principal product technology groups: Tesma Engine Technologies; Tesma Transmission Technologies; and Tesma Fuel Technologies.
TESMA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)
(unaudited)
September 30 December 31
As at NOTE 2004 2003
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ASSETS
Current:
Cash and cash equivalents $ 168,581 $ 163,255
Accounts receivable 7 217,080 193,160
Inventories 122,213 100,216
Prepaid expenses and other 16,830 10,152
Future tax assets 1,938 979
Income taxes recoverable - 2,372
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526,642 470,134
Capital assets 2,3 365,135 303,749
Goodwill 2,3 54,235 15,096
Other assets 2 7,779 3,527
Future tax assets 2,5 8,116 1,834
Escrow deposit 2 - 44,635
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$ 961,907 $ 838,975
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
Bank indebtedness 2 $ 30,678 $ 40,756
Accounts payable 7 117,505 80,398
Other accrued liabilities 7 46,973 34,126
Accrued salaries and wages 4 30,474 27,065
Income taxes payable 2,197 -
Future taxes payable 19,226 16,796
Long-term debt due within one year 2,3 4,849 3,919
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251,902 203,060
Long-term debt 2,3 67,502 62,879
Future tax liabilities 21,274 18,102
Other long term liabilities 2,4 14,354 5,680
SHAREHOLDERS' EQUITY
Class A Subordinate Voting Shares,
authorized: unlimited
(issued: 18,251,329;
December 31, 2003 - 18,140,429) 4 199,271 198,250
Class B Shares, authorized: unlimited
(issued: 14,223,900;
December 31, 2003 - 14,223,900) 4 1,894 1,894
Contributed surplus 1,4 1,243 572
Retained earnings 1 336,179 285,736
Currency translation adjustment 68,288 62,802
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606,875 549,254
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$ 961,907 $ 838,975
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See accompanying notes
TESMA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(U.S. dollars in thousands, except share and per share figures)
(unaudited)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
NOTE 2004 2003 2004 2003
-------------------------------------------------------------------------
(restated- (restated-
see Note 1) see Note 1)
Sales 7 $ 323,526 $ 254,317 $1,025,323 $ 800,536
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Cost of goods sold 7 264,489 201,074 810,764 628,913
Selling, general and
administrative
expenses 3,7,8 19,597 16,536 64,563 49,102
Depreciation and
amortization 15,512 12,565 45,047 36,630
Affiliation and
social fees 7 3,223 2,818 10,635 9,026
Interest, net 7 358 (140) 1,203 (216)
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Income before
income taxes 20,347 21,464 93,111 77,081
Income taxes 5 8,004 5,555 29,891 23,627
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Net income for the
period attributable
to Class A
Subordinate Voting
Shares and Class B
Shares 12,343 15,909 63,220 53,454
Retained earnings,
beginning of period 328,385 256,909 285,736 225,678
Dividends on Class A
Subordinate Voting
Shares and Class B
Shares (4,549) (3,791) (12,777) (10,026)
Cumulative adjustment
for change in
accounting policy 1 - - - (79)
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Retained earnings,
end of period $ 336,179 $ 269,027 $ 336,179 $ 269,027
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Earnings per Class A
Subordinate Voting
Share or Class B Share
Basic $ 0.38 $ 0.49 $ 1.95 $ 1.65
Diluted $ 0.38 $ 0.49 $ 1.93 $ 1.64
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Average number of
Class A Subordinate
Voting Shares and
Class B Shares
outstanding during the
period (in millions)
Basic 32.5 32.3 32.4 32.3
Diluted 32.7 32.6 32.7 32.5
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See accompanying notes
TESMA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(U.S. dollars in thousands)
(unaudited)
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
NOTE 2004 2003 2004 2003
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(restated- (restated-
see Note 1) see Note 1)
CASH PROVIDED FROM
(USED FOR):
OPERATING ACTIVITIES
Net income $ 12,343 $ 15,909 $ 63,220 $ 53,454
Items not involving
current cash flows 21,918 14,529 62,852 45,639
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34,261 30,438 126,072 99,093
Net change in non-
cash working capital (18,249) (6,801) (11,972) (31,015)
