Magna announces fourth quarter and 2004 results
AURORA, ON, Feb. 28, 2005 -- Magna International Inc. (TSX: MG.SV.A, MG.MV.B; NYSE: MGA) today reported sales, profits and earnings per share for the fourth quarter and year ended December 31, 2004.
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THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
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2004 2003 2004 2003
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Sales $ 5,653 $ 4,623 $20,653 $15,345
Net income(1) $ 178 $ 139 $ 692 $ 520
Net income from continuing
operations(1)(2) $ 178 $ 139 $ 692 $ 587
Diluted earnings per share(1) $ 1.81 $ 1.36 $ 7.13 $ 5.19
Diluted earnings per share from
continuing operations(1)(2) $ 1.81 $ 1.36 $ 7.13 $ 5.89
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(1) Net income, net income from continuing operations, diluted earnings
per share and diluted earnings per share from continuing operations
have been prepared in accordance with Canadian generally accepted
accounting principles.
(2) Net income from continuing operations and diluted earnings per share
from continuing operations reflect the disclosure of Magna
Entertainment Corp. ("MEC") as discontinued operations until
August 29, 2003. On September 2, 2003, we distributed 100% of the
Class A Subordinate Voting and Class B Shares of MI Developments Inc.
("MID"), which includes our former controlling interest in MEC, to
our shareholders of record as of August 29, 2003.
For more information see notes 3 and 4 of the fourth quarter
Unaudited Interim Consolidated Financial Statements attached.
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All results are reported in millions of U.S. dollars,
except per share figures.
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THREE MONTHS ENDED DECEMBER 31, 2004
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Sales were a record $5.7 billion for the fourth quarter ended December 31, 2004, an increase of 22% over the fourth quarter of 2003. The higher sales level in the fourth quarter of 2004 reflects increases of 18% in North American content per vehicle and 44% in European content per vehicle over the comparable quarter in 2003. The increase in content per vehicle in North America relates primarily to acquisitions completed during 2004, the launch of new programs during or subsequent to the fourth quarter of 2003, and increased reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar. These increases were partially offset by lower vehicle production volumes and/or content on certain programs and customer price concessions. The increase in content per vehicle in Europe relates primarily to the launch of the BMW X3 complete vehicle assembly program during the fourth quarter of 2003, higher reported U.S. dollar sales due to the strengthening of the euro and British pound, each against the U.S. dollar, the launch of vehicle production programs during or subsequent to the fourth quarter of 2003, acquisitions completed during or subsequent to the fourth quarter of 2003, and increased production and/or content on certain programs. These increases were partially offset by lower production and/or content on certain programs, the disposition of two facilities during 2004, and increased customer price concessions. During the fourth quarter of 2004, North American vehicle production declined approximately 3% and European vehicle production declined approximately 2%, each from the comparable quarter in 2003.
We earned net income and net income from continuing operations for the fourth quarter ended December 31, 2004 of $178 million, representing an increase over the comparable quarter in 2003 of 28% or $39 million.
Diluted earnings per share and diluted earnings per share from continuing operations were $1.81 for the fourth quarter ended December 31, 2004, representing an increase over the comparable quarter of 33% or $0.45 per share.
During the fourth quarter ended December 31, 2004, we generated $377 million of cash from operations before changes in non-cash operating assets and liabilities, and invested $179 million in non-cash operating assets and liabilities. Total investment activities for the fourth quarter of 2004 were $376 million, including $328 million in fixed asset additions, and a $48 million increase in investments and other assets.
YEAR ENDED DECEMBER 31, 2004 ----------------------------
Sales were a record $20.7 billion for the year ended December 31, 2004, an increase of 35% over the year ended December 31, 2003. The higher sales level for 2004 reflects increases of 19% in North American average dollar content per vehicle and 68% in European average dollar content per vehicle over 2003. The increase in average dollar content per vehicle in North America relates primarily to the launch of new programs during or subsequent to the year ended December 31, 2003, acquisitions completed during 2004 and an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar. These increases were partially offset by lower content and/or vehicle production on certain programs and customer price concessions. The increase in average dollar content per vehicle in Europe relates primarily to the launch of new programs during or subsequent to the year ended December 31, 2003, in particular the launch of complete vehicle assembly programs at Magna Steyr and higher reported U.S. dollar sales due to the strengthening of the euro and British pound, each against the U.S. dollar. These increases were partially offset by lower production on certain programs and customer price concessions. For 2004, North American vehicle production declined by 1% and European vehicle production increased approximately 1%, each from 2003.
We earned net income from continuing operations for the year ended December 31, 2004 of $692 million, representing an increase over 2003 of 18% or $105 million. Net income for the year ended December 31, 2004 was also $692 million.
Diluted earnings per share from continuing operations were $7.13 for the year ended December 31, 2004, representing an increase over 2003 of 21% or $1.24 per share. Diluted earnings per share for the year ended December 31, 2004 were also $7.13.
During the year ended December 31, 2004, we generated $1.5 billion of cash from operations before changes in non-cash operating assets and liabilities, and invested $95 million in non-cash operating assets and liabilities. Total investment activities for the year ended December 31, 2004 were $1.4 billion, including $859 million in fixed asset additions, $417 million to purchase subsidiaries, and an $81 million increase in other assets.
A more detailed discussion of our consolidated financial results for the fourth quarter and year ended December 31, 2004 is contained in the Management's Discussion and Analysis of Results of Operations and Financial Position and the unaudited interim consolidated financial statements and notes thereto which are attached to this press release.
OTHER MATTERS -------------
The Company also announced that its Board of Directors today declared its regular quarterly dividend with respect to its outstanding Class A Subordinate Voting Shares and Class B Shares in respect of the fiscal quarter ended December 31, 2004. The dividend of U.S. $0.38 per share is payable on March 23, 2005 to shareholders of record on March 11, 2005.
Earlier today, we jointly announced with Decoma International Inc. ("Decoma") that Decoma's shareholders have approved the previously announced plan of arrangement under Ontario law, by which we will acquire all of the outstanding Class A Subordinate Voting Shares of Decoma not owned by us.
2005 OUTLOOK ------------ All amounts below exclude the impact of potential acquisitions.
We expect 2005 average dollar content per vehicle to be between $700 and $725 in North America and between $315 and $335 in Europe. We expect 2005 European assembly sales to be between $4.4 billion and $4.7 billion. Further, we have assumed 2005 vehicle production volumes will be approximately 15.8 million units in North America and approximately 16.2 million units in Europe. Based on expected average dollar content per vehicle in North America and Europe, current exchange rates, the above volume assumptions and anticipated tooling and other automotive sales, we expect our sales for 2005 to be between $21.8 billion and $23.1 billion, compared to 2004 sales of $20.7 billion. We expect the higher sales this year to result in earnings growth for 2005. In addition, we expect that 2005 spending for fixed assets will be in the range of $875 million to $925 million.
Magna, the most diversified automotive supplier in the world, designs, develops and manufactures automotive systems, assemblies, modules and components, and engineers and assembles complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks in North America, Europe, Mexico, South America and Asia. Our products include: automotive interior and closure components, systems and modules through Intier Automotive Inc.; metal body systems, components, assemblies and modules through Cosma International; exterior and interior mirror and engineered glass systems through Magna Donnelly; fascias, front and rear end modules, plastic body panels, exterior trim components and systems, greenhouse and sealing systems, and lighting components through Decoma International Inc.; various engine, transmission and fueling systems and components through Tesma International Inc.; a variety of drivetrain components through Magna Drivetrain; and complete vehicle engineering and assembly through Magna Steyr.
Magna has approximately 81,000 employees in 219 manufacturing operations and 49 product development and engineering centres in 22 countries.
