Magna announces first quarter results
AURORA, ON, May 3, 2005 -- Magna International Inc. (TSX: MG.SV.A, MG.MV.B; NYSE: MGA) today reported sales, profits and earnings per share for the first quarter ended March 31, 2005.
-------------------------------------------------------------------------
THREE MONTHS ENDED
-------------------------------
March 31, 2005 March 31, 2004
--------------- ---------------
Sales $ 5,718 $ 5,103
Operating income $ 254 $ 321
Net income $ 172 $ 179
Diluted earnings per share $ 1.68 $ 1.84
-------------------------------------------------------------------------
All results are reported in millions of U.S. dollars, except per share
figures.
-------------------------------------------------------------------------
We posted sales of $5.7 billion for the first quarter ended March 31, 2005, an increase of 12% over the first quarter of 2004. The higher sales level in the first quarter of 2005 reflects increases of 19% in North American average dollar content per vehicle and 16% in European average dollar content per vehicle over the comparable quarter in 2004. The increase in average dollar content per vehicle in North America was largely attributable to the launch of new programs during or subsequent to the first quarter of 2004, acquisitions completed subsequent to the first quarter of 2004, the strengthening of the Canadian dollar against the U.S. dollar and increased production on certain programs. These increases were partially offset by lower vehicle production volumes and/or content on certain programs and incremental customer price concessions. The increase in average dollar content per vehicle in Europe was largely attributable to the launch of new programs during or subsequent to the first quarter of 2004, the strengthening of European currencies against the U.S. dollar, in particular the euro, and acquisitions completed subsequent to the first quarter of 2004. These increases were partially offset by lower production on certain programs and incremental customer price concessions. During the first quarter of 2005, North American vehicle production declined approximately 4% and European vehicle production declined approximately 5%, each from the comparable quarter in 2004.
Operating income was $254 million for the first quarter of 2005 compared to $321 million for the first quarter of 2004.
We earned net income for the first quarter ended March 31, 2005 of $172 million, compared to $179 million for the first quarter ending March 31, 2004.
Diluted earnings per share were $1.68 for the first quarter ended March 31, 2005, compared to $1.84 for the first quarter ending March 31, 2004.
During the three months ended March 31, 2005, we generated cash from operations before changes in non cash operating assets and liabilities of $362 million, and generated $162 million from non cash operating assets and liabilities. Total investment activities for the first quarter of 2005 were $307 million, including $136 million to purchase subsidiaries, $124 million in fixed asset additions, and a $47 million increase in other assets.
For further detail, see the "HIGHLIGHTS" section in the attached Management's Discussion and Analysis of Results of Operations and Financial Position.
OTHER MATTERS -------------
We also announced that our Board of Directors today declared a quarterly dividend with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares for the fiscal quarter ended March 31, 2005. The dividend of U.S. $0.38 per share is payable on June 15, 2005 to shareholders of record on May 27, 2005.
2005 OUTLOOK ------------ All amounts below exclude the impact of any future acquisitions.
Our results are expected to continue to be impacted by the negative conditions in the automotive industry, including production cutbacks, OEM price concessions, higher commodity costs and general economic uncertainty. In addition, our 2005 results are expected to be negatively impacted by certain unusual items, including restructuring charges arising from our previously announced privatizations, and rationalization and other charges associated with certain of our operations, including operations that supply MG Rover.
We expect 2005 average dollar content per vehicle to be between $710 and $735 in North America and between $315 and $335 in Europe. We expect 2005 European assembly sales to be between $4.3 billion and $4.6 billion. Further, we have assumed 2005 vehicle production volumes will be approximately 15.7 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. In addition, we expect that 2005 spending for fixed assets will be between $850 and $900 million.
In 2005, excluding the impact of the unusual items noted above, we anticipate a decline in operating income and growth in diluted earnings per share.
