Magna announces second quarter and year to date results
AURORA, ON, Aug. 10, 2005 -- Magna International Inc. (TSX: MG.SV.A, MG.MV.B; NYSE: MGA) today reported financial results for the second quarter and six month period ended June 30, 2005.
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2005 2004 2005 2004
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Sales $ 5,858 $ 5,113 $ 11,576 $ 10,216
Operating income $ 323 $ 331 $ 577 $ 652
Net income $ 225 $ 188 $ 397 $ 367
Diluted earnings per share $ 2.06 $ 1.93 $ 3.73 $ 3.77
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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 JUNE 30, 2005
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We posted record sales of $5.9 billion for the second quarter ended June 30, 2005, an increase of 15% over the second quarter of 2004. The higher sales level in the second quarter of 2005 reflects increases of 19% in North American average dollar content per vehicle and 16% in European average dollar content per vehicle, each over the comparable quarter in 2004. During the second quarter of 2005, North American vehicle production declined approximately 1% and European vehicle production declined approximately 3%, each from the comparable quarter in 2004. European complete vehicle assembly sales decreased 8% or $90 million to $1.05 billion for the second quarter of 2005 compared to $1.14 billion for the second quarter of 2004.
Operating income was $323 million for the second quarter of 2005 compared to $331 million for the second quarter of 2004.
We earned net income for the second quarter ended June 30, 2005 of $225 million, compared to $188 million for the second quarter ending June 30, 2004.
Diluted earnings per share were $2.06 for the second quarter ended June 30, 2005, compared to $1.93 for the second quarter ending June 30, 2004.
During the three months ended June 30, 2005, we generated cash from operations before changes in non-cash operating assets and liabilities of $401 million, and invested $272 million in non-cash operating assets and liabilities. Total investment activities for the second quarter of 2005 were $260 million, including $205 million in fixed asset additions, $33 million to purchase subsidiaries and a $22 million increase in other assets.
SIX MONTHS ENDED JUNE 30, 2005 ------------------------------
We posted record sales of $11.6 billion for the six months ended June 30, 2005, an increase of 13% over the comparable period in 2004. The higher sales level in the first six months of 2005 reflects increases of 19% in North American average dollar content per vehicle and 16% in European average dollar content per vehicle, each over the comparable period in 2004. During the first six months of 2005, North American vehicle production declined approximately 3% and European vehicle production declined approximately 4%, each from the comparable period in 2004. European complete vehicle assembly sales increased 1% or $24 million to $2.18 billion for the six months ended June 30, 2005 compared to $2.16 billion for the six months ended June 30, 2004.
Operating income was $577 million for the six months ended June 30, 2005 compared to $652 million for the comparable period in 2004.
We earned net income for the six months ended June 30, 2005 of $397 million, compared to $367 million for the comparable period in 2004.
Diluted earnings per share were $3.73 for the six months ended June 30, 2005, compared to $3.77 for the comparable period in 2004.
During the six months ended June 30, 2005, we generated cash from operations before changes in non-cash operating assets and liabilities of $763 million, and invested $110 million in non-cash operating assets and liabilities. Total investment activities for the first six months of 2005 were $567 million, including $329 million in fixed asset additions, $169 million to purchase subsidiaries and a $69 million increase in other assets.
A more detailed discussion of our consolidated financial results for the second quarter and six months ended June 30, 2005 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 -------------
Our Board of Directors yesterday declared a quarterly dividend with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares for the fiscal quarter ended June 30, 2005. The dividend of U.S. $0.38 per share is payable on September 15, 2005 to shareholders of record on August 31, 2005.
2005 OUTLOOK ------------
All amounts below exclude the impact of any potential future acquisitions.
Our results are expected to continue to be impacted by the negative conditions in the automotive industry, including weak automotive production, 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 rationalization and other charges associated with certain of our operations, including operations that supplied MG Rover, and restructuring charges arising from our recently completed privatizations.
We expect 2005 average dollar content per vehicle to be between $710 and $730 in North America and between $305 and $325 in Europe. We expect 2005 European complete vehicle assembly sales to be between $4.0 billion and $4.2 billion. Further, we have assumed 2005 vehicle production volumes will be approximately 15.7 million units in North America and approximately 16.1 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 complete vehicle assembly, tooling and other automotive sales, we expect our sales for 2005 to be between $21.6 billion and $22.6 billion, compared to 2004 sales of $20.7 billion. In addition, we expect that 2005 spending for fixed assets will be between $850 million and $900 million.