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16,012 23,637 114,100 68,078
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INVESTING ACTIVITIES
Capital asset additions (23,721) (10,680) (78,020) (43,856)
Decrease in other
assets 83 47 167 148
Proceeds from disposal
of capital and other
assets 7 209 384 630 27,006
Proceeds on disposal
of interest in
jointly-controlled
entity, net of cash
disposed 3 - - (953) -
Acquisition of
subsidiaries, in
excess of funds
previously held
in escrow 2 - - (427) -
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(23,429) (10,249) (78,603) (16,702)
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FINANCING ACTIVITIES
Decrease in bank
indebtedness (21,601) (1,122) (18,886) (3,480)
Dividends paid on
Class A Subordinate
Voting Shares and
Class B Shares (4,549) (3,791) (12,777) (13,326)
Repayments of long-
term debt (1,789) (1,180) (10,575) (1,814)
Proceeds from loan
repayments 3 - - 7,728 -
Issuance of Class A
Subordinate Voting
Shares - 190 1,021 353
Proceeds from issuance
of long-term debt - 3,291 540 6,768
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(27,939) (2,612) (32,949) (11,499)
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Effect of exchange
rate changes on cash
and cash equivalents 7,057 (162) 2,778 21,721
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Net increase (decrease)
in cash and cash
equivalents during
the period (28,299) 10,614 5,326 61,598
Cash and cash
equivalents,
beginning of period 196,880 186,064 163,255 135,080
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Cash and cash equivalents,
end of period $ 168,581 $ 196,678 $ 168,581 $ 196,678
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See accompanying notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Accounting Changes
The unaudited interim consolidated financial statements have been
prepared following the accounting policies as set out in the
Company's 2003 Annual Report, except for the adoption of new
accounting pronouncements which include the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3110 "Asset Retirement
Obligations" (CICA 3110) and Accounting Guideline AcG-13 "Hedging
Relationships" (AcG-13).
CICA 3110 requires the Company to estimate and recognize the fair
value (discounted to present value) of any liabilities for future
asset retirements, where applicable, and to record the associated
cost over the period of use. For the Company, this primarily
represents the obligation, at the end of each lease term, to restore
leased premises back to their condition at the inception of the
lease. At lease inception, the present value of this obligation is
determined and recognized as a long-term liability with a
corresponding amount recognized as an additional capital asset. The
amount recognized as a capital asset is amortized and the liability
amount is accreted over the period from lease inception to the time
the Company expects to vacate the premises, such that both
depreciation and interest expense are recorded as charges against
earnings. The Company adopted these rules effective January 1, 2004
and the resulting impact to the unaudited interim consolidated
financial statements was not significant.
AcG-13 establishes certain conditions and documentation requirements
that must exist at the inception of a hedge in order to apply hedge
accounting. On January 1, 2004, the Company's treasury management
system complied with the documentation requirements of AcG-13 and, as
such, the Company continues to apply hedge accounting, when
applicable, in its consolidated financial statements.
As described in Note 1(p) of the Company's 2003 Annual Report, the
Company adopted the new rules under Handbook Section 3870 "Stock-
Based Compensation and other Stock-Based Payments" (CICA 3870) which
require that all stock-based compensation transactions be accounted
for at fair value. The Company adopted the rules on a retroactive
basis for all stock-based awards granted on or after August 1, 2002,
the date the Company was initially required to adopt CICA 3870. As a
result, the comparative nine-month period ended September 30, 2003
has been restated and reflects a cumulative adjustment to decrease
opening retained earnings and increase contributed surplus by
$0.1 million, respectively and to record compensation expense of
$0.4 million in the period ($0.4 million for the quarter ended
September 30, 2003).
The unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles, 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, as contained in the
Company's 2003 Annual Report.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments necessary to present fairly the
financial position of the Company at September 30, 2004 and the
results of operations and cash flows for the three and nine-month
periods ended September 30, 2004 and 2003.
2. Business Acquisition
Acquisition of Davis Industries, Inc.
On January 2, 2004, the Company completed the acquisition of Davis
Industries, Inc. (Davis). Davis, at the time of acquisition, employed
over 700 employees at 3 manufacturing facilities located in Indiana
(2 facilities) and Tennessee and a corporate office and research and
development centre in Michigan. The main product focus for Davis is
stamped powertrain components and assemblies, including driveplate
assemblies, transmission shells, oil pan assemblies and engine valve
covers, but also includes some body and chassis stampings and fuel
filler door assemblies.
The Company has accounted for this transaction using the purchase
method of accounting and has recorded 100% of the assets,
liabilities, revenues, expenses and cash flows of Davis in its
consolidated results commencing January 3, 2004. Total consideration
for the acquisition of all the outstanding shares of Davis amounted
to $47.5 million, consisting of $45.1 million paid in cash (including
transaction costs of $0.5 million and $44.6 million that was held in
escrow at our December 31, 2003 year end) and the issuance of a five-
year, $2.4 million note bearing interest at the rate of prime plus 1%
per annum. The Company also assumed $21.6 million of long-term debt
(including current portion) and indebtedness and $5.4 million of
other long-term obligations. The following is a summary of the effect
of this acquisition on the Company's consolidated balance sheet:
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(U.S. dollars in millions)
Non-cash working capital $ 4.1
Capital assets 25.1
Intangible assets 5.6
Goodwill 40.5
Long-term debt (including current portion) and indebtedness (21.6)
Long-term employee benefit obligation (5.4)
Net future tax liabilities (0.8)
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Total consideration $ 47.5
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Comprised of:
Cash paid from escrow account $ 44.6
Transaction costs 0.5
Five-year note bearing interest at prime plus
1% per annum 2.4
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$ 47.5
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The goodwill recorded on the acquisition is deductible for income tax
purposes and included in the above allocation is an estimated future
tax asset of approximately $1.1 million resulting from an excess of
the tax basis of goodwill over the amount recorded for accounting
purposes.
The related allocations for this acquisition at the end of the
current period reflect a $1 million reduction to the purchase price
during the quarter (with a corresponding reduction to goodwill)
pursuant to claims made in accordance with certain provisions of the
purchase agreement. In addition, the allocations reflect adjustments
as a result of obtaining more information regarding asset valuations,
liabilities assumed and revisions of preliminary estimates of fair
values made at the date of purchase.
These amounts and the results of Davis are included in the North
American Automotive segment of the Company's operations (Note 6).
3. Reduction In Ownership Interest of Jointly-Controlled Entity
Pursuant to the agreement that resulted in the increase of the
Company's interest in one of its jointly-controlled entities from 45%
to 75% in December 2001, the other remaining shareholder retained an
option to purchase an additional 25% equity ownership from the
Company at any time prior to August 1, 2004 at a formula price.
Effective February 7, 2004, this shareholder exercised its option and
acquired an additional 25% interest in the jointly- controlled entity
for nominal cash consideration.
The impact of this transaction on the Company's consolidated balance
sheet was to decrease capital and other assets by $5.5 million, cash
and cash equivalents by $1.0 million, future tax and other current
assets by $4.3 million, goodwill by $0.2 million and total
liabilities and long-term debt by $9.8 million.
As a result of this transaction, the Company recorded a net loss
totaling $1.2 million (representing the excess of our carrying value
of this 25% equity interest over the consideration received) as part
of selling, general and administrative expenses in the Company's
first quarter.
In addition, as part of this transaction, $7.7 million of shareholder
loans due to the Company from the jointly-controlled entity were sold
by the Company to the other shareholder for $7.7 million in cash,
thereby bringing each shareholder's proportionate share of loans to
an equal basis.