------------------------------------------------------------------------- We will hold a conference call for interested analysts and shareholders to discuss our fourth quarter results on Monday, February 28, 2005 at 6:00 p.m. EST. The conference call will be co-chaired by Mark T. Hogan, President and Vincent J. Galifi, Executive Vice-President and Chief Financial Officer. The number to use for this call is 1-800-377-5794. The number for overseas callers is 1-416-641-6677. Please call in 10 minutes prior to the call. We will also webcast the conference call at www.magna.com. The slide presentation accompanying the conference call will be on our website Monday afternoon prior to the call. For further information, please contact Vincent J. Galifi or Louis Tonelli at 905-726-7100. For teleconferencing questions, please call 905-726 7103. -------------------------------------------------------------------------
This press release may contain statements that, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of applicable securities legislation. Forward- looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or economic performance, or the assumptions underlying any of the foregoing. Any such forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks, assumptions and uncertainties. These risks, assumptions and uncertainties principally relate to the risks associated with the automotive industry and include those items listed in the attached Management's Discussion and Analysis of Results of Operations and Financial Position. In addition, for a more detailed discussion, reference is made to the risks, assumptions, uncertainties and other factors set out in our Annual Information Form filed with the Canadian Securities Commissions and our annual report on Form 40-F filed with the United States Securities and Exchange Commission, and subsequent filings. In evaluating forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward- looking statements to reflect subsequent information, events, results or circumstances or otherwise.
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For further information about Magna, please see our website at
www.magna.com. Copies of financial data and other publicly filed
documents are available through the internet on the Canadian Securities
Administrators' System for Electronic Document Analysis and Retrieval
(SEDAR) which can be accessed at www.sedar.com.
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MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Unaudited)
(United States dollars in millions, except per share figures)
Three months ended Year ended
December 31, December 31,
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Note 2004 2003 2004 2003
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(restated (restated
note 2) note 2)
Sales $ 5,653 $ 4,623 $20,653 $15,345
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Cost of goods sold 10 4,880 3,940 17,696 12,806
Depreciation and
amortization 173 137 598 506
Selling, general and
administrative 10,12,13 314 279 1,186 1,007
Interest expense
(income), net 2 (3) (5) (13)
Equity income (4) (6) (14) (16)
Impairment charges 5 36 17 36 17
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Operating income 252 259 1,156 1,038
Other loss 3 - - - (6)
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Income from continuing
operations before
income taxes and
minority interest 252 259 1,156 1,032
Income taxes 8 72 107 398 373
Minority interest 2 13 66 72
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Net income from
continuing operations 178 139 692 587
Net loss from
discontinued
operations - MEC 3,4 - - - (67)
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Net income $ 178 $ 139 $ 692 $ 520
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Financing charges on
Preferred Securities and
other paid in capital $ (1) $ (5) $ (16) $ (20)
Foreign exchange gain on
redemption of
Preferred Securities 6 - - 18 -
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Net income available
to Class A Subordinate
Voting and Class B
Shareholders 177 134 694 500
Retained earnings,
beginning of period 2,794 2,284 2,390 2,570
Dividends on Class A
Subordinate Voting
and Class B Shares (36) (34) (143) (130)
Distribution of
MID shares 3 - - - (552)
Adjustment for change
in accounting policy
related to asset
retirement obligation 2 - - (6) (4)
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Retained earnings,
end of period $ 2,935 $ 2,384 $ 2,935 $ 2,384
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Earnings per Class A
Subordinate Voting
or Class B Share from
continuing operations
Basic $ 1.82 $ 1.37 $ 7.17 $ 5.91
Diluted $ 1.81 $ 1.36 $ 7.13 $ 5.89
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Earnings per Class A
Subordinate Voting
or Class B Share
Basic $ 1.82 $ 1.37 $ 7.17 $ 5.21
Diluted $ 1.81 $ 1.36 $ 7.13 $ 5.19
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Cash dividends paid per
Class A Subordinate
Voting or Class B Share $ 0.38 $ 0.34 $ 1.48 $ 1.36
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Average number of
Class A Subordinate
Voting and Class B
Shares outstanding
during the period
(in millions):
Basic 96.8 96.4 96.7 95.9
Diluted 97.3 97.0 97.3 96.3
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(United States dollars in millions)
Three months ended Year ended
December 31, December 31,
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Note 2004 2003 2004 2003
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(restated (restated
note 2) note 2)
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income from
continuing operations $ 178 $ 139 $ 692 $ 587
Items not involving
current cash flows 199 188 809 701
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377 327 1,501 1,288
Changes in non-cash
operating assets
and liabilities (179) 534 (95) (72)
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198 861 1,406 1,216
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INVESTMENT ACTIVITIES
Fixed asset additions (328) (302) (859) (801)
Purchase of subsidiaries 7 - (33) (417) (41)
Decrease (increase)
in investments (2) (9) 4 -
Increase in other assets (46) (93) (81) (210)
Proceeds from disposition 57 25 79 50
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(319) (412) (1,274) (1,002)
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FINANCING ACTIVITIES
Net issues (repayments)
of debt 7 (27) (38) 183 73
Redemption of Preferred
Securities 6 - - (300) -
Preferred Securities
distributions - (6) (19) (26)
Repayments of debentures'
interest obligation (1) (2) (6) (6)
Issue of subordinated
debentures by subsidiaries - - - 66
Issues of Class A
Subordinate Voting Shares - 4 26 42
Issues of shares by
subsidiaries 12 3 25 16
Dividends paid to
minority interests (8) (5) (22) (16)
Dividends (35) (32) (142) (147)
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(59) (76) (255) 2
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Effect of exchange rate
changes on cash and
cash equivalents 98 88 114 191
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Net increase (decrease) in
cash and cash equivalents
during the period (82) 461 (9) 407
Cash and cash equivalents,
beginning of period 1,601 1,067 1,528 1,121
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Cash and cash equivalents,
end of period $ 1,519 $ 1,528 $ 1,519 $ 1,528
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(United States dollars in millions)
December 31, December 31,
Note 2004 2003
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(restated
note 2)
ASSETS
Current assets
Cash and cash equivalents $ 1,519 $ 1,528
Accounts receivable 3,276 2,615
Inventories 1,376 1,116
Prepaid expenses and other 110 112
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6,281 5,371
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Investments 139 127
Fixed assets, net 3,967 3,313
Goodwill 7 747 505
Future tax assets 195 231
Other assets 7 280 317
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$ 11,609 $ 9,864
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness 9 $ 136 $ 298
Accounts payable 3,006 2,471
Accrued salaries and wages 449 368
Other accrued liabilities 350 244
Income taxes payable 36 19
Long-term debt due within one year 84 35
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4,061 3,435
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Deferred revenue 70 80
Long-term debt 7,9 768 267
Debentures' interest obligation 38 41
Other long-term liabilities 240 230
Future tax liabilities 288 280
Minority interest 12,16 702 613
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6,167 4,946
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Shareholders' equity
Capital stock 11
Class A Subordinate Voting Shares
(issued: 2004 - 95,850,377;
2003 - 95,310,518) 1,610 1,587
Class B Shares
(convertible into Class A
Subordinate Voting Shares)
(issued: 2004 - 1,093,983;
2003 - 1,096,509) - -
Preferred Securities 6 - 277
Other paid-in capital 75 68
Contributed surplus 12 16 3
Retained earnings 2,935 2,384
Currency translation adjustment 806 599
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5,442 4,918
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$ 11,609 $ 9,864
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Commitments and contingencies (note 9 and 14)
See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions,
except per share figures, unless otherwise noted)
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1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in U.S. dollars following Canadian
generally accepted accounting policies, as well as following the
accounting policies as set out in the 2003 annual consolidated
financial statements, except those accounting changes set out in
note 2.
The unaudited interim consolidated financial statements do not
conform in all respects to the requirements of generally accepted
accounting principles for annual financial statements. Accordingly,
these unaudited interim consolidated financial statements should be
read in conjunction with the 2003 annual consolidated financial
statements.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at December 31, 2004 and the results of operations
and cash flows for the three-month periods and years ended December
31, 2004 and 2003.
2. ACCOUNTING CHANGE
(a) Asset Retirement Obligation
In December 2003, the Canadian Institute of Chartered Accountants
("CICA") issued Handbook Section 3110, "Asset Retirement
Obligations", which establishes standards for the recognition,
measurement and disclosure of asset retirement obligations and
the related asset retirement costs. The Company adopted these new
recommendations effective January 1, 2004 on a retroactive basis.
The retroactive changes to the consolidated balance sheet as at
December 31, 2003 were as follows:
Increase in fixed assets $ 13
Increase in future tax assets 2
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Increase in other long term liabilities $ 23
Decrease in minority interest (1)
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Decrease in retained earnings $ (6)
Decrease in currency translation adjustment (1)
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The impact of this accounting policy change on reported net
income for the three-month period and year ended December 31,
2004 and 2003 was not material.