In 2005, excluding the impact of the unusual items noted above, we anticipate lower diluted earnings per share than 2004.
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; metal body systems, components, assemblies and modules; exterior and interior mirror and engineered glass systems; fascias, front and rear end modules, plastic body panels, exterior trim components and systems, greenhouse and sealing systems and lighting components; various powertrain and drivetrain components; and complete vehicle engineering and assembly.
Magna has approximately 82,000 employees in 220 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 second quarter results on Wednesday, August 10, 2005 at 8:30 a.m. EDT. The conference call will be chaired by Vincent J. Galifi, Executive Vice-President and Chief Financial Officer. The number to use for this call is 1-877-871-4105. 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. -------------------------------------------------------------------------
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.
------------------------------------------------------------------------- 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 and on the United States Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval System (EDGAR) which can be accessed at www.sec.gov. ------------------------------------------------------------------------- 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 and six months ended June 30, 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 and six months ended June 30, 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 August 9, 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 further enhance our overall competitiveness. During the first quarter of 2005, we completed the privatization of Tesma International Inc. ("Tesma") and Decoma International Inc. ("Decoma") and during the second quarter of 2005 we completed the privatization of Intier Automotive Inc. ("Intier"). The completion of these transactions has allowed management the opportunity to evaluate alternative operating structures that could further enhance our competitiveness. Currently, management has not yet completed the evaluation or implementation of these alternative operating structures. As a result, for the second quarter of 2005, our segmented information has been provided utilizing our former global systems groups, consistent with the first quarter of 2005. On April 4, 2005, we announced that Donald Walker and Siegfried Wolf had been appointed as co-Chief Executive Officers with primary responsibility for North America and Europe, respectively.
HIGHLIGHTS -------------------------------------------------------------------------
Compared to the second quarter of 2004, we continued to face significant challenges during the second quarter of 2005, including:
- higher commodity prices;
- comparatively lower production at General Motors ("GM") and Ford; and
- increased price concessions.
Despite these ongoing challenges, we reported solid results for the quarter. Our sales increased 15% or $745 million to $5.9 billion for the second quarter of 2005 compared to $5.1 billion for the second quarter of 2004, even though vehicle production volumes declined 1% in North America and 3% in Europe. Our operating income decreased 2% to $323 million and our diluted earnings per share increased 7% to $2.06.
The second quarter of 2005 was successful in terms of new and replacement business awards, with over $1 billion awarded. In particular, we made significant progress with the Asian-based OEMs, with over $150 million of new and replacement business awarded. Also during the second quarter of 2005, we successfully launched the assembly of the Chrysler 300 at our Magna Steyr facility in Graz, Austria. We now assemble seven different vehicles in one of the world's most flexible vehicle assembly plants.
The most significant issues that affected our results in the second quarter of 2005 included:
- Unusual Items: During the second quarter of 2005, we recorded certain
unusual items that affected our operating income and diluted earnings
per share, including:
- an $18 million ($0.16 per share) foreign currency gain on the
repatriation of funds from Europe;
- a $16 million ($0.09 per share) gain on disposal of a non-core
seat component facility in North America; and
- restructuring and impairment charges totalling $14 million ($0.12
per share) related substantially to three European facilities.
- Privatizations: During the second quarter of 2005, we successfully
completed the privatization of Intier. Total consideration paid for
the Class A Shares of Intier not owned by us was approximately
$202 million, which was satisfied by issuing approximately
2.3 million Magna Class A Subordinate Voting Shares and cash of
approximately $50 million.
Our operating results for the second quarter of 2005 were negatively
impacted by $8 million due to the amortization of fair value
increments (reflected in the preliminary purchase accounting) for the
privatizations. Offsetting the additional amortization was a
$27 million reduction in minority interest expense since no minority
interest expense was recorded in the second quarter of 2005 as a
result of the privatizations. Finally, our diluted earnings per share
were negatively impacted as a result of the increase in the weighted
average number of diluted shares outstanding due to the
privatizations, including:
- approximately 10.7 million Class A Subordinate Voting Shares
issued to complete the privatizations;
- approximately 1.1 million additional shares that are issuable as a
result of assuming Decoma's obligation for it's 6.5% Convertible
Subordinated Debentures; and
- an increase in the number of options outstanding as a result of
assuming the Tesma, Decoma and Intier stock options.