This transaction and the results of this jointly-controlled entity
are included in the North American Automotive segment of the
Company's operations (Note 6). Effective February 8, 2004, only 50%
of the assets, liabilities, revenues, expenses and cash flows of this
jointly-controlled entity are included in the Company's consolidated
results.
4. Capital Stock
(a) Class A Subordinate Voting Shares and Class B Shares
The Company's share structure has remained consistent with that in
place as at December 31, 2003. For details concerning the nature of
the Company's securities, please refer to Note 12 "Capital Stock" of
the notes to the Company's audited consolidated financial statements
for the year ended December 31, 2003 contained in the Company's 2003
Annual Report.
Outstanding Class A Subordinate Voting Shares and Class B Shares
included in shareholders' equity of the Company consists of:
Class A Subordinate
Voting Shares Class B Shares
---------------------------------------------------------------------
(U.S. dollars in
thousands, except Number of Stated Number of Stated
shares) Shares Value Shares Value
---------------------------------------------------------------------
Balance, December 31,
2003 18,140,429 $ 198,250 14,223,900 $ 1,894
Exercise of incentive
stock options 110,900 1,021 - -
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Balance, September 30,
2004 18,251,329 $ 199,271 14,223,900 $ 1,894
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(b) Incentive Stock Options
Information concerning the Company's Incentive Stock Option Plan is
included in Note 12 "Capital Stock" of the notes to the Company's
audited consolidated financial statements for the year ended December
31, 2003 contained in the Company's 2003 Annual Report.
The following is a continuity schedule of the options outstanding:
Weighted
average
Number of Range of exercise
Options exercise price price
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(Share prices in Canadian dollars)
Balance, December 31, 2003 1,483,350 $10.50 - $31.74 $24.83
Granted 109,000 $31.55 $31.55
Exercised (110,900) $10.50 - $26.00 $12.35
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Balance, September 30, 2004 1,481,450 $10.50 - $31.74 $26.26
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Exercisable at September 30,
2004 1,120,450 $10.50 - $31.74 $25.39
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The Company accounts for all stock-based compensation transactions at
fair value. The Company determines the total estimated fair value of
each tranche of stock options as at the date of grant and then
records compensation expense, on an amortized basis, over the
applicable vesting periods of the underlying stock options. As such,
at each reporting date, cumulative compensation expense will be
recognized for each tranche of stock options to the extent that they
are vested.
During the three and nine-month period ended September 30, 2004, the
Company recorded $0.2 million and $0.7 million, respectively
($0.4 million in the same periods, respectively, in 2003), of
compensation expense as part of selling, general and administrative
expenses and recorded a corresponding increase to contributed
surplus. Upon exercise of the underlying stock options recorded at
fair value, (i.e. those issued on or after August 1, 2002), the
Company will record a reduction to contributed surplus and a
corresponding increase in the value attributed to the Class A
Subordinate Voting Shares issued on the exercise of these stock
options.
The balance of contributed surplus related to stock compensation is
as follows:
2004 2003
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(U.S. dollars in thousands)
Opening balance, January 1 $ 572 $ 79
Compensation expense 671 393
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Closing balance, September 30 $ 1,243 $ 472
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(c) Maximum Number of Shares
The following table presents the maximum number of shares that would
be outstanding if all of the options outstanding at September 30,
2004 were exercised:
Number of Shares
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Class A Subordinate Voting Shares outstanding
at September 30, 2004 18,251,329
Class B Shares outstanding at September 30, 2004 14,223,900
Options to purchase Class A Subordinate Voting Shares 1,481,450
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33,956,679
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The maximum number of shares reserved to be issued for stock options
is 4,000,000 Class A Subordinate Voting Shares, of which 637,500 are
reserved and unoptioned as at September 30, 2004.
(d) Non-Employee Director Share-Based Compensation Plan
Under this plan, non-employee directors can elect to receive a
portion of their annual retainers and other Board-related
compensation in the form of deferred share units (DSUs) which are
credited to the director's account, and the Company records a
liability. The number of DSUs issued is based upon the market value
of the Company's Class A Subordinate Voting Shares at each allocation
date. Each DSU has a cash value equal to the market price of one of
the Company's Class A Subordinate Voting Shares. Within a specified
time after retirement, non-employee directors receive a cash payment
equal to the market value of their DSUs.