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, Asia and South America. Magna's products include: automotive interior and closure components, systems and modules through Intier Automotive Inc.; metal body systems, components, assemblies and modules through Cosma International; exterior and interior mirror and engineered glass systems through Magna Donnelly; fascias, front and rear end modules, plastic body panels, exterior trim components and systems, greenhouse and sealing systems and lighting components through Decoma International; various powertrain and drivetrain components through Magna Powertrain; and complete vehicle engineering and assembly through Magna Steyr.
Magna has over 82,000 employees in 223 manufacturing operations and 56 product development and engineering centres in 22 countries.
------------------------------------------------------------------------- We will hold a conference call for interested analysts and shareholders to discuss our first quarter results and other developments on Wednesday, May 4, 2005 at 8:00 a.m. EDT. 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 1 800 296 1907. The number for overseas callers is 1 416 620 7069. 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 Wednesday morning prior to the call. For teleconferencing questions, please call 905-726 7103. -------------------------------------------------------------------------
------------------------------------------------------------------------- Readers are asked to refer to the unaudited interim consolidated financial statements and the Management's Discussion and Analysis of Results of Operations and Financial Position attached to this Press Release for more detailed information regarding the financial results for the first quarter of fiscal 2005. 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. ------------------------------------------------------------------------- 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 average dollar content per vehicle, which are in U.S. dollars, unless otherwise noted. When we use the terms "we", "us", "our" 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 unaudited interim consolidated financial statements for the three months ended March 31, 2005, included in this press release, and the audited consolidated financial statements and MD&A for the year ended December 31, 2004, included in our 2004 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the three months ended March 31, 2005 and the audited consolidated financial statements for the year ended December 31, 2004 are both prepared in accordance with Canadian generally accepted accounting principles.
This MD&A has been prepared as at May 3, 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 to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia and South America.
In October 2004, we announced our intention to take each of our publicly traded subsidiaries private to increase our overall competitiveness. During the first quarter of 2005, we completed the privatization of Tesma International Inc. ("Tesma") and Decoma International Inc. ("Decoma"), and on April 3, 2005, we completed the privatization of Intier Automotive Inc. ("Intier"). The completion of these transactions will allow management the opportunity to evaluate alternative operating or group structures that could further enhance our competitiveness.
As at March 31, 2005, our global systems groups were as follows:
- 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
- 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
- Other Automotive Operations
- Cosma - stamped, hydroformed, and welded metal body systems,
components, assemblies, modules, body-in-white assemblies,
chassis systems and complete suspension modules; and
- Magna Donnelly - exterior and interior mirror, interior
lighting and engineered glass systems, electro mechanical
systems and advanced electronics
HIGHLIGHTS
-------------------------------------------------------------------------
The first quarter of 2005 proved to be a challenging quarter for Magna and the automotive supply base in general. Our sales increased 12% to $5.7 billion despite decreases in vehicle production in North America and Europe of 4% and 5%, respectively. Our operating income decreased to $254 million and earnings per share decreased to $1.68. The most significant issues that impacted our first quarter results include:
- Commodity Prices: During the quarter, we continued to pay more for
raw materials used in our production. Although a significant
portion of our steel, resins and other components are covered
under customer resale programs or long-term contracts, increased
commodity prices negatively impacted Magna's results in the first
quarter of 2005, as compared to the first quarter of 2004.
- Weak Production on Key Platforms: In the North American market, the
trend of declining production and market share of General Motors
("GM") and Ford, two of our largest customers, continued. Although
North American vehicle production volumes declined by only 4% in
the first quarter of 2005 compared to the first quarter of 2004,
GM and Ford production volumes declined by 13% and 10%,
respectively. More importantly, production volumes on certain of
our high content platforms declined even further. Production
volumes for the GMT800 platform, the Ford Freestar and Mercury
Monterey and the Ford Explorer and Mercury Mountaineer declined
22%, 38% and 35%, respectively in the first quarter.