- Commodity Prices: During the quarter, we continued to pay more for
raw materials, including purchased components, used in our production
compared to the second quarter of 2004. Although steel prices have
recently begun to decline following a period of significant price
increases, and 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 our results
in the second quarter of 2005, as compared to the second quarter of
2004.
- Weak Production on Key Platforms: In the North American market, GM
and Ford production volumes declined by 11% and 6%, respectively,
even though North American vehicle production volumes declined by
only 1% in the second quarter of 2005 compared to the second quarter
of 2004. More importantly, production volumes on certain of our high
content platforms experienced significant declines, including:
- a 60% decline in Ford Freestar and Mercury Monterey volumes;
- a 30% decline in Ford Explorer and Mercury Mountaineer volumes;
- a 21% decline in Dodge Ram Pickup volumes;
- an 11% decline in Ford Escape and Mazda Tribute volumes; and
- a 6% decline in volumes for the GMT800 platform.
- Pricing Pressures: Given the increasingly competitive nature of the
automotive industry, we faced increased price concessions in the
second quarter of 2005 as compared to the second quarter of 2004.
- New Facilities: In the second quarter of 2005, we continued to invest
in new and existing production facilities to support our continued
growth, including: a new frame facility in Kentucky for the new Ford
Explorer and F-Series Super Duty pickup trucks; a new fascia moulding
and paint facility in Georgia to support the launch of the Mercedes M-
Class and R-Class; and a new stamping facility in Sonora, Mexico to
support the launch of the Ford Fusion, Mercury Milan and Lincoln
Zephyr. 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 are not capitalized.
- Plant Rationalizations: As discussed above, during the second quarter
of 2005, we incurred certain restructuring costs and impairment
charges. In connection with our recent privatizations and other
industry issues, we are in the process of completing an assessment of
our global operating capacity. As a result of this assessment, we are
developing and implementing a facility rationalization strategy that
includes plant consolidations and/or closures and the associated
expenses have had, and will continue to have, an adverse effect on
our 2005 profitability.
- Income Taxes: During the second quarter of 2005, we realized a
significant decrease in our effective income tax rate (excluding the
unusual items above) compared to the second quarter of 2004,
primarily as a result of a decrease in income tax rates in Austria
and Mexico, an increase in utilization of losses not previously
benefited and a reduction in losses not benefited. 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
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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;
- volatility of commodity costs; 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 consumer demand for
automobiles is sensitive to changes in certain economic and political
conditions, including interest rates, oil and energy prices and
international conflicts (including acts of terrorism). As a result of
these conditions, some of our customers are currently experiencing
reduced consumer demand for their vehicles, as well as declining
vehicle production volumes. A continued reduction in vehicle
production volumes could have a material adverse effect on our
profitability.
- 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.
- 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 overall production volumes by
these customers, such as in the case of GM and Ford in recent
quarters, could have an adverse effect on our sales and
profitability, particularly if we are unable to diversify our
customer base. 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 of, or delay in the implementation of any
significant production contract could have an adverse effect on our
sales and profitability.
- Over the last year we have experienced significant price increases
for key commodities used in our parts production, particularly steel
and resin. Although steel prices have begun to decline recently, we
expect steel prices will remain at elevated levels in 2005.
Approximately half of our steel is acquired through resale programs
operated by the automobile manufacturers, which do not expose us to
steel price increases 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. However, one such supplier has challenged its agreement
with one of our groups while steel prices were rising and, to the
extent that it or other suppliers successfully continue to dispute,
terminate or otherwise refuse to honour their contracts, our exposure
to steel price increases will increase to the extent that steel
prices remain at elevated levels. 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 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.