Due to the fact these DSUs will require settlement at some point in
the future for cash, the Company records each allocation of units
issued as compensation expense and records the associated liability
in the period they are issued. The values of all DSUs outstanding,
and the associated liability, are adjusted at each reporting date to
reflect their fair value based on the current market price of the
Company's Class A Subordinate Voting Shares.
During the three and nine-month periods ended September 30, 2004,
$nil and $0.2 million, respectively, ($0.2 million in the same
periods, respectively, ended September 30, 2003) was recorded as
compensation expense (including foreign exchange and the revaluation
of the DSUs to their fair values at the period end) and no amounts
were paid out under this plan. At September 30, 2004, there were
34,041 DSUs (December 31, 2003 - 28,265) having a total value of
$0.8 million (December 31, 2003 - $0.6 million) that were issued and
outstanding.
(e) Other Employee Share-Based Compensation Plan
In conjunction with the appointment of the Company's former President
to the position of Vice Chairman effective May 4, 2004, the Company
created a restricted stock account in his name and credited 32,550
notional units of restricted stock (RSUs) to this account as part of
the overall compensation arrangement for future employment services
to be rendered. Each RSU has a value equivalent to one of the
Company's Class A Subordinate Voting Shares. Under this stock-based
compensation arrangement, the total cash equivalent value of the RSUs
(plus accumulated dividend equivalents) will be paid in cash at a
future date upon satisfaction of certain conditions. Because these
RSUs will require settlement in the future for cash, the Company
initially recognized a liability in the related period that these
RSUs were granted and recognizes the related compensation expense
over the periods that the employment services are rendered. The value
of the associated liability is adjusted at each reporting date to
fair value based on the current market price of the Company's Class A
Subordinate Voting Shares. Compensation expense (including foreign
exchange and the revaluation of the liability to fair value at the
period end) in the three and nine-month periods ended September 30,
2004 totaled $nil and $0.1 million, respectively.
5. Income Taxes
During the Company's second quarter ended June 30, 2004, the Company
completed a series of recapitalization and refinancing transactions
at certain subsidiaries. As a result of these transactions, the
Company recognized $4.0 million in the second quarter as the benefit
for income tax losses available for carryforward (previously
unrecognized) and recorded a corresponding future tax asset in the
amount of $4.0 million in its Austrian subsidiary.
During the Company's third quarter, losses were incurred at the
Company's U.S. subsidiary that were not tax benefited. In deciding
whether it is appropriate to recognize future tax assets based on
future projected operating results, it is generally accepted that the
length of the forecast horizon should be limited to relatively short
periods, for example 2 to 3 years. Our decision to not benefit these
losses at this time is due to the presence of negative operating
trends (consisting mainly of operating issues at one of the Davis
facilities and the escalating impact of steel price increases which
is significantly impacting certain divisions of this subsidiary and
on which the future pricing trend of this commodity over the next 12
to 18 months is highly speculative) that provides uncertainty as to
our ability to generate sufficient future taxable income during a
reasonable forecast period.
6. Segmented Information
The Company currently operates in one industry segment, the
automotive powertrain business, designing and manufacturing parts and
assemblies primarily for the automotive OEMs or their Tier I and Tier
II powertrain component manufacturers.
The Company operates internationally and its manufacturing facilities
are arranged geographically to match the requirements of the
Company's customers in each market. Each manufacturing facility has
the capability to offer many different powertrain parts and
assemblies as the technological processes employed can be used to
make many different parts and assemblies. Additionally, specific
marketing and distribution strategies are required in each geographic
region.