- Pricing Pressures: Given the increasingly competitive nature of the
automotive industry, our customers continued their demands for
increased price concessions. In particular, the traditional Big
Three, burdened with overcapacity, deteriorating market share and
high labour costs (specifically healthcare, pension and other
post-employment benefits), continued their demand for significant
price concessions in the first quarter of 2005.
- MG Rover: On April 8, 2005, MG Rover Group Limited ("MG Rover") was
placed into administration, which is similar to Chapter 11
bankruptcy protection in the United States. As a result, we
recorded charges of approximately $15 million related to our MG
Rover assets and supplier obligations during the first quarter of
2005.
- New Facilities: In the first quarter of 2005, we continued to invest
in new and existing production facilities to support our continued
growth, including: a new stamping facility in Sonora, Mexico to
support the launch of the Ford Fusion, Mercury Milan and Lincoln
Zephyr; a new fascia moulding and paint facility in Georgia to
support the launch of the Mercedes M-Class; and a new frame
facility in Kentucky for the new Ford Explorer and F-Series Super
Duty pickup truck. Although we expect these programs to be
profitable as they launch and ramp-up, in the short term our
operating profits are negatively affected by these investments as
certain costs that we incur cannot be capitalized.
- Plant Rationalizations: During the first quarter of 2005, we incurred
costs to rationalize a facility in North America. In connection
with our recent privatizations and other industry issues, in the
near future we will complete an assessment of our global operating
capacity. As a result of this assessment we expect to develop and
implement a facility rationalization strategy that may include
plant consolidations and/or closures and that associated expenses
will have an adverse effect on our 2005 profitability.
Despite the negative events of the first quarter described above, we were pleased with the progress made in other areas, including:
- Privatizations: During the first quarter of 2005 we successfully
completed the privatizations of Tesma and Decoma, and on April 3,
2005 we completed the privatization of Intier. Total consideration
for the Class A Shares of Tesma, Decoma and Intier not owned by us
was approximately $1.1 billion, which was satisfied by issuing
approximately 11.9 million Magna Class A Subordinate Voting Shares
and cash of $185 million.
- Management: With the successful completion of the privatizations, our
management team was further strengthened. On April 4, 2005, we
announced that Donald Walker and Siegfried Wolf had been appointed
as co-Chief Executive Officers. Don and Sigi, along with Manfred
Gingl, Mark Hogan and Vincent Galifi, combine to create a strong
management partnership that has the complementary skills necessary
to lead us in our continuing evolution and to protect the
decentralized and entrepreneurial culture needed for Magna to
remain a leader in the global automotive industry. This culture,
combined with the commitment and dedication of our many managers
and employees, has been and will remain the cornerstone of our
success.
- Income Taxes: During the first quarter of 2005, we realized a
significant decrease in our effective income tax rate primarily as
a result of a decrease in income tax rates in Austria and Mexico,
a change in the mix of earnings, whereby more profits were earned
in lower taxed jurisdictions during the first quarter of 2005 than
in the first quarter of 2004, a reduction in losses not benefited,
and a favourable tax settlement. In addition to the lower income
tax rates, we believe that our effective income tax rate will
remain below historical levels as we expect to capitalize on
income tax planning strategies that may become available as a
result of the privatizations.
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;
- growth of Asian based automobile manufacturers in North America and
Europe; and
- growth of the automotive industry in China and other Asian countries.
The following are some of the more significant risks that could affect our ability to achieve our desired results:
- The global automotive industry is cyclical and sensitive to changes
in certain economic conditions, such as interest rates, consumer
demand, oil and energy prices and international conflicts. Our
customers are currently experiencing the impact of these conditions,
which could continue to adversely affect vehicle production volumes.
A continued reduction in vehicle production volumes could have a
material adverse effect on our profitability.