- We rely on a number of suppliers to supply us with a wide range of
components required in connection with our business. Economic
conditions, intense pricing pressures, increased commodity costs and
a number of other factors have left many automotive components
suppliers in varying degrees of financial distress. The continued
financial distress or the insolvency or bankruptcy of one of our
major automotive components suppliers could disrupt the supply of
components to us from these suppliers, possibly resulting in a
temporary disruption in the supply of products by us to our
customers. Any prolonged disruption in the supply of critical
components by our suppliers, the inability to re-source production of
a critical component from a financially distressed automotive
components sub-supplier, or any temporary shut-down of one of our
production lines or the production lines of our customers, could have
an adverse effect on our operations and/or our profitability.
Additionally, the insolvency, bankruptcy or financial restructuring
of any of our critical suppliers could result in us incurring
unrecoverable costs related to the financial work-out of such
suppliers and/or increased exposure for product liability, warranty
or recall costs relating to the components supplied by such suppliers
to the extent such suppliers are not able to assume responsibility
for such amounts.
- 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 fully or partially
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
challenging 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 2006 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 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 euro, the British pound 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.
- In response to the increasingly competitive 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
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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 the 6.5% Convertible 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 was as follows:
Three Six
months months
ended ended
June 30, June 30,
2004 2004
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Increase in interest expense $ 11 $ 19
Decrease in income taxes (5) (7)
Decrease in minority interest (1) (2)
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Decrease in net income (5) (10)
Decrease in financing charges on Preferred Securities
and other paid-in-capital 5 10
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Change in net income available to Class A
Subordinate Voting and Class B Shareholders $ - $ -
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There was no impact of this accounting policy change on reported basic and diluted earnings per Class A Subordinate Voting or Class B Share.
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 For the six months
ended June 30, ended June 30,
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2005 2004 Change 2005 2004 Change
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1 Canadian dollar
equals U.S. dollars 0.803 0.735 + 9% 0.810 0.747 + 8%
1 euro equals U.S.
dollars 1.255 1.206 + 4% 1.283 1.227 + 5%
1 British pound
equals U.S. dollars 1.850 1.807 + 2% 1.871 1.824 + 3%
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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 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.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 2005
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Sales For the three months
ended June 30,
--------------------
2005 2004 Change
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Vehicle Production Volumes (millions of units)
North America 4.126 4.176 - 1%
Europe 4.269 4.423 - 3%
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Average Dollar Content Per Vehicle
North America $ 709 $ 595 + 19%
Europe $ 313 $ 269 + 16%
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Sales
North American Production $ 2,927 $ 2,484 + 18%
European Production 1,336 1,188 + 12%
European Complete Vehicle Assembly 1,054 1,144 - 8%
Tooling, Engineering and Other 541 297 + 82%
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Total Sales $ 5,858 $ 5,113 + 15%
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Total sales reached a record level in the second quarter of 2005, increasing 15% or $745 million to $5.9 billion compared to $5.1 billion for the second quarter of 2004.
North American Production Sales
North American production sales increased 18% or $443 million to $2.9 billion for the second quarter of 2005 compared to $2.5 billion for the second 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 1% decrease in North American vehicle production volumes.
Our average dollar content per vehicle grew by 19% or $114 to $709 for the second quarter of 2005 compared to $595 for the second quarter of 2004, primarily as a result of:
- the launch of new programs during or subsequent to the second quarter
of 2004, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Hummer H3;
- the Cadillac STS;
- the Ford Mustang;
- the Mercury Mariner; and
- the Dodge Charger;
- 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 minivan,
Pacifica and 300/300C programs and the Ford F-150 program.
These increases were partially offset by:
- the impact of lower volumes and/or content on certain high content
programs including:
- the Ford Freestar and Mercury Monterey;
- the Dodge Ram Pickup;
- the Ford Escape and Mazda Tribute;
- the GMT800 platform; and
- the Ford Explorer and Mercury Mountaineer;
- programs that ended production during or subsequent to the second
quarter of 2004; and
- incremental customer price concessions.
European Production Sales
European production sales increased 12% or $148 million to $1.3 billion for the second quarter of 2005 compared to $1.2 billion for the second quarter of 2004. This increase in production sales reflects a 16% increase in our European average dollar content per vehicle, partially offset by a 3% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 16% or $44 to $313 for the second quarter of 2005 compared to $269 for the second quarter of 2004, primarily as a result of:
- programs that launched during or subsequent to the second quarter of
2004, including:
- the Mercedes A-Class and B-Class;
- the Land Rover Discovery; 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
- increased production on certain programs.