(b) Revenue Recognition
During the year ended December 31, 2004, 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. 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 and engineering services can be accounted for as a
separate revenue element only in circumstances where the tooling
and engineering 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 or vehicle assembly. The adoption
of EIC-142 did not have a material effect on the Company's
revenue or net income for the three month period and year ended
December 31, 2004.
3. DISTRIBUTION OF MID SHARES
On August 19, 2003, Magna shareholders approved the distribution to
shareholders of 100% of the outstanding shares of MI Developments
Inc. ("MID"), a wholly owned subsidiary of the Company. MID owns
substantially all of Magna's automotive real estate and the Company's
former controlling interest in Magna Entertainment Corp. ("MEC"). On
September 2, 2003, the Company distributed 100% of MID's Class A
Subordinate Voting and Class B Shares to shareholders of record as of
August 29, 2003 and, accordingly, no longer has any ownership
interest in MID and MEC.
As required by CICA Handbook Section 3475, "Disposal of Long-Lived
Assets and Discontinued Operations" ("CICA 3475"), the Company
recognized a non-cash impairment loss at the date of the distribution
equal to the excess of the Company's carrying value of the
distributed assets over their fair values on the distribution date.
The Company recorded impairment losses of $68 million related to MEC
and $6 million related to certain real estate properties of MID. The
impairment evaluation was completed on an individual asset basis for
the real estate properties of MID and based on an assessment of the
fair value of MID's controlling interest in MEC.
Immediately prior to the distribution of the MID shares, the Company
increased the stated capital of its Class B Shares by way of a
transfer from retained earnings of $10 million. On August 29, 2003,
the Company recorded the distribution of the MID shares as a
reduction of shareholders' equity of $1,492 million, representing
Magna's net investment in MID, after the impairment charges described
above, plus costs related to the distribution. The distribution was
structured as a return of stated capital of the Class A Subordinate
Voting and Class B Shares of $939 million and $1 million,
respectively. The remaining reduction in shareholders' equity has
been recorded as a charge to retained earnings of $552 million.
In accordance with CICA 3475, the financial results of MEC have been
disclosed as discontinued operations until August 29, 2003 (note 4).
However, because Magna and its operating subsidiaries will continue
to occupy their facilities under long-term leases with MID, the
operations of the real estate business of MID cannot be reflected as
discontinued operations. Therefore, the results of the real estate
business are disclosed in continuing operations in the consolidated
financial statements until August 29, 2003.
4. DISCONTINUED OPERATIONS - MEC
The Company's revenues and expenses, and cash flows, and assets,
liabilities and equity related to MEC are as follows:
For the eight
months ended
August 29, 2003
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Statement of income
Sales $ 525
Costs and expenses 520
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Operating income 5
Impairment loss recorded on distribution (note 3) (68)
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Loss before income taxes and minority interest (63)
Income taxes 3
Minority interest 1
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Net loss $ (67)
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Statement of Cash Flows:
Cash provided from (used for):
Operating activities $ 18
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Investment activities $ (59)
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Financing activities $ 99
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5. GOODWILL, INTANGIBLE ASSETS AND LONG-LIVED ASSETS
In conjunction with the Company's annual goodwill and indefinite life
intangible asset impairment analysis, and other indicators of
impairment, the Company also assessed the recoverability of its
long-lived assets at certain operations.
During the three-month period ended December 31, 2004, Decoma
International Inc. ("Decoma"), a subsidiary of the Company, recorded
an asset impairment of $16 million relating to its plan to cease
anodizing operations at its Anotech facility and transferred this
business to its Mytox and Rollstamp facilities.
During the three-month period ended December 31, 2004, Decoma also
identified issues relating to its Prometall metal trim assets and
Decotrim extrusion assets. The issues surround recurring losses that
are projected to continue throughout the current business planning
period as a result of existing sales levels and limited sales growth
prospects relative to certain assets at these facilities. An asset
impairment of $20 million was recorded in respect of the specifically
identified assets at these facilities. The operations of Prometall
and Decotrim will continue in the normal course.
During the three-month period ended December 31, 2003, Decoma
identified a number of indicators of United Kingdom long-lived asset
impairment including the continuation of projected operating losses,
uncertain long-term production volumes for the United Kingdom market
in general which affect certain of Decoma's existing programs, and
excess paint capacity in the United Kingdom market. These and other
indicators of impairment required Decoma to assess its United Kingdom
asset base for recoverability. Estimated discounted future cash flows
were used to determine the amount of the writedown. The result was a
writedown of $12 million of certain of the assets of Decoma's Sybex
facility.
During the three-month period ended December 31, 2003, Decoma
completed, and committed to, a plan to consolidate its continental
Europe paint capacity. This plan entailed shutting down Decoma's
Decoform paint line in Germany and transferring Decoform's painted
trim and fascia business to Decoma's newer paint lines in Germany and
Belgium. The consolidation required the writedown of the carrying
value of the Decoform paint line by $5 million.
As a result of cumulative losses in Belgium, Germany, and the United
Kingdom the impairment charges for operations in these countries have
not been tax benefited.
6. REDEMPTION OF PREFERRED SECURITIES
In September 2004, the Company redeemed all of the Preferred
Securities for cash at a price equal to 100% of the principal amount
plus accrued and unpaid interest thereon to, but excluding, the date
of redemption. On redemption, the Company recognized a foreign
exchange gain of $18 million, which was recorded directly in retained
earnings. In accordance with the recommendations of the CICA, the
foreign exchange gain of $18 million has been recorded as income
available to Class A Subordinate Voting or Class B Shareholders and
reflected in the calculation of basic and diluted earnings per share.
7. ACQUISITIONS
The following acquisitions were accounted for using the purchase
method:
Acquisitions in the year ended December 31, 2004
(a) On September 29, 2004, the Company completed the acquisition of
the worldwide operations of DaimlerChrysler Corporation's ("DCC")
wholly owned subsidiary, New Venture Gear, Inc. ("NVG"). NVG is a
leading supplier of transfer cases and other drivetrain products,
with 2003 sales of approximately $1.5 billion. Its customers
include DaimlerChrysler, General Motors, Ford, Volkswagen and
Porsche. The business consists of a 1.8 million square foot
leased manufacturing facility in Syracuse, New York, a 95,000
square foot manufacturing facility in Roitzsch, Germany, and a
leased research and development centre and sales office in Troy,
Michigan.
The transaction involved the creation of a new joint venture
named New Process Gear, Inc. ("NPG") that acquired the
manufacturing assets and now operates the manufacturing facility
in Syracuse. Magna currently owns 80% of the NPG joint venture
and DCC owns the remaining 20% interest. Magna is consolidating
100% of NPG from the date of closing and accounting for DCC's
remaining interest as debt, since such interest will be purchased
by Magna at a fixed and predetermined price.
Total consideration for the acquisition of 100% of NVG amounted
to $428 million, subject to post-closing adjustments. The
purchase price was satisfied with a combination of $348 million
in cash (net of cash acquired of $3 million) and $80 million in
zero-coupon notes payable to DCC, which have a face value of
$95 million and are due in December 2008.
In connection with the NVG acquisition, Magna issued five series
of senior unsecured zero-coupon notes with an aggregate issue
price of Cdn$365 million ($287 million on issue date) and an
aggregate amount due at maturity of Cdn$415 million. The notes,
which mature at various dates to December 2008, were sold in
Canada on an underwritten private placement basis.
The excess of the purchase price for NVG over the book value of
the net assets acquired of $132 million has been tentatively
recorded as goodwill pending finalization of the purchase price
allocation.
(b) On January 2, 2004, Tesma International Inc. ("Tesma"), a
subsidiary of the Company, completed the acquisition of Davis
Industries Inc. ("Davis"). Davis produces stamped powertrain
components and assemblies at three manufacturing facilities in
the United States. For the fiscal year ended September 30, 2003,
Davis reported sales of approximately $130 million.
The total consideration for the acquisition of all the
outstanding shares of Davis amounted to $47 million, consisting
of $45 million paid in cash (which was held in escrow at December
31, 2003) and the issuance of a five-year, $2 million note
bearing interest at prime plus 1% per annum. Long-term debt of
$22 million was also assumed on the acquisition. Goodwill
recorded on the acquisition amounted to $40 million.
(c) During 2004, the Company also completed a number of small
acquisitions which include a number of manufacturing facilities
and engineering centres. The total consideration for the above
noted acquisitions amounted to approximately $102 million,
consisting of $69 million paid in cash and $33 million of assumed
debt.