- We have experienced significant price increases for key commodities
used in our parts production, particularly steel and resin, and
expect such prices to remain 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 steel
prices continue to be imposed 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. Approximately half of
our steel is acquired through resale programs operated by the
automobile manufacturers, which does not expose us to steel price
increases and surcharges, and the balance is acquired through spot,
short-term and long-term contracts. We also have pricing agreements
with some of our suppliers that reduce our exposure to steel price
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 will increase. We
also sell scrap steel, which is generated through our parts
production process, and the revenues from these sales have reduced
some of our exposure to steel price increases in the past. However,
if scrap steel prices decline, while steel prices remain high, our
ability to reduce our exposure to steel price increases and
surcharges will diminish. To the extent we are unable to fully
mitigate our exposure to increased steel prices, or to pass on to our
customers the additional costs associated with increased steel and
resin prices, such additional costs could have a material 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. Some of our
customers have demanded, and in light of deteriorating automotive
industry conditions may continue to demand, additional price
concessions and retroactive price reductions. We may not be
successful in offsetting all of these 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 they are not
offset through cost reductions or improved operating efficiencies.
- We continue to be pressured to absorb 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. Some of these costs cannot be
capitalized, which could adversely affect our profitability until the
programs in respect of which they have been incurred have been
launched. In addition, since our contracts generally do not include
any guaranteed minimum purchase requirements, if estimated production
volumes are not achieved, these costs may not be fully recovered,
which could have an adverse effect on our profitability.
- Our customers continue to demand that we 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. 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 could have a material 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 could have an adverse effect on our operations and financial
condition.
- Although we supply parts to most of the leading automobile
manufacturers, a significant majority of our sales are to four
automobile manufacturers. A decline in production volume by these
customers, such as in the recent case of GM and Ford, could have an
adverse effect on our sales and profitability. 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 could
have an adverse effect on our sales and profitability.
- 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 and other currencies in
which we generate revenues and incur expenses. 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, could have an adverse
effect on our financial condition.
- Rising healthcare, pension and other post-employment benefit costs
are having a significant adverse effect on the profitability and
competitiveness of certain North American based automobile
manufacturers. Increased raw material prices, including steel and
resins, are also adversely affecting automobile manufacturers. Other
economic conditions, such as increased gasoline prices, could further
threaten sales of certain models, such as full-sized sport utility
vehicles. All of these conditions, coupled with a decline in market
share and overall production volumes, could threaten the financial
condition of some of our customers. Through our normal supply
relationship, we are exposed to credit risk with our customers and,
in the event that our customers are unable to satisfy their financial
obligations or seek protection from their creditors, as in the case
of MG Rover, we may incur additional expenses as a result of such
credit exposure, which could have a material adverse effect on our
profitability.
- In response to the deteriorating automotive industry conditions, we
may further rationalize some of our production facilities. Additional
expenses associated with such a rationalization, including plant
closings and relocations and employee severance costs, could also
have an adverse effect on our short-term profitability.
- In connection with the recent privatization of our former publicly
traded subsidiaries, we expect certain administrative functions will
be reorganized to streamline such functions in a manner consistent
with the stated objectives of the privatization. Such reorganization
could involve additional expenses, such as office closings and
relocations and employee severance costs, which could have an adverse
effect on our short term profitability.
RESULTS OF OPERATIONS
-------------------------------------------------------------------------
Accounting Change
Financial Instruments - Disclosure and Presentation
In 2003, the Canadian Institute of Chartered Accountants ("CICA") amended Handbook Section 3860 "Financial Instruments - Disclosure and Presentation" ("CICA 3860") to require certain obligations that may be settled with an entity's own equity instruments to be reflected as a liability. The amendments require us to present our Preferred Securities and Subordinated Debentures as liabilities, with the exception of the equity value ascribed to the holders' option to convert certain of the Subordinated Debentures into Class A Subordinate Voting Shares, and to present the related liability carrying costs as a charge to net income. We adopted these new recommendations effective January 1, 2005 on a retroactive basis.