These increases were partially offset by lower production on certain programs, including the Mercedes E-Class, incremental customer price concessions, and the end of production on all MG Rover programs as a result of MG Rover Group Limited ("MG Rover") being placed into administration on April 8, 2005 in the United Kingdom, which is similar to Chapter 11 bankruptcy protection in the United States.
European Complete Vehicle Assembly Sales
European complete vehicle assembly sales decreased 8% or $90 million to $1.05 billion for the second quarter of 2005 compared to $1.14 billion for the second quarter of 2004. This decrease in sales is primarily the result of lower assembly volumes for the BMW X3 and Mercedes E-Class 4MATIC.
These decreases were partially offset by:
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar:
- higher volumes for our other assembly contracts, including:
- the Jeep Grand Cherokee;
- the Saab 93 Convertible; and
- the Chrysler Voyager; and
- the start of assembly in June 2005 of the Chrysler 300 for
distribution in European markets and certain other markets outside
North America.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 82% or $244 million to $541 million for the second quarter of 2005 compared to $297 million for the second quarter of 2004. The increase was primarily attributable to tooling and engineering revenue related to programs which launched in 2005 or for upcoming program launches and an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar, euro, and British pound, each against the U.S. dollar. Tooling and engineering revenue recorded in the second quarter of 2005 relates to a number of programs, including:
- the Ford Fusion, Mercury Milan and Lincoln Zephyr launching in 2005;
- the next generation Mini Cooper launching subsequent to the second
quarter of 2005;
- the Mercedes M-Class which launched in 2005; and
- the Hummer H3 which launched in 2005.
Gross Margin
Gross margin increased $17 million to $793 million for the second quarter of 2005 compared to $776 million for the second quarter of 2004. Gross margin as a percentage of total sales decreased to 13.5% for the second quarter of 2005 compared to 15.2% for the second 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 Ford Freestar and Mercury Monterey, the Ford
Escape and Mazda Tribute, the GMT800 platform, and the Ford Explorer
and Mercury Mountaineer;
- inefficiencies at certain facilities;
- the acquisition of the NVG business, which currently operates at
margins that are lower than 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 and R-Class;
- 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 second quarter of 2005 than in
the second quarter of 2004 and, on average, our European operations
operate at margins that are currently lower than our consolidated
average margin;
- lower volumes in both North America and Europe; and
- an increase in tooling, and other sales that earn low or no margins.
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;
- decreased complete vehicle assembly sales for the BMW X3, which has a
lower gross margin percentage than our consolidated average gross
margin because the costs of this vehicle assembly contract are
reflected on a full-cost basis in the selling price of the vehicle;
and
- incremental gross margin earned on new program launches.
Depreciation and Amortization
Depreciation and amortization costs increased 24% or $33 million to $173 million for the second quarter of 2005 compared to $140 million for the second quarter of 2004. The increase in depreciation and amortization for the second quarter of 2005 was primarily due to:
- the acquisition of the NVG business;
- amortization of fair value increments related to the privatizations
of Tesma, Decoma and Intier;
- 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 5.0% for the second quarter of 2005 compared to 5.8% for the second quarter of 2004. SG&A expenses decreased $6 million to $292 million for the second quarter of 2005 compared to $298 million for the second quarter of 2004.
During the second quarter of 2005, we recorded the following items in SG&A expenses:
- a $16 million gain on disposal of a non-core seat component facility
in North America;
- an $18 million foreign currency gain on the repatriation of funds
from Europe; and
- $9 million of restructuring charges related to two facilities in
Europe and the privatizations of Tesma, Decoma and Intier.
Under Canadian generally accepted accounting principles ("GAAP"), we are required to recognize in income a gain or loss equal to the appropriate portion of the cumulative translation adjustment account when there is a reduction in our net investment in non-U.S. dollar based operations. During the second quarter of 2005, we repatriated funds from Europe, resulting in an $18 million foreign currency gain.
Excluding these items, the remaining $19 million increase in SG&A expenses is primarily 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 acquisition of the NVG
business; and
- higher infrastructure costs to support upcoming launches.