The purchase price allocations for these acquisitions are preliminary
and adjustments to the purchase price and related preliminary
allocations will occur as a result of obtaining more information
regarding asset valuations, liabilities assumed, purchase price
adjustments pursuant to the purchase agreements, and revisions of
preliminary estimates of fair value made at the date of purchase.
Acquisition in the year ended December 31, 2003
During 2003, the Company completed a number of small acquisitions
which include a tooling facility and a number of manufacturing
facilities for total consideration of $46 million, consisting of cash
paid of $41 million and a deferred payment of $5 million. The net
effect on the Company's consolidated balance sheet was an increase in
non-cash operating assets and liabilities of $12 million, fixed
assets of $30 million, goodwill of $6 million and long-term debt of
$2 million.
8. INCOME TAXES
During the three-month period ended December 31, 2004, the Company
recorded a future income tax benefit of $6 million related to the
decrease in enacted tax rates in foreign jurisdictions.
During the three-month period ended December 31, 2003, the Company
recorded a future income tax charge of $10 million related to the
increase in enacted income tax rates in Canada.
9. DEBT AND COMMITMENTS
During September 2004, Decoma, replaced its $300 million 364 day
revolving credit facility with a $400 million three year term
facility maturing September 30, 2007. Accordingly, borrowings under
this facility have been recorded as long-term debt.
10. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses (income) as
follows:
Three months ended Year ended
December 31, December 31,
------------------- -------------------
2004 2003 2004 2003
---------------------------------------------------------------------
Defined benefit pension plans
and other(a) $ (15) $ 8 $ (1) $ 21
Termination and long service
arrangements 4 5 17 16
Retirement medical benefits plan 2 3 8 8
---------------------------------------------------------------------
$ (9) $ 16 $ 24 $ 45
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) The Magna, Intier Automotive Inc. ("Intier"), Decoma and Magna
Donnelly defined benefit pension plans in the United States have
been frozen at December 31, 2004. No further benefits will accrue
under the plans. This freeze will reduce service costs and
pension expense in 2005. The Magna Donnelly defined benefit
pension plan has a December 31, 2004 measurement date. As a
result of freezing the plan a curtailment gain of $29 million was
recorded in cost of goods sold in the three-month period ended
December 31, 2004. The Magna, Intier and Decoma defined benefit
pension plans have a measurement date of September 30, 2004 and
therefore the impact of the freeze of these plans has not been
reflected in the accounting results.
11. CAPITAL STOCK
(a) The following table presents the maximum number of shares that
would be outstanding if all the dilutive instruments outstanding
at January 31, 2005 were exercised:
Class A Subordinate Voting and Class B Shares
outstanding at January 31, 2005 96.9
Stock options 3.7
-----------------------------------------------------------------
100.6
-----------------------------------------------------------------
-----------------------------------------------------------------
The above amounts exclude any Class A Subordinate Voting Shares
issuable pursuant to the proposed privatization transactions of
Tesma, Decoma and Intier (note 16), and also excludes any Class A
Subordinate Voting Shares issuable, only at the Company's option,
to settle the 7.08% Subordinated Debentures on redemption or
maturity. The number of shares issuable is dependent on the
trading price of Class A Subordinate Voting Shares at redemption
or maturity of the 7.08% Subordinated Debentures.
(b) The dollar amount of Class A Subordinate Voting Shares has been
reduced by $9 million, related to Class A Subordinate Voting
Shares that have not been released to certain executives of the
Company under a restricted stock arrangement. These shares have
been excluded in the calculation of basic earnings per share but
have been included in the calculation of diluted earnings per
share.
12. STOCK BASED COMPENSATION
(a) The following is a continuity schedule of options outstanding
(number of options in the table below are expressed in whole
numbers and have not been rounded to the nearest million):
2004 2003
------------------------------- --------------------------------
Options outstanding Options outstanding
-------------------- --------------------
Exercise Options Exercise Options
Options price(i) exercisable Options price(i) exercisable
No. Cdn$ No. No. Cdn$ No.
-------------------------------------------------------------------------
Beginning
of year 3,046,450 82.31 1,991,950 3,377,875 89.19 1,958,375
Granted 15,000 105.19 - 320,000 93.19 -
Exercised (117,600) 62.63 (117,600) (36,850) 66.55 (36,850)
Vested - - 43,625 - - 65,000
Cancelled (3,000) 97.47 - - - -
-------------------------------------------------------------------------
March 31 2,940,850 83.20 1,917,975 3,661,025 89.77 1,986,525
Granted - - - 40,000 93.17 -
Exercised (414,474) 71.43 (414,474) (64,150) 68.46 (64,150)
Vested - - - - - 8,000
Cancelled - - - (115,000) 104.08 (42,000)
-------------------------------------------------------------------------
June 30 2,526,376 85.13 1,503,501 3,521,875 89.73 1,888,375
Granted 100,000 100.69 - - - -
Exercised - - - (621,025) 74.83 (621,025)
Vested - - 44,375 - - 25,000
Option
repricing
related to
MID distri-
bution(b) - - - - (11.98) -
-------------------------------------------------------------------------
September
30 2,626,376 85.72 1,547,876 2,900,850 80.74 1,292,350
Granted - - - 225,000 105.05 -
Exercised - - - (79,400) 89.51 (79,400)
Vested - - 507,000 - - 779,000
Cancelled (12,000) 81.19 (12,000) - - -
-------------------------------------------------------------------------
December
31 2,614,376 85.74 2,042,876 3,046,450 82.31 1,991,950
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The exercise price noted above represents the weighted average
exercise price in Canadian dollars.
(b) As a result of the dilutive impact of the MID distribution
(note 3), all issued but unexercised options for Magna Class A
Subordinate Voting Shares were adjusted down by Cdn$11.98 in
accordance with the adjustment mechanism prescribed by the TSX.
The adjustment mechanism is intended to ensure that the
difference between the fair market value of a Class A Subordinate
Voting Share and the exercise price of the stock options after
the MID distribution is not greater than the difference between
the fair market value of a Class A Subordinate Voting Share and
the exercise price of the stock options immediately before the
MID distribution.
(c) Prior to 2003, the Company did not recognize compensation expense
for its outstanding fixed price stock options. Effective January
1, 2003, the Company adopted the fair value recognition
provisions of CICA 3870 for all stock options granted after
January 1, 2003. The fair value of stock options is estimated at
the date of grant using the Black Scholes option pricing model.
The weighted average assumptions used in measuring the fair value
of stock options, the weighted average fair value of options
granted or modified and the compensation expense recorded in
selling, general and administrative expense are as follows:
Three months ended Year ended
December 31, December 31,
------------------ --------------------
2004 2003 2004 2003
-----------------------------------------------------------------
Risk free interest rate - 3.75% 3.04% 4.06%
Expected dividend yield - 1.30% 1.70% 1.80%
Expected volatility - 32% 32% 30%
Expected time until
exercise - 4 years 4 years 4 years
Weighted average fair value
of options granted or
modified in period (Cdn$) $ - $ 24.13 $ 28.64 $ 24.13
Compensation expense
recorded in selling,
general and
administrative expenses $ 1 $ 2 $ 15 $ 4
-----------------------------------------------------------------
-----------------------------------------------------------------
During the three month period ended March 31, 2004, option
agreements with certain former employees of the Company were
modified, which resulted in a one time charge to compensation
expense of $12 million. This charge represents the remaining
measured but unrecognized compensation expense related to the
options granted during 2003, and the fair value at the date of
modification of all options that were granted prior to January 1,
2003.
If the fair value recognition provisions would have been adopted
effective January 1, 2002 for all stock options granted after
January 1, 2002, the Company's pro forma net income and pro forma
basic and diluted earnings per Class A Subordinate Voting or
Class B Share would have been as follows:
Three months ended Year ended
December 31, December 31,
----------------- ---------------------
2004 2003 2004 2003
-----------------------------------------------------------------
Pro forma net income $ 177 $ 137 $ 692 $ 516
Pro forma earnings per
Class A Subordinate
Voting or Class B Share
Basic $ 1.81 $ 1.36 $ 7.17 $ 5.17
Diluted $ 1.80 $ 1.35 $ 7.13 $ 5.15
-----------------------------------------------------------------
(d) The Company has awarded to certain executives an entitlement to
Class A Subordinate Voting Shares of the Company and its public
subsidiaries in the form of restricted stock. Such shares become
available to the executives, subject to acceleration on death and
disability, after an approximate four-year holding period,
provided certain conditions are met, and are to be released in
equal amounts over a 10-year period, subject to forfeiture under
certain circumstances. The fair value of the restricted stock
grant is amortized to compensation expense from the effective
date of the grant to the final vesting date. At December 31,
2004, unamortized compensation expense related to the restricted
stock arrangements was $36 million (2003 - $17 million) and has
been presented as a reduction of shareholders' equity and
minority interest.