The impact of this accounting policy change on the consolidated balance sheet as at December 31, 2004 was as follows:
Increase in other assets $ 2 ------------------------------------------------------------------------- Decrease in income taxes payables $ 1 Increase in long-term debt 216 Decrease in debentures' interest obligation 38 Decrease in minority interest 68 ------------------------------------------------------------------------- Decrease in other paid-in-capital $ 75 Increase in retained earnings 2 Decrease in currency translation adjustment 34 -------------------------------------------------------------------------
The impact of this accounting policy change on the consolidated statements of income and retained earnings for the three months ended March 31, 2004 was as follows:
Increase in interest expense $ 8 Decrease in income taxes (2) Decrease in minority interest (1) ------------------------------------------------------------------------- Decrease in net income (5) Decrease in financing charges on Preferred Securities and other paid-in-capital 5 ------------------------------------------------------------------------- Change in net income available to Class A Subordinate Voting and Class B shareholders $ - ------------------------------------------------------------------------- -------------------------------------------------------------------------
There was no impact of this accounting policy change on reported basic and diluted earnings per Class A Subordinate Voting or Class B Share for the three months ended March 31, 2005 and 2004.
Comparative Period Amounts European Average Dollar Content per Vehicle
Our reporting of European production sales and European average dollar content per vehicle 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 have been presented separately, however, European average dollar content per vehicle continued to include both European production sales and European complete vehicle assembly sales.
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.
Effective with the first quarter of 2005, European average dollar content per vehicle includes only European production sales. The comparative period European average dollar content per vehicle has been restated to conform to the current period's presentation. We do not have any complete vehicle assembly sales in North America.
Average Foreign Exchange
For the three months
ended March 31,
--------------------
2005 2004 Change
-------------------------------------------------------------------------
1 Canadian dollar equals U.S. dollars 0.816 0.758 + 8%
1 euro equals U.S. dollars 1.311 1.248 + 5%
1 British pound equals U.S. dollars 1.891 1.840 + 3%
-------------------------------------------------------------------------
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 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 these 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 denominated in foreign currencies). However, as a result of historical 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.
Sales
For the three months
ended March 31,
--------------------
2005 2004 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (millions of units)
North America 3.964 4.134 - 4%
Europe 4.116 4.342 - 5%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 724 $ 606 + 19%
Europe $ 322 $ 278 + 16%
-------------------------------------------------------------------------
Sales
North American Production $ 2,869 $ 2,504 + 15%
European Production 1,326 1,209 + 10%
European Complete Vehicle Assembly 1,126 1,012 + 11%
Tooling, Engineering and Other 397 378 + 5%
-------------------------------------------------------------------------
Total Sales $ 5,718 $ 5,103 + 12%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North American Production Sales
North American production sales increased 15% or $365 million to $2.9 billion for the first quarter of 2005 compared to $2.5 billion for the first quarter of 2004. This increase in production sales reflects a 19% increase in our North American average dollar content per vehicle, partially offset by a 4% decrease in North American vehicle production volumes.
Our average dollar content per vehicle grew by 19% or $118 to $724 for the first quarter of 2005 compared to $606 for the first quarter of 2004, primarily as a result of:
- the launch of new programs during or subsequent to the first quarter
of 2004, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Chrysler 300/300C and Dodge Magnum;
- the Chevrolet Equinox;
- the Cadillac STS;
- the Mercury Mariner;
- the Ford Mustang; and
- the Mercedes M-Class;
- the acquisition of the New Venture Gear, Inc. ("NVG") business in
September 2004;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar; and
- increased production on certain programs, including Chrysler minivans
and the Ford Escape and Mazda Tribute.
These increases were partially offset by:
- the impact of lower volumes and/or content on certain programs
including:
- the GMT800 platform;
- the Ford Freestar and Mercury Monterey;
- the Dodge Ram Pickup; and
- the Ford Explorer and Mercury Mountaineer; and
- incremental customer price concessions.
European Production Sales
European production sales increased 10% or $117 million to $1.3 billion for the first quarter of 2005 compared to $1.2 billion for the first quarter of 2004. This increase in sales reflects a 16% increase in our European average dollar content per vehicle, partially offset by a 5% decrease in European vehicle production volumes.