Interest Expense
Interest expense decreased $8 million to $2 million for the second quarter of 2005 compared to $10 million for the second 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
and 2005.
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 acquisition of the NVG business.
Operating Income
Operating income decreased 2% or $8 million to $323 million for the second quarter of 2005 compared to $331 million for the second quarter of 2004. The discussions above provide an analysis of the $8 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 programs;
- increased commodity prices;
- costs incurred at new facilities in preparation for upcoming launches
or for programs that have not fully ramped up production;
- incremental price concessions;
- restructuring costs and impairment charges related substantially to
three European facilities;
- increased depreciation and amortization as a result of the
privatizations of Tesma, Decoma and Intier and the acquisition of the
NVG business; and
- operating inefficiencies at certain facilities.
Partially offsetting these decreases was the positive impact of:
- realization of a foreign currency gain on the repatriation of funds
from Europe;
- a gain on the disposal of a non-core seat component facility;
- programs that launched during or subsequent to the second quarter of
2004;
- the acquisition of the NVG business; and
- operational improvements at certain facilities.
Income Taxes
Our effective income tax rate on operating income (excluding equity income) decreased to 30.5% for the second quarter of 2005 from 35.4% for the second quarter of 2004. In the second quarter of 2005 we benefited from the realization of a foreign currency gain on the repatriation of funds from Europe, which was partially offset by an impairment charge recorded at a European facility, both of which have not been fully tax effected.
Excluding these items, the effective income tax rate was 31.8% for the second quarter of 2005 and 35.4% for the second 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, an increase in utilization of losses not previously benefited and a reduction in losses not benefited.
Minority Interest
Minority interest expense decreased $27 million because no minority interest expense was recorded in the second quarter of 2005 as a result of the privatizations of Tesma, Decoma and Intier.
Net Income
Net income increased 20% or $37 million to $225 million for the second quarter of 2005 compared to $188 million for the second quarter of 2004. The increase in net income is a result of a decrease in income taxes and minority interest of $18 million and $27 million, respectively, partially offset by an $8 million decrease in operating income (see above).
Earnings per Share
For the three months
ended June 30,
--------------------
2005 2004 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting or
Class B Share
Basic $ 2.10 $ 1.94 + 8%
Diluted $ 2.06 $ 1.93 + 7%
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting
and Class B Shares outstanding (millions)
Basic 107.2 96.8 + 11%
Diluted 109.9 97.4 + 13%
-------------------------------------------------------------------------
Diluted earnings per share increased 7% or $0.13 to $2.06 for the second quarter of 2005 compared to $1.93 for the second quarter of 2004. Included in the $0.13 increase in diluted earnings per share are the following items in the second quarter of 2005, which totalled $0.13 per share:
- realization of a foreign currency gain on the repatriation of funds
from Europe; and
- a gain on the disposal of a non-core seat component facility;
partially offset by
- restructuring costs and impairment charges related substantially to
three European facilities.
Excluding these items, diluted earnings per share was unchanged from the second quarter of 2004 as a result of an increase in the weighted average number of diluted shares outstanding during the quarter, offset by the increase in net income (excluding the above items).
The increase in the weighted average number of diluted shares outstanding was a result of:
- approximately 10.7 million additional shares that were included in
the weighted average number of shares outstanding as a result of the
privatization of Tesma, Decoma and Intier;
- approximately 1.1 million additional shares that are issuable as a
result of assuming Decoma's obligation for its 6.5% Convertible
Subordinated Debentures;
- 0.4 million additional stock options that were exercised during 2004
and the first half of 2005; and
- an increase in the number of options outstanding as a result of
assuming the Tesma, Decoma and Intier 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 fewer 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 ("ROFE")(1).
ROFE for the second quarter of 2005 was 21.1%, a decline from 28.7% for the second quarter of 2004. Included in ROFE in the second quarter of 2005 are the following items discussed above, which positively impacted ROFE by 1.3%:
- realization of a foreign currency gain on the repatriation of funds
from Europe; and
- a gain on the disposal of a non-core seat component facility;
partially offset by
- restructuring costs and impairment charges related substantially to
three European facilities.