The Company currently operates in four geographic segments, of which
only two are reportable segments. The accounting policies for the
segments are the same as those described in Note 1 to the audited
consolidated financial statements for the year ended December 31,
2003 (as contained in the Company's 2003 Annual Report) and
intersegment sales are accounted for at prices which approximate fair
value.
Executive management assesses the performance of each segment based
on income before income taxes, as the management of income tax
expense is centralized.
The following tables show certain information with respect to
operating segment disclosures:
Three months ended:
North
American European Other
September 30, 2004 Automotive Automotive Automotive Total
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(U.S. dollars in thousands)
Total Sales $ 259,244 $ 65,437 $ 8,551 $ 333,232
Intersegment sales 8,864 811 31 9,706
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Sales to external
customers $ 250,380 $ 64,626 $ 8,520 $ 323,526
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Depreciation and
amortization $ 11,779 $ 2,606 $ 1,127 $ 15,512
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Interest, net $ 684 $ (701) $ 375 $ 358
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Income (loss) before
income taxes $ 15,103 $ 6,412 $ (1,168) $ 20,347
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Capital assets, net $ 254,809 $ 74,459 $ 35,867 $ 365,135
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Capital asset
additions $ 16,560 $ 5,831 $ 1,330 $ 23,721
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Goodwill $ 53,489 $ 746 $ - $ 54,235
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September 30, 2003
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Total Sales $ 198,124 $ 54,818 $ 6,871 $ 259,813
Intersegment sales 4,951 519 26 5,496
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Sales to external
customers $ 193,173 $ 54,299 $ 6,845 $ 254,317
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Depreciation and
amortization $ 9,676 $ 1,981 $ 908 $ 12,565
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Interest, net $ (766) $ 259 $ 367 $ (140)
-------------------------------------------------------------------------
Income (loss) before
income taxes $ 21,291 $ 2,042 $ (1,869) $ 21,464
-------------------------------------------------------------------------
Capital assets, net $ 197,426 $ 56,660 $ 33,735 $ 287,821
-------------------------------------------------------------------------
Capital asset
additions $ 8,147 $ 1,705 $ 828 $ 10,680
-------------------------------------------------------------------------
Goodwill $ 13,127 $ 699 $ - $ 13,826
-------------------------------------------------------------------------
Nine months ended:
North
American European Other
September 30, 2004 Automotive Automotive Automotive Total
-------------------------------------------------------------------------
(U.S. dollars in thousands)
Total Sales $ 819,144 $ 206,210 $ 26,021 $ 1,051,375
Intersegment sales 24,008 1,760 284 26,052
-------------------------------------------------------------------------
Sales to external
customers $ 795,136 $ 204,450 $ 25,737 $ 1,025,323
-------------------------------------------------------------------------
Depreciation and
amortization $ 33,928 $ 7,770 $ 3,349 $ 45,047
-------------------------------------------------------------------------
Interest, net $ 8 $ (178) $ 1,373 $ 1,203
-------------------------------------------------------------------------
Income (loss) before
income taxes $ 75,327 $ 21,229 $ (3,445) $ 93,111
-------------------------------------------------------------------------
Capital assets, net $ 254,809 $ 74,459 $ 35,867 $ 365,135
-------------------------------------------------------------------------
Capital asset
additions $ 56,558 $ 15,785 $ 5,677 $ 78,020
-------------------------------------------------------------------------
Goodwill $ 53,489 $ 746 $ - $ 54,235
-------------------------------------------------------------------------
September 30, 2003
-------------------------------------------------------------------------
Total Sales $ 622,957 $ 174,537 $ 20,103 $ 817,597
Intersegment sales 14,945 2,003 113 17,061
-------------------------------------------------------------------------
Sales to external
customers $ 608,012 $ 172,534 $ 19,990 $ 800,536
-------------------------------------------------------------------------
Depreciation and
amortization $ 28,093 $ 5,859 $ 2,678 $ 36,630
-------------------------------------------------------------------------
Interest, net $ (2,027) $ 866 $ 945 $ (216)
-------------------------------------------------------------------------
Income (loss) before
income taxes $ 70,528 $ 10,164 $ (3,611) $ 77,081
-------------------------------------------------------------------------
Capital assets, net $ 197,426 $ 56,660 $ 33,735 $ 287,821
-------------------------------------------------------------------------
Capital asset
additions $ 26,563 $ 8,571 $ 8,722 $ 43,856
-------------------------------------------------------------------------
Goodwill $ 13,127 $ 699 $ - $ 13,826
-------------------------------------------------------------------------
7. Related Party Transactions
(a) Transactions with Controlling Shareholder
The Company completed transactions with Magna International Inc.