Our average dollar content per vehicle grew by 16% or $44 to $322 for the first quarter of 2005 compared to $278 for the first quarter of 2004, primarily as a result of:
- programs that launched during or subsequent to the first quarter of
2004, including the Land Rover Discovery, Mercedes A-Class, Mercedes
SLK and the BMW 1-Series;
- an increase in reported U.S. dollar sales due to the strengthening of
European currencies against the U.S. dollar, in particular the euro;
- the acquisition of the European operations of NVG; and
- an increase in production for the BMW X3, a program in which we have
production content in addition to the assembly contract.
These increases were partially offset by lower production for the Mercedes E-Class and incremental customer price concessions.
European Complete Vehicle Assembly Sales
European complete vehicle assembly sales increased 11% or $114 million to $1.1 billion for the first quarter of 2005 compared to $1.0 billion for the first quarter of 2004. This increase in sales reflects:
- an increase in volumes for the BMW X3;
- an increase in reported U.S. dollar sales as a result of the
strengthening of the euro against the U.S. dollar; and
- favourable trim levels on the Mercedes G-Class.
These increases were partially offset by:
- a reduction in volumes on our other assembly contracts, including the
Mercedes E-Class 4MATIC and the Saab 93 Convertible; and
- a substantial reduction of Jeep Grand Cherokee volumes, which had no
production in January and early February in preparation for the new
model launch in March 2005.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 5% or $19 million to $397 million for the first quarter of 2005 compared to $378 million for the first quarter of 2004. The increase was primarily the result of an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar and euro, each against the U.S. dollar. The major programs for which tooling revenue was recorded in the first quarter of 2005 were the Ford Fusion, Mercury Milan and Lincoln Zephyr in North America, and the Jeep Grand Cherokee in Europe. In the first quarter of 2004, the major programs for which tooling revenues were recorded were the Ford Explorer and the Ford Mustang. The level of tooling, engineering and other sales reflects our continued involvement in new production and assembly programs.
Gross Margin
Gross margin decreased $25 million to $725 million for the first quarter of 2005 compared to $750 million for the first quarter of 2004. Gross margin as a percentage of total sales also decreased to 12.7% for the first quarter of 2005 compared to 14.7% for the first quarter of 2004.
Gross margin as a percentage of sales was negatively impacted by:
- an increase in commodity prices, combined with lower scrap steel
prices;
- the decrease in production volumes for several of our high content
programs including the GMT800 platform, the Ford Freestar and Mercury
Monterey and the Ford Explorer and Mercury Mountaineer;
- inefficiencies at Decoma, primarily at its European facilities;
- the acquisition of the NVG business, which currently operates at
margins that are lower than the our consolidated average gross
margin;
- incremental customer price concessions;
- costs incurred at new facilities in preparation for upcoming launches
or for programs that have not fully ramped up production, including:
- a new frame facility in Kentucky for the next generation Ford
Explorer and F-Series Super Duty pickup trucks;
- a new stamping facility in Sonora, Mexico to support the launch
of the Ford Fusion, Mercury Milan and Lincoln Zephyr; and
- a new fascia moulding and paint facility in Georgia to support
the launch of the Mercedes M-Class;
- increased complete vehicle assembly sales for the BMW X3 since the
costs of this vehicle assembly contract are reflected on a full-cost
basis in the selling price of the vehicle;
- the write-down of our inventory related to MG Rover production and
charges for supplier obligations as a result of the appointment of
administrators for MG Rover in the United Kingdom; and
- the strengthening of the euro and British pound, each against the
U.S. dollar, since proportionately more of our consolidated gross
margin was earned in Europe during the first quarter of 2005 than in
the first quarter of 2004 and on average our European operations
operate at margins that are currently lower than our consolidated
average margin.
Partially offsetting these decreases in gross margin as a percentage of sales were:
- operational improvements at certain facilities;
- the closure during 2004 of certain underperforming divisions in
Europe; and
- incremental gross margin earned on new program launches.