The Company has also awarded 112,072 restricted share units to an
executive, each of which is equivalent to one Magna Class A
Subordinate Voting Share. Such restricted share units will be
released to the executive, subject to acceleration on death and
disability, after an approximate five-year holding period,
provided certain conditions are met, and are to be released in
equal amounts over a 10-year period, subject to forfeiture under
certain circumstances. Upon the release of all or any portion of
the Restricted Share Units, the executive shall be entitled to
receive one Magna Class A Subordinate Voting Share for every
Restricted Share Unit Released. The executive shall be entitled
to receive all dividends in respect of the restricted share units
at an amount equivalent to the dividends payable on a Magna
Class A Subordinate Voting Share multiplied by the number of
restricted share units held.
(e) Contributed surplus consists of accumulated stock option
compensation expense less the fair value of options at the grant
date that have been exercised and reclassified to share capital
and the accumulated restricted stock compensation expense less
the portion of restricted stock that has been released to the
executives and reclassified to share capital. The following is a
continuity schedule of contributed surplus:
2004 2003
-----------------------------------------------------------------
Balance, beginning of year $ 3 $ -
Stock-based compensation expense 12 1
Exercise of options (1) -
-----------------------------------------------------------------
March 31 14 1
Stock-based compensation expense - 1
-----------------------------------------------------------------
June 30 14 2
Stock-based compensation expense 1 1
-----------------------------------------------------------------
September 30 15 3
Stock-based compensation expense 1 1
Exercise of options - (1)
-----------------------------------------------------------------
December 31 $ 16 $ 3
-----------------------------------------------------------------
-----------------------------------------------------------------
13. TRANSACTIONS WITH RELATED PARTIES
During the year ended December 31, 2004, MID provided project
management services to the Company in connection with the
construction of a new plant. In December 2004, the land and
building for this plant were sold to MID for $46 million and the
assumption of related development liabilities of $12 million,
representing the Company's cost of these assets. The land and
building have been leased back under a 17-year operating lease.
During the year ended December 31, 2004, the Company renewed its
agreements with MEC for the use of their golf course and
clubhouse meeting, dining and other facilities in Aurora, Ontario
and in Oberwaltersdorf, Austria for annual payments of
Cdn$5.0 million and (euro) 2.5 million, respectively, for a
period of 10 years ending December 31, 2014. The expense included
in the consolidated statements of income with respect to these
agreements for the year ended December 31, 2004 was $7 million
(for the period from August 29, 2003 to December 31, 2003 -
$2 million).
14. COMMITMENTS AND CONTINGENCIES
(a) On June 10, 2004, Intier was served with a statement of claim
issued in the Ontario Superior Court of Justice by C-MAC
Invotronics Inc., a subsidiary of Solectron Corporation. The
plaintiff is a supplier of electro-mechanical and electronic
automotive parts and components to Intier. The statement of claim
alleges, among other things:
- improper use by Intier of the plaintiff's confidential
information and technology in order to design and manufacture
certain automotive parts and components; and
- breach of contract related to a failure by Intier to fulfill
certain preferred sourcing obligations arising under a
strategic alliance agreement signed by the parties at the time
of the Company's disposition of the Invotronics business
division to the plaintiff in September 2000.
The plaintiff is seeking, among other things, compensatory
damages in the amount of Cdn$150 million and punitive damages in
the amount of Cdn$10 million. Despite the early stages of the
litigation, Intier believes it has valid defenses to the
plaintiff's claims and therefore intends to defend this case
vigorously.
(b) The Company and/or its subsidiaries Magna Donnelly and Intier,
have been named with Ford Motor Company as defendants in class
action proceedings in the Ontario Superior Court of Justice as
well as state courts in Alabama, Texas, North Carolina and
Florida as a result of Magna Donnelly's role as a supplier to
Ford of door handles and Intier's role as a supplier of door
latches, and in certain cases door latch assemblies, for the Ford
F-150, F-250, Expedition, Lincoln Navigator and Blackwood
vehicles produced by Ford between November 1995 and April 2000.
Class proceedings in Massachusetts and other states are
anticipated. In these proceedings, plaintiffs are seeking
compensatory damages in an amount to cover the cost of repairing
the vehicles or replacing the door latches, punitive damages,
attorney fees and interest. Each of the class actions have
similar claims and allege that the door latch systems are
defective and do not comply with applicable motor vehicle safety
legislation and that the defendants conspired to hide the alleged
defects from the end use consumer. These class proceedings are in
the early stages and have not been certified by any court. The
Company denies these allegations and intends to vigorously defend
the lawsuits, including taking steps to consolidate the state
class proceedings to federal court wherever possible. Given the
early stages of the proceedings, it is not possible to predict
their outcome.
15. SEGMENTED INFORMATION
Three months ended Three months ended
December 31, 2004 December 31, 2003
---------------------------- ----------------------------
Fixed Fixed
Total assets, Total assets,
sales EBIT(i) net sales EBIT(i) net
-------------------------------------------------------------------------
Public Automotive
Operations
Decoma
International
Inc. $ 711 $ (26) $ 713 $ 663 $ 21 $ 686
Intier
Automotive Inc. 1,406 70 589 1,422 43 550
Tesma
International
Inc. 352 17 398 298 33 307
Wholly Owned
Automotive
Operations
Magna Steyr 1,894 55 819 1,000 21 546
Other Automotive
Operations 1,335 110 1,373 1,272 114 1,156
Corporate and
other (45) 28 75 (32) 24 68
-------------------------------------------------------------------------
Total reportable
segments $ 5,653 $ 254 3,967 $ 4,623 $ 256 3,313
Current assets 6,281 5,371
Investments,
goodwill and
other assets 1,361 1,180
-------------------------------------------------------------------------
Consolidated
total assets $11,609 $ 9,864
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) EBIT represents operating income before interest income or expense
Year ended Year ended
December 31, 2004 December 31, 2003
---------------------------- ----------------------------
Fixed Fixed
Total assets, Total assets,
sales EBIT(i) net sales EBIT(i) net
-------------------------------------------------------------------------
Public Automotive
Operations
Decoma
International
Inc. $ 2,759 $ 79 $ 713 $ 2,426 $ 161 $ 686
Intier
Automotive
Inc. 5,487 231 589 4,654 136 550
Tesma
International
Inc. 1,377 111 398 1,102 110 307
Wholly Owned
Automotive
Operations
Magna Steyr 6,172 206 819 2,719 49 546
Other Automotive
Operations 5,024 436 1,373 4,591 444 1,156
Corporate and
other (166) 88 75 (147) 125 68
-------------------------------------------------------------------------
Total reportable
segments $20,653 $1,151 3,967 $15,345 $1,025 3,313
Current assets 6,281 5,371
Investments,
goodwill and
other assets 1,361 1,180
-------------------------------------------------------------------------
Consolidated
total assets $11,609 $ 9,864
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) EBIT represents operating income before interest income or expense
16. SUBSEQUENT EVENTS
On October 25, 2004, the Company announced that it has made separate
proposals to the respective boards of directors of Intier, Decoma and
Tesma, to acquire all the outstanding Class A Subordinate Voting
Shares of each subsidiary not owned by Magna. Each proposal, which
would be implemented by way of a court-approved plan of arrangement
under Ontario law, is independent and not conditional on completion
of the other transactions. In addition to court approval, each
transaction would require the approval of the shareholders of each
subsidiary, including a majority of votes cast by holders other than
Magna and its affiliates and other insiders.
(a) Tesma
On February 1, 2005, Tesma's shareholders approved a plan of
arrangement that became effective on February 6, 2005. Under the
terms of the arrangement agreement, shareholders of Tesma
received 0.44 of a Class A Subordinate Voting Share of Magna for
each Class A Subordinate Voting Share of Tesma or, at the
election of any shareholder of Tesma, cash.