(Magna), the Company's controlling shareholder, and other companies
under Magna's control as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
---------------------------------------------------------------------
(U.S. dollars in thousands)
Sales(i) $ 2,068 $ 1,501 $ 6,217 $ 5,606
Purchases of
materials(i) $ 819 $ 670 $ 2,635 $ 4,101
Rental of manufacturing
facilities(ii) $ - $ 519 $ - $ 1,877
Affiliation fee(iii) $ 2,916 $ 2,502 $ 9,236 $ 7,868
Social fee(iv) $ 307 $ 316 $ 1,399 $ 1,158
Other specific
charges(v) $ 563 $ 400 $ 1,326 $ 1,304
Interest, net $ 4 $ - $ 8 $ 4
Construction management
fees(ii) $ - $ - $ - $ (1,293)
---------------------------------------------------------------------
(i) Sales to, and purchases from, Magna and other companies under
Magna's control, and the resulting accounts receivable and
payable balances, are typically effected on normal commercial
terms.
(ii) On January 31, 2003, the Company completed a sale and leaseback
transaction with MI Developments Inc. (MID), then a wholly-
owned subsidiary of Magna, for all the land and buildings on
the Tesma Corporate Campus, which includes the corporate office
building and two manufacturing facilities. Under the terms of
the purchase and sale agreement, the land and buildings
comprising the Corporate Campus (with a carrying value of
$23.5 million) were sold to MID for cash proceeds approximating
fair value which totaled $25.0 million. The gain of
$1.5 million resulting from the sale was initially deferred and
is now being amortized on a straight-line basis over the term
of the leases.
Under the terms of this transaction, in the prior year,
$1.3 million of construction management fees (including
carrying charges) previously billed in fiscal 2002 by MID to
the Company on account of this project were refunded. In
addition, the Company entered into agreements to lease the
properties back from MID (at prevailing market rates existing
at inception) for a term of twelve years (with an initial
option to renew for three years followed by two subsequent
five-year renewal options) and is required to make lease
payments of approximately $2.7 million per year. The Company
made rental payments totaling $0.5 million to MID (prior to the
August 29, 2003 reorganization) in the two-month period ended
August 31, 2003 ($1.9 million in the eight-month period ended
August 31, 2003). On August 29, 2003, all of the shares of MID
were distributed to the shareholders of Magna pursuant to a
planned reorganization of Magna. As a result of this
distribution, MID became directly controlled by the same entity
that indirectly controls the Company, such that MID remains a
related party to the Company, but is no longer part of the
group of companies controlled by Magna.
(iii) The Company is party to an affiliation agreement with Magna
that provides for the payment by the Company of an affiliation
fee in exchange for, among other things, a non-exclusive world-
wide license to use certain Magna trademarks, access to Magna
management resources, and the collaboration and sharing of best
practices in areas such as new management techniques, employee
benefits and programs, marketing and technological initiatives.
This agreement became effective for a term of seven years and
five months commencing August 1, 2002 and expires on December
31, 2009 (subject to annual renewals thereafter). Under this
agreement, affiliation fees payable to Magna are calculated as
1.0% of the Company's consolidated net sales, subject to
certain exceptions for sales from acquired businesses (which
are exempt from the calculation of the affiliation fee in the
year of acquisition, with 50% inclusion in the year after
acquisition and full inclusion in all subsequent years).