Depreciation and Amortization
Depreciation and amortization costs increased 24% or $33 million to $168 million for the first quarter of 2005 compared to $135 million for the first quarter of 2004. The increase in depreciation and amortization for the first quarter of 2005 was primarily due to:
- the NVG acquisition;
- increased assets employed in the business to support future growth;
and
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the euro, Canadian dollar and British pound,
each against the U.S. dollar.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales decreased to 5.3% for the first quarter of 2005 compared to 5.7% for the first quarter of 2004. SG&A expenses increased $12 million to $305 million for the first quarter of 2005 compared to $293 million for the first quarter of 2004, primarily as a result of:
- an increase in reported U.S. dollar expenses due to the strengthening
of the euro and Canadian dollar, each against the U.S. dollar;
- increased SG&A spending as a result of the NVG acquisition;
- the write-down of accounts receivable from MG Rover as a result of
the appointment of administrators for MG Rover in the United Kingdom;
- costs to rationalize a facility in North America;
- higher infrastructure costs to support upcoming launches; and
- the expensing of capitalized bank facility fees as a result of the
cancellation of Decoma's term credit facility.
These increases were partially offset by:
- a one-time charge to compensation expense of $12 million recorded
during the first quarter of 2004 as a result of modifying option
agreements with certain former employees. The charge represented 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 the options that were granted prior to January 1,
2003; and
- charges recorded during the first quarter of 2004 with respect to the
closure of facilities in Europe.
Interest Expense
Interest expense decreased $6 million to $1 million for the first quarter of 2005 compared to $7 million for the first quarter of 2004, primarily as a result of:
- a reduction of interest expense related to the Preferred Securities
which were redeemed for cash in the third quarter of 2004; and
- a reduction in outstanding long-term debt as a result of the
repayments of government debt and other long term debt during 2004.
These reductions were partially offset by an increase in interest expense that has been accreted on the senior unsecured zero-coupon notes that were issued in connection with the NVG acquisition.
Operating Income
Operating income decreased 21% or $67 million to $254 million for the first quarter of 2005 compared to $321 million for the first quarter of 2004. The discussions above provide an analysis of the $67 million decrease in our operating income. In particular, on a comparable basis, our operating income was negatively impacted by:
- reduced volumes on certain high content GM and Ford programs;
- incremental price concessions;
- increased commodity prices;
- costs incurred at new facilities in preparation for upcoming launches
or for programs that have not fully ramped up production;
- operating inefficiencies at certain facilities;
- charges related to the appointment of administrators for MG Rover;
- costs to rationalize a facility in North America; and
- the expensing of capitalized bank facility fees.
Partially offsetting these decreases was the positive impact of:
- programs that launched during or subsequent to the first quarter of
2004;
- increased complete vehicle assembly sales;
- operational improvements at certain facilities;
- the one-time charge to compensation expense of $12 million recorded
in the first quarter of 2004; and
- charges recorded during the first quarter of 2004 with respect to the
closure of facilities in Europe.
Income Taxes
Our effective income tax rate on operating income (excluding equity income) decreased to 28.3% for the first quarter of 2005 from 37.8% for the first quarter of 2004. In the first quarter of 2005 the income tax rate was negatively impacted by charges recorded as a result of the appointment of administrators for MG Rover, which have not been fully tax-effected, and in the first quarter of 2004 the effective income tax rate was higher as a result of the $12 million stock option expense and charges recorded with respect to the closure of a facility in Europe, both of which have not been tax-effected.
Excluding these items, the effective income tax rate was 26.6% for the first quarter of 2005 and 35.9% for the first quarter of 2004. The decrease in the effective income tax rate is primarily the result of a decrease in income tax rates in Austria and Mexico, a change in the mix of earnings, whereby more profits were earned in lower taxed jurisdictions during the first quarter of 2005 than in the first quarter of 2004, a reduction in losses not benefited, and a favourable tax settlement.