Based on the volume-weighted average trading price ("VWAP") of
Magna's Class A Subordinate Voting Shares on the TSX over the
five trading days ended February 4, 2005, the purchase price for
the outstanding Class A Subordinate Voting Shares of Tesma not
owned by Magna was approximately Cdn.$759 million, which was
satisfied by issuing 6.7 million Magna Class A Subordinate Voting
shares and cash of approximately Cdn.$128 million.
(b) Decoma
On February 28, 2005, Decoma's shareholders approved a plan of
arrangement, which is expected to become effective on March 6,
2005. Under the terms of the arrangement agreement, shareholders
of Decoma will receive 0.1453 of a Class A Subordinate Voting
Share of Magna for each Class A Subordinate Voting Share of
Decoma or, at the election of any shareholder of Decoma, cash.
The aggregate cash payable to all electing Decoma shareholders is
capped at Cdn.$150 million.
Based on the closing price of Magna's Class A Subordinate Voting
Shares on the TSX on February 25, 2005, the total purchase price
for the outstanding Class A Subordinate Voting Shares of Decoma
not owned by the Company is approximately Cdn.$297 million.
When the plan of arrangement becomes effective, Decoma will
amalgamate with Magna. Decoma's credit facility requires the
consent of the lenders participating in the Decoma facility.
Consent of the lenders in the facility is currently in the
process of being obtained and it is anticipated that such consent
will be obtained in advance of the amalgamation date. Regardless
of whether consent is obtained, Magna plans to repay all the
outstanding debt under this facility within 30 days of the
amalgamation being completed. At December 31, 2004, long-term
debt includes $215 million related to this facility.
(c) Intier
On February 9, 2005, Magna and Intier announced that they had
entered into a definitive arrangement agreement that would allow
Intier shareholders to vote on whether Magna would acquire all
the outstanding Class A Subordinate Voting Shares of Intier not
owned by Magna.
Under the terms of the arrangement agreement, shareholders of
Intier will receive 0.41 of a Class A Subordinate Voting Share of
Magna for each Class A Subordinate Voting Share of Intier or, at
the election of any shareholder, cash. The aggregate cash payable
to all electing Intier shareholders in the proposed transaction
is capped at Cdn.$125 million.
Intier expects to hold a special meeting on March 30, 2005 and
expects that the arrangement, if approved by Intier's
shareholders, will become effective on April 3, 2005.
Based on the closing price of Magna's Class A Subordinate Voting
Shares on the TSX on February 25, 2005, the total purchase price
for the outstanding Class A Subordinate Voting Shares of Intier
not owned by the Company is approximately Cdn.$281 million.
In addition to the purchase price for the outstanding Class A
Subordinate Voting Shares of each subsidiary not owned by the
Company, Magna will assume responsibility for the existing stock
option agreements of Intier, Decoma and Tesma. If existing stock
options were exercised, a maximum of 2.5 million Magna Class A
Subordinate Voting Shares would be issued over the life of the option
agreements at a weighted average exercise price of approximately
Cdn.$56 per share. The Cdn.$100 million of Decoma convertible
debentures will also be modified to become convertible into Magna
Class A Subordinate Voting Shares at a fixed conversion price of
Cdn.$91.19 per share.
The acquisition of the minority interests in Tesma (56%) and Decoma
(27%), and the proposed acquisition of the minority interest in
Intier (15%), will be accounted for as step acquisitions under the
purchase method of accounting. The purchase price allocations for
these acquisitions will be based on the Company's incremental
interest in the fair value of the assets acquired and liabilities
assumed and the amount of goodwill arising from the respective
acquisitions has not been determined at this time.
17. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current period's method of presentation.
MAGNA INTERNATIONAL INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL POSITION
-------------------------------------------------------------------------
All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular amounts are in millions of U.S. dollars, except per share figures and content per vehicle, which are in U.S. dollars, unless otherwise noted. When we use the terms "we", "us", "our", the "Company" or "Magna", we are referring to Magna International Inc. and its subsidiaries and jointly controlled entities, unless the context otherwise requires.
This MD&A should be read in conjunction with the accompanying unaudited consolidated financial statements for the three months and year ended December 31, 2004, which are prepared in accordance with Canadian generally accepted accounting principles. This MD&A has been prepared as of February 28, 2005.
OVERVIEW
We are the most diversified automotive supplier in the world. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles. Our products and services are sold primarily to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia and South America. We supply our products and services through global product groups. Throughout 2004, three of our global product groups were publicly traded companies in which we had a controlling interest through voting securities. In October 2004, we announced our proposal to take each of our publicly traded subsidiaries private. As at February 28, 2005, we had completed the acquisition of all the outstanding Class A Subordinate Voting Shares of Tesma International Inc. ("Tesma"), and shareholders of Decoma International Inc. ("Decoma") had approved a plan of arrangement which is expected to become effective on March 6, 2005 subject to final court approval. A special shareholders meeting has been called for March 30, 2005 to allow Intier Automotive Inc. ("Intier") shareholders to vote on the proposed privatization arrangement. The privatization of Intier remains subject to shareholder and court approval, and completion of the related plan of arrangement. (see "SUBSEQUENT EVENTS" below).
Our global product groups as at December 31, 2004 were as follows:
Public Subsidiaries
- Decoma
- exterior components and systems which include fascias (bumper
systems), front and rear end modules, plastic body panels, exterior
trim components and systems, sealing and greenhouse systems and
lighting components
- Intier
- interior and closure components, systems and modules including
cockpit, sidewall, overhead and complete seating systems, seat
hardware and mechanisms, floor and acoustic systems, cargo
management systems, latching systems, glass moving systems, wiper
systems, power sliding doors and liftgates, mid-door and door
module technologies and electro-mechanical systems
- Tesma
- powertrain (engine, transmission and fuel) components, assemblies,
modules and systems
Wholly Owned Subsidiaries
- Magna Steyr
- Magna Steyr - complete vehicle assembly of low volume derivative,
specialty and other vehicles and complete vehicle design,
engineering, validation and testing services; and
- Magna Drivetrain - complete drivetrain technologies, four-wheel and
all-wheel drive systems, mass balancing systems and chassis
modules, including the operations of New Venture Gear acquired on
September 29, 2004
- Other Automotive Operations
- Cosma International ("Cosma") - stamped, hydroformed and welded
metal body systems, components, assemblies, modules, body-in-white
assemblies, chassis systems and complete suspension modules
- Magna Donnelly - exterior and interior mirror, interior lighting
and engineered glass systems, electro-mechanical systems and
advanced electronics
HIGHLIGHTS
2004 was a challenging year for the automotive industry. North American vehicle production declined slightly to 15.7 million units, while Western Europe experienced only modest growth in vehicle production to 16.6 million units. More importantly, certain key platforms on which we have high content experienced declines in production volumes during the year. As a result of increased global demand for steel, much of which was brought on by continued economic growth in China, steel prices rose dramatically, affecting operations throughout the automotive supply chain. Despite these challenges, in 2004 we benefited from the many programs we launched over the past couple of years. In addition to our financial achievements, we also made strategic investments in our business, including our management team, our products, our processes and our customers.
Our Shareholders
- During the year ended December 31, 2004, we achieved strong financial
results, including:
- Record sales of $20.7 billion
- Record operating income of $1.2 billion
- Record diluted earnings per share of $7.13
- In respect of the first quarter of 2004, our Board of Directors raised
our quarterly dividend to $0.38 per share, representing a 12% increase
over the prior level. This dividend increase underscores our strong
cash flow and the Board's confidence in our future.
- During September 2004, we redeemed all of our outstanding Preferred
Securities for $300 million in cash. Redeeming these Preferred
Securities will result in an annual reduction in financing charges of
approximately $17 million, which will be partially offset by lower
interest income earned on our cash balances. The redemption is
expected to result in an annual increase in diluted earnings per share
and after tax cash flows of approximately $0.13 and $13 million,
respectively.
Investments in our business
- In October 2004, we announced proposals to take our publicly-traded
subsidiaries private, Intier, Decoma and Tesma. There are four key
elements to our rationale for these transactions:
(i) Improved strategic positioning, as we believe Magna will be
better positioned to meet our customers' needs for larger and
increasingly complex modules and systems;
(ii) Exploiting our various competencies, particularly our complete
vehicle expertise at Magna Steyr;
(iii) Better alignment of our product portfolio, where we have similar
capabilities in different automotive groups; and
(iv) Avoiding duplication of investment in infrastructure and
development costs, particularly as we expand into new markets
and further broaden our customer base
The total purchase price to complete the privatizations is expected to be approximately Cdn.$1.3 billion which is discussed more fully in "SUBSEQUENT EVENTS" below.