Excluding these items, the remaining 8.9% decrease in ROFE can be attributed to a decrease in our EBIT (as discussed above) and an increase in our average funds employed for the second quarter of 2005 compared to the second quarter of 2004. The increase in our average funds employed was primarily a result of:
- the acquisition of the NVG business;
- the privatizations of Tesma, Decoma and Intier, which added
approximately $600 million of funds employed;
- an increase in our average investment in non-cash working capital;
and
- increased funds employed for new facilities associated with new or
upcoming launches.
SEGMENTS
-------------------------------------------------------------------------
For the three months ended June 30,
-------------------------------------------
2005 2004
--------------------- ---------------------
Total Total
sales EBIT sales EBIT
-------------------------------------------------------------------------
Decoma $ 799 $ 19 $ 689 $ 44
Intier 1,518 86 1,410 67
Tesma 369 22 341 35
Magna Steyr 1,771 79 1,471 63
Other Automotive Operations 1,458 101 1,247 125
Corporate and Other(i) (57) 18 (45) 7
-------------------------------------------------------------------------
$ 5,858 $ 325 $ 5,113 $ 341
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) Included in Corporate and Other are intercompany fee revenue, and
intercompany sales eliminations.
The sales amounts in the following discussion are before intersegment eliminations.
-------------------------------------------------------------------------
(1) ROFE is defined as EBIT(2) divided by the average funds employed(3)
for the period.
(2) EBIT is defined as operating income as presented on our unaudited
interim consolidated financial statements before net interest expense
and intercompany dividend income.
(3) Funds employed is defined as long-term assets, excluding future tax
assets and investments in subsidiaries, plus non-cash operating
assets and liabilities(4).
(4) 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.
Decoma
Sales
Decoma's sales increased by 16% or $110 million to $799 million for the second quarter of 2005 from $689 million for the second quarter of 2004. The increase in sales is primarily the result of an increase in Decoma's North American and European average dollar content per vehicle, partially offset by a 1% decline in North American vehicle production volumes and a 3% decline in European vehicle production volumes.
In North America, the increase in Decoma's average dollar content per vehicle was primarily attributable to:
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar; and
- increased content and/or production on several programs, related
principally to the launch of new programs during or subsequent to the
second quarter of 2004 including:
- the Chrysler 300/300C and Dodge Magnum;
- the Chevrolet Equinox;
- the Mercedes M-Class; and
- the Jeep Grand Cherokee.
These increases were partially offset by incremental customer price concessions and by lower volumes on certain high content Ford and GM programs.
In Europe, Decoma's average dollar content per vehicle growth was primarily attributable to:
- new facility and program launches including:
- the launch of the fascia and front end module for the Mercedes A-
Class;
- the ramp up of the fascia and front end module for the Volkswagen
City Car; and
- the launch of various Porsche, Audi and other Mercedes programs; and
- the increase in reported U.S. dollar sales due to the strengthening
of European currencies against the U.S. dollar.
These increases were partially offset by incremental customer price concessions.
EBIT
Decoma's EBIT decreased 57% or $25 million to $19 million for the second quarter of 2005 compared to $44 million for the second quarter of 2004. This decrease is primarily attributable to:
- inefficiencies at facilities in Europe, including increased losses
associated with under-utilized paint capacity, performance issues and
program launch costs;
- restructuring costs and impairment charges related to two facilities
in Europe;
- operating losses at Decoma's new fascia moulding and paint facility
in Georgia as it launches and ramps up production on new Mercedes
programs;
- the impact of lower vehicle production volumes at both Ford and GM;
and
- incremental customer price concessions and raw material costs.
These losses were partially offset by operational improvements realized at certain facilities, the closure of the Anotech facility early in 2005, and contributions from new launches.
Intier Sales
Intier's sales increased by 8% or $108 million to $1.5 billion for the second quarter of 2005 compared to $1.4 billion for the second quarter of 2004. The increase in sales reflects increases in Intier's average dollar content per vehicle in both North America and Europe and an increase in tooling, engineering and other sales, partially offset by a 1% decline in North American vehicle production volumes and a 3% decline in European vehicle production volumes.