(iv) Under the terms of a social fee agreement, the Company pays
Magna a social fee of 1.5% of pretax profits as a contribution
to social and charitable programs coordinated by Magna on
behalf of Magna and its affiliated companies, including the
Company. This agreement became effective for a term of seven
years and five months commencing August 1, 2002 and expires on
December 31, 2009 (subject to annual renewals thereafter).
(v) Other specific charges, which are recorded primarily as part of
selling, general and administrative expenses, are negotiated
annually and are based on the level of certain benefits or
services provided to the Company by Magna Services Inc., a
wholly-owned subsidiary of Magna. These services include, but
are not limited to: information technology (WAN infrastructure
and support services), human resource and employee relations
services (including administration of the Employee Equity
Participation and Profit Sharing Program), specialized legal,
environmental, finance and treasury support, management and
technology training, and an allocated share of the facility and
overhead costs dedicated to providing these services.
(b) Other Related Party Transactions
(i) Rental payments to MID in the three and nine-month periods
ended September 30, 2004 amounted to $0.9 million and
$2.6 million, respectively, and were paid under lease
agreements entered into at prevailing market rates. Rental
payments to MID for the one-month period ended September 30,
2003 (subsequent to the August 29, 2003 spin-off) totaled
$0.3 million.
(ii) During 2003, the Company's Austrian subsidiary transferred
certain assets and activities into Magna Systemtechnik AG
(MST), an entity controlled by Magna established for the
training of apprentices in the design, development and
manufacturing of tools, prototypes and automotive components.
Effective the same date, the Company acquired a minority equity
ownership interest in MST and participated in its ongoing
activities to the extent of this equity ownership interest. In
September 2004, the Company sold this equity ownership to a
related company under Magna's control and recorded a gain of
$0.9 million as part of selling, general and administrative
expenses. During the first six months of 2004, the Company
accounted for this investment using the equity method and had
recorded $0.5 million in selling, general and administrative
expenses as the Company's share of the year-to-date net loss of
MST ($0.2 million in the three and nine-month periods ended
September 30, 2003, respectively).
(c) Outstanding Balances
The outstanding balances with all related parties resulting from
transactions included in the consolidated financial statements at the
end of the period are as follows:
September 30 December 31
2004 2003
---------------------------------------------------------------------
(U.S. dollars in thousands)
Accounts receivable $ 1,656 $ 1,560
Accounts payable and other
accrued liabilities $ 923 $ 1,882
---------------------------------------------------------------------
---------------------------------------------------------------------
8. Foreign Exchange
Included as part of selling, general and administrative expenses are
gains (losses) resulting from foreign exchange as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
---------------------------------------------------------------------
(U.S. dollars in thousands)
Foreign exchange
gains $ 306 $ 598 $ 1,066 $ 1,310
---------------------------------------------------------------------
---------------------------------------------------------------------
9. Post-Retirement and Other Long-Term Employee Obligations
In the three and nine-month periods ended September 30, 2004, the
Company recorded expenses of $0.2 million and $0.6 million,
respectively ($0.1 million and $0.3 million in the respective periods
ended September 30, 2003) in relation to the Company's post-
retirement medical benefit plan and other long-term employment
service obligations.
10. Comparative Consolidated Financial Statements
The Company has retroactively restated the comparative consolidated
financial statements for the change in accounting policy for stock-
based compensation as described in Note 1.
Certain other comparative figures have been reclassified to conform
to the current year's method of presentation.
11. Subsequent Event
As announced on October 25, 2004, the Company's board of directors
received a proposal from Magna to acquire all the outstanding Class A
Subordinate Voting Shares of the Company not owned by Magna. Magna
has proposed that the transaction be effected by way of a court-
approved plan of arrangement under Ontario law and is subject to
applicable securities laws, including the Ontario rules governing
going-private transactions of this nature. In addition to court
approval, the transaction would require approval by the Company's
shareholders, including by way of a majority of the votes cast by
holders other than Magna, its affiliates and other insiders.
FIRST AND FINAL ADD TO FOLLOW