- In September 2004, we acquired the worldwide operations of
DaimlerChrysler Corporation's ("DCC") wholly owned subsidiary,
New Venture Gear, Inc. ("NVG"). NVG is a leading supplier of transfer
cases and other drivetrain products in North America, with 2003 sales
of approximately $1.5 billion. Its customers include DaimlerChrysler,
General Motors, Ford, Volkswagen and Porsche. We believe the
drivetrain is a product area that has significant potential for sales
growth, both from component outsourcing and eventually larger
drivetrain modules. The NVG business gives us additional capacity and
resources to take advantage of drivetrain growth opportunities. We
also believe that the acquired business has technologies and
capabilities that complement those of our existing Magna Drivetrain
business. The total purchase price for 100% of NVG's business amounted
to $428 million, subject to post-closing adjustments.
- We continued to invest in new and existing production facilities to
support our continued growth. Some of the investments made during 2004
included: a new stamping facility in Sonora, Mexico to support the
launch of the Ford Fusion and Mercury Milan; a new fascia moulding and
paint facility in Georgia and an expansion of our Class A stamping
facility in South Carolina, both to support the launch of the Mercedes
M-Class; and a new frame facility in Kentucky for the next generation
Ford Explorer and F-Series Super Duty pick-up truck. Some of the other
new programs for which we invested capital are General Motors' next
generation pick-up and sport utility vehicles, new and replacement
assembly programs at Magna Steyr, the Mercedes A-Class, the MINI
Convertible, the Volkswagen Toledo and the Chrysler 300/300C and
Dodge Magnum.
- We further strengthened our presence in the Asia Pacific Basin. In
Japan, we made two senior appointments to support our efforts in
growing our business with Japanese-based OEMs. In China, we started up
two new facilities and established a new sales and engineering office
in Shanghai. We acquired our joint venture partner's equity interest
at three of our established Chinese facilities, and now own 100% of
these operations. We are beginning to be rewarded for our efforts to
strengthen our relationship with the Asian-based OEMs. In 2004, we
recorded sales of $732 million to Asian-based OEMs, an increase of 22%
over 2003, and were awarded incremental business that is expected to
generate annual revenues of approximately $390 million.
- In June 2004, we acquired the engineering group of Duarte, which
includes four locations in France. The acquisition strengthens Magna
Steyr's position in the European market as a leading engineering and
development partner of the OEMs and is consistent with our strategy of
increasing our exposure to the French-based OEMs, Duarte's primary
customers.
Our management
- In August 2004, Mark Hogan joined Magna as President after spending
over 30 years with General Motors. His career included assignments as
President, GM do Brazil, as President of e-GM, as general manager for
the GM North America Car Group, Small Car Operations and most recently
was in charge of advanced vehicle development. At Magna, Mr. Hogan
draws on his extensive global experience with General Motors'
operations and his advanced vehicle development expertise to assist us
in our efforts to explore new markets and opportunities.
Our future
- We were awarded a substantial amount of business during 2004, which is
expected to grow our content per vehicle in the future. In North
America, significant awards included the frame and transfer case for
General Motors' next generation pick-up and sport utility vehicles,
the frame for the next generation of Ford Explorer and F-Series Super
Duty pick-up trucks, fascias for a new crossover utility vehicle to be
built by one of our traditional "Big Three" customers, and a water
management program for an Asian-based OEM. In Europe, significant
awards included the assembly program for Chrysler's popular 300C
passenger car for distribution in certain non-North American markets,
which will launch at Magna Steyr later this year, a contract for the
development and production of a new all-wheel drive system for future
Volkswagen models, and door panels and a door hardware module for a
high-volume vehicle program of one of our German-based customers.
- We expect North American vehicle production volumes in 2005 of
approximately 15.8 million units, which is modestly higher than 2004
production. In Western Europe, we expect 2005 vehicle production
volumes to be approximately 16.2 million units, 2% lower than 2004
production volumes. North American average dollar content per vehicle
is expected to be between $700 and $725 and European average dollar
content (excluding assembly sales) to be between $315 and $335.
Assembly sales for 2005 are expected to be in the range of $4.4 to
$4.7 billion. Based on our expected production volume and content,
total sales are expected to be in the ranges of $21.8 to
$23.1 billion. These forecasts are subject to the risks and
uncertainties as described below in the "INDUSTRY TRENDS AND RISKS"
section.
INDUSTRY TRENDS AND RISKS
A number of trends have had a significant impact on the global automotive industry in recent years, including:
- increased pressure by automobile manufacturers on automotive component
suppliers to reduce their prices and bear additional costs;
- globalization and consolidation of the automotive industry, including
both automobile manufacturers and automotive component suppliers;
- the evolving role of independent automotive component suppliers and
their progression up the "value chain";
- increased outsourcing and modularization of vehicle production;
- increased engineering capabilities required in order to be awarded new
business for more complex systems and modules;
- increased prevalence of lower volume "niche" vehicles built off
high-volume global vehicle platforms; and
- growth of Asian based automobile manufacturers in North American and
Europe.
The following are some of the more significant risks and associated trends relating to the automotive industry that could affect our ability to achieve our desired results:
- Changes in global economic conditions could reduce vehicle production
volumes, which could have a material adverse effect on our
profitability. The global automotive industry is cyclical and is
sensitive to changes in certain economic conditions such as interest
rates, consumer demand, oil and energy prices and international
conflicts.
- We have experienced significant price increases in 2004 for key
commodities used in our parts production, particularly steel and
resin, and expect such prices to be at elevated levels in 2005. Steel
price increases have been primarily the result of increased demand for
steel in China and a shortage of steel-making ingredients, such as
scrap steel, iron ore and coke coal. Surcharges on existing prices
have been imposed on us by our steel suppliers and other suppliers of
steel parts, with the threat of withheld deliveries by such suppliers
if the surcharges are not paid. We have pricing agreements with some
of our suppliers that reduce our exposure to steel pricing increases
and surcharges. However, certain suppliers have challenged these
agreements and, to the extent that they are successfully disputed,
terminated or otherwise not honoured by our suppliers, our exposure to
steel price increases and surcharges may increase. To the extent we
are unable to pass on to our customers the additional costs associated
with increased steel and resin prices, such additional costs could
have an adverse effect on our profitability.
- Increasing price reduction pressures from our customers could reduce
profit margins. We have entered into, and will continue to enter into,
long term supply arrangements with automobile manufacturers, which
provide for, among other things, price concessions over the supply
term. To date, these concessions have been somewhat offset by cost
reductions arising principally from product and process improvements
and price reductions from our suppliers. However, the competitive
automotive industry environment in North America, Europe and Asia has
caused these pricing pressures to intensify. A number of our customers
have demanded, and will continue to demand, additional price
concessions and retroactive price reductions. We may not continue to
be successful in offsetting price concessions through improved
operating efficiencies, reduced expenditures or reduced prices from
our suppliers. Such concessions could have a material adverse effect
on our profitability to the extent that these price reductions are not
offset through cost reductions or improved operating efficiencies.
- We are under increasing pressure to absorb more costs related to
product design, engineering and tooling, as well as other items
previously paid for directly by automobile manufacturers. In
particular, some automobile manufacturers have requested that we pay
for design, engineering and tooling costs that are incurred up to the
start of production and recover these costs through amortization in
the piece price of the applicable component. Our current contracts do
not generally include any guaranteed minimum purchase requirements.
If estimated production volumes are not achieved, the design,
engineering and tooling costs incurred by us may not be fully
recovered.
- Our customers are increasingly requesting that each of their suppliers
bear the cost of the repair and replacement of defective products
which are either covered under their warranty or are the subject of a
recall by them. If our products are, or are alleged to be, defective,
we may be required to participate in a recall of those products,
particularly if the actual or alleged defect relates to vehicle
safety. Warranty provisions are established based on our best estimate
of the amounts necessary to settle existing claims on product default
issues. Recall costs are costs incurred when we and/or our customers
decide, either voluntarily or involuntarily, to recall a product due
to a known or suspected performance issue. Costs typically include the
cost of the product being replaced, the customer's cost of the recall
and labour to remove and replace the defective part. Given the nature
of our products to date, we have not experienced significant warranty
or recall costs. However, we continue to experience increased customer
pressure to assume greater warranty responsibility. Currently we only
account for existing or probable claims, however, the obligation to
repair or replace such products may have an adverse effect on our
operations and financial condition.