Minority Interest
Minority interest expense decreased by $12 million or 52% to $11 million for the first quarter of 2005 compared to $23 million for the first quarter of 2004. The decrease in minority interest expense is primarily a result of:
- a decrease in net income at each of Tesma and Decoma for the
respective periods prior to privatization from the comparable periods
in 2004; and
- the elimination of minority interest obligations for Tesma and Decoma
for the periods after privatization.
Partially offsetting this reduction in earnings was an increase in net income at Intier, combined with a 1% increase in Intier's minority interest percentage from the first quarter of 2004 to the first quarter of 2005.
Net Income
Net income decreased 4% or $7 million to $172 million for the first quarter of 2005 compared to $179 million for the first quarter of 2004. The decrease in net income is a result of a $67 million decrease in operating income (see above), partially offset by decreases in income taxes and minority interest of $48 million and $12 million, respectively.
Earnings per Share
For the three months
ended March 31,
--------------------
2005 2004 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share
Basic $ 1.69 $ 1.85 - 9%
Diluted $ 1.68 $ 1.84 - 9%
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting
and Class B Shares outstanding (millions)
Basic 101.7 96.5 + 5%
Diluted 102.4 97.1 + 5%
-------------------------------------------------------------------------
Diluted earnings per share decreased 9% or $0.16 to $1.68 for the first quarter of 2005 compared to $1.84 for the first quarter of 2004. Included in the $0.16 reduction in diluted earnings per share are the following charges incurred in the first quarter of 2005 which totalled $0.17 per share:
- charges recorded as a result of the appointment of administrators for
MG Rover;
- costs incurred to rationalize a facility in North America; and
- the expensing of capitalized bank facility fees as a result of the
cancellation of Decoma's term credit facility.
These charges were partially offset by the following items incurred in the first quarter of 2004 which totalled $0.16:
- a one-time charge to compensation expense as a result of modifying
option agreements with certain former employees; and
- charges recorded during the first quarter of 2004 with respect to the
closure of facilities in Europe.
Excluding these items, the remaining $0.15 decrease in diluted earnings per share was a result of the decrease in net income as discussed above combined with an increase in the weighted average number of diluted shares outstanding during the quarter. The increase in the weighted average number of diluted shares outstanding was a result of:
- approximately 5.0 million additional shares that were included in the
weighted average number of shares outstanding as a result of the
privatization of Decoma and Tesma;
- 0.6 million additional stock options that were exercised during 2004
and the first quarter of 2005; and
- an increase in the number of options outstanding as a result of
assuming the Decoma and Tesma stock options.
This increase in the weighted average number of shares outstanding was partially offset by a lower average trading price for our Class A Subordinate Voting Shares, which results in less options becoming dilutive.
Return on Funds Employed
An important financial ratio that we use across all of our operating units to measure return on investment is return on funds employed. Return on funds employed ("ROFE") is defined as EBIT divided by the average funds employed for the past period. EBIT is defined as operating income as presented on our unaudited interim consolidated financial statements before net interest expense. Funds employed is defined as long term assets, excluding future tax assets, plus non-cash operating assets and liabilities. Non-cash operating assets and liabilities are defined as the sum of accounts receivable, inventory, income taxes recoverable and prepaid assets less the sum of accounts payable, accrued salaries and wages, other accrued liabilities, income taxes payable and deferred revenues.
ROFE for the first quarter of 2005 was 17.2%, a decrease from 27.1% for the first quarter of 2004. The decrease in ROFE can be attributed to:
- the NVG acquisition since the NVG business currently earns ROFE that
is below our consolidated average;
- the charges recorded as a result of the appointment of administrators
for MG Rover;
- the decrease in operating income associated with the reduction in
sales on certain programs; and
- increased costs incurred for new facilities in preparation of
upcoming launches since these programs require infrastructure costs
in advance of revenues and profits which reduces our consolidated
average ROFE, both in terms of increasing our funds employed as
investments are made in capital and in terms of increasing expenses
that cannot be capitalized.