- We are also subject to the risk of exposure to product liability
claims in the event that the failure of our products results in bodily
injury and/or property damage. We may experience material product
liability losses in the future and may incur significant costs to
defend such claims. Currently, we have bodily injury coverage under
insurance policies. This coverage will continue until August 2005 and
is subject to renewal on an annual basis. A successful claim against
us in excess of our available insurance coverage may have an adverse
effect on our operations and financial condition.
- Although we supply parts to most of the leading automobile
manufacturers, the majority of our sales are to three automobile
manufacturers. Moreover, while we supply parts for a wide variety of
vehicles produced in North America and Europe, we do not supply parts
for all vehicles produced, nor is the number or value of parts evenly
distributed among the vehicles for which we do supply parts. Shifts in
market share among vehicles or the early termination, loss,
renegotiation of the terms or delay in the implementation of any
significant production contract may have an adverse effect on our
sales and profit margins.
- Although our financial results are reported in U.S. dollars, a
significant portion of our sales and operating costs are realized in
Canadian dollars, euros, British pounds and other currencies. Our
profitability is affected by movements of the U.S. dollar against the
Canadian dollar, the British pound, the euro or other currencies in
which we generate our revenues. However, as a result of hedging
programs employed by us primarily in Canada, foreign currency
transactions are not fully impacted by the recent movements in
exchange rates. We record foreign currency transactions at the hedged
rate where applicable. Despite these measures, significant long term
fluctuations in relative currency values, in particular a significant
change in the relative values of the U.S. dollar, Canadian dollar,
euro or the British pound, may have an adverse effect on our financial
condition.
RESULTS OF OPERATIONS
Accounting Changes
Asset Retirement Obligation
In December 2003, the Canadian Institute of Chartered Accountants ("CICA") issued Handbook Section 3110, "Asset Retirement Obligations", ("CICA 3110") which establishes standards for the recognition, measurement and disclosure of asset retirement obligations and the related asset retirement costs. The standard requires us to estimate and accrue for the present value of our 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 we expect to vacate the premises resulting in both depreciation and interest charges in the consolidated statements of income. We adopted these new recommendations effective January 1, 2004 on a retroactive basis. The retroactive changes to the consolidated balance sheet as at December 31, 2003 was an increase in fixed assets, future tax assets and other long-term liabilities of $13 million, $2 million and $23 million, respectively, and a decrease in minority interest, retained earnings and currency translation adjustment of $1 million, $6 million and $1 million, respectively. The impact of this accounting policy change on our reported net income for the years ended December 31, 2004, 2003 and 2002 was not material.
Revenue Recognition
During the year, we 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 us on or after January 1, 2004. 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. The adoption of EIC-142 did not have a material effect on our reported revenue or net income for the year ended December 31, 2004.
Comparative Period Amounts European Production Sales
Our reporting of European production sales has historically included sales related to the complete vehicle assembly business carried out by our Magna Steyr group (see "Magna Steyr" discussion in "SEGMENTS" below). Effective with the first quarter of 2004, European production sales and complete vehicle assembly sales are presented separately. Complete vehicle assembly sales are calculated as follows:
- where assembly programs are accounted for on a value-added basis,
100% of the selling price to the OEM customer is included in complete
vehicle assembly sales; and
- where assembly programs are accounted for on a full-cost basis,
complete vehicle assembly sales include 100% of the selling price to
the OEM customer, less intercompany parts purchases made by our
assembly divisions. These intercompany purchases are included in
European production sales.
European production sales and complete vehicle assembly sales for the comparative periods have been restated to conform to the current period's presentation. We do not have any complete vehicle assembly sales in North America. For 2004 and prior periods presented, European average content per vehicle includes both production sales and complete vehicle assembly sales. Beginning in 2005, European average content per vehicle will include only European production sales.
MID Transaction
On September 2, 2003, we distributed 100% of the outstanding shares of MI Developments Inc. ("MID") to our shareholders (the "MID distribution"). MID owns substantially all of what was previously our automotive real estate and our former controlling interest in Magna Entertainment Corp. ("MEC"). As a result of the MID distribution, we no longer have any ownership interest in MID or MEC. In accordance with the recommendations of the CICA, the financial results of MEC are presented as discontinued operations for all periods. However, because we continue to occupy the automotive real estate under long- term leases with MID, the operations of MID's real estate business are presented as continuing operations in our unaudited consolidated financial statements until August 29, 2003, the date of the MID distribution. Throughout this MD&A, reference is made to the impact of the MID distribution where relevant. In particular, for periods after the MID distribution, our gross margin is negatively impacted because the lease expense reported in cost of goods sold by our divisions is no longer being offset by intercompany lease revenue earned by MID. For the period from January 1, 2003 to August 29, 2003, MID recorded $64 million of intercompany lease revenue.
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Average Foreign Exchange
For the year For the three
ended months ended
December 31, December 31,
-------------- ---------------
2004 2003 Change 2004 2003 Change
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1 Canadian dollar
equals U.S. dollars 0.770 0.716 + 8% 0.821 0.760 + 8%
1 euro equals U.S. dollars 1.245 1.132 + 10% 1.302 1.192 + 9%
1 British pound equals U.S.
dollars 1.834 1.635 + 12% 1.872 1.708 + 10%
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The preceding table reflects the average foreign exchange rates between the most common currencies in which we conduct business and our U.S. dollar reporting currency. The significant changes in these foreign exchange rates for the year and three months ended December 31, 2003 impacted the reported U.S. dollar amounts of our sales, expenses and income.
The results of operations whose functional currency is not the U.S. dollar are translated into U.S. dollars using the average exchange rates in the table above for the relevant period. Throughout this MD&A, reference is made to the impact of translation of foreign operations on reported U.S. dollar amounts where relevant.
Our results can also be affected by the impact of movements in exchange rates on foreign currency transactions (such as raw material purchases or sales denominated in foreign currencies). However, as a result of hedging programs employed by us primarily in Canada, foreign currency transactions in the current period have not been fully impacted by the recent movements in exchange rates. We record foreign currency transactions at the hedged rate where applicable.
Finally, holding gains and losses on foreign currency denominated monetary items, which are recorded in selling, general and administrative expenses, impact reported results.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2004
Sales
2004 2003 Change
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Vehicle Production Volumes
(millions of units)
North America 15.732 15.864 - 1%
Europe 16.558 16.428 + 1%
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Average Dollar Content Per Vehicle
North America $ 629 $ 529 + 19%
Europe $ 556 $ 331 + 68%
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Sales
North American Production $ 9,897 $ 8,398 + 18%
European Production 4,764 3,817 + 25%
European Complete Vehicle Assembly 4,450 1,614 + 176%
Tooling, Engineering and Other 1,542 1,516 + 2%
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Total Sales $ 20,653 $ 15,345 + 35%
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Total sales reached a record level, increasing 35% or $5.3 billion to $20.7 billion for 2004 compared to $15.3 billion for 2003.
North American Production Sales
North American production sales increased 18% or $1.5 billion to $9.9 billion for 2004 compared to $8.4 billion for 2003. This increase in production sales reflects a 19% increase in our North American average dollar content per vehicle over 2003, partially offset by a 1% decline in North American vehicle production volumes from 2003.
Our average dollar content per vehicle grew by 19% or $100 to $629 for 2004 compared to $529 for 2003. The increase relates primarily to the launch of new programs during or subsequent to the year ended December 31, 2003, acquisitions completed during 2004, including the acquisitions of the New Venture Gear business from DaimlerChrysler Corporation on September 29, 2004 (the "NVG acquisition") and Davis Industries Inc. ("Davis") in January 2004, an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar, partially offset by the impact of lower content and/or production on certain programs and customer price concessions.
New programs launched during or subsequent to the year ended December 31, 2003 include the Chevrolet Equinox, the GMC Canyon and Chevrolet Colorado, the Ford Freestar and Mercury Monterey, the Ford F-Series pick-up trucks, the Chevrolet Malibu and the Dodge Durango. The programs that experienced lower production and/or content include the General Motors GMT800 program, the GMC Envoy and Chevy Trailblazer programs and the Ford Explorer and Mercury Mountaineer.
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