In North America, the increase in Intier's average dollar content per vehicle was primarily attributable to:
- new programs that launched during or subsequent to the second quarter
of 2004, including:
- the complete interior, excluding seats, for the Hummer H3;
- the complete seats for the Chevrolet Cobalt and the Pontiac Pursuit;
- the complete seats for the Mercury Mariner; and
- the interior integration, overhead system, instrument panel and door
panels for the Cadillac STS; 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:
- incremental customer price concessions;
- lower volumes on certain high content programs including:
- the Ford Freestar and Mercury Monterey;
- the Ford Explorer and Mercury Mountaineer; and
- the GMT800 platform; and
- reduced content for the Dodge Ram Pickup.
In Europe, the increase in Intier's average dollar content per vehicle was primarily attributable to:
- the launch of new programs during or subsequent to the second quarter
of 2004 including:
- the cargo management system and other interior trim for the Audi A6;
- a side door latch for the Seat Altea and Volkswagen Passat;
- the door panels for the BMW 1-Series;
- the floorspace for the Mercedes A-Class; and
- a modular side door latch for a number of Audi programs; and
- an increase in reported U.S. dollar sales due to the strengthening of
the euro and the British pound, each against the U.S. dollar.
These increases were partially offset by incremental customer price concessions.
EBIT
Intier's EBIT increased by 28% or $19 million to $86 million for the second quarter of 2005 compared to $67 million for the second quarter of 2004. The increase is primarily a result of:
- a $16 million gain on the sale of a non-core seat component facility;
- additional gross margin earned on sales from new product launches;
- an increase in reported U.S. dollar EBIT due to the strengthening of
the Canadian dollar, euro and British Pound, each against the U.S.
dollar; and
- operational improvements at certain facilities.
These increases in EBIT have been partially offset by:
- increased raw material prices, including purchased components;
- incremental customer price concessions; and
- reduced operating margin resulting from lower vehicle volumes on
certain of Intier's high content programs.
Tesma
Sales
Tesma's sales increased by 8% or $28 million to $369 million for the second quarter of 2005 compared to $341 million for the second quarter of 2004. The increase in sales was a result of maintaining a consistent average dollar content per vehicle in North America and an increase in European average dollar content per vehicle, partially offset by a 1% decline in North American vehicle production volumes and a 3% decline in European vehicle production volumes.
In North America, Tesma's average dollar content per vehicle remained consistent with the prior year, as an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar was substantially offset by incremental customer price concessions and production volume declines in North America. In particular, production volumes on certain GM and Ford programs for which Tesma has high content declined even further, including:
- the GM GEN IV engine and 4L60E transmission which are installed in
GM's larger pickup truck and sport utility vehicles ("SUVs");
- the GM L850/LE5 engine program used in smaller compact cars and SUVs;
- the GM Line 6 engine installed into mid-size SUVs;
- the GM Line 4 and 5 engine which are installed into GM's mid-size
pickup trucks; and
- the Ford Modular V8 engine which is used in Ford's high-volume pickup
trucks and larger cars.
Partially offsetting these sales decreases were higher volumes on certain programs including:
- the launch of assemblies including an integrated front cover with
water pump, oil pans and flexplates for GM's 3.9L engine program;
- water pump modules and tensioner assemblies for the 5.7L Hemi engine
for the Dodge Durango, Chrysler 300/300C and Dodge Magnum;
- various stamped products for Nissan and Honda launched during 2005;
- various stamped components included in 6-speed and continuously
variable transmission applications for Ford;
- the oil pumps supplied for Ford's 5R110 transmission;
- tensioner assemblies supplied to Volkswagen, Ford and Honda; and
- engine front cover and water pump modules for Hyundai's high-volume
Lambda V6 engine program.
In Europe, Tesma's average dollar content per vehicle increased as a result of:
- higher reported U.S. dollar sales as a result of the strengthening of
the euro against the U.S. dollar;
- higher shipments of fuel filler pipes for Ford's high-volume Focus
program;
- increased volumes and content for stainless steel fuel tank
assemblies for Audi's D3 platform; and
- volume increases on water pumps for Fiat which launched late in 2004.
These increases were partially offset by lower volumes of stainless steel fuel tank assemblies for the Volkswagen Beetle for which production has been suspended until the second half of 2005 and incremental customer price concessions.
EBIT
Tesma's EBIT decreased 37% or $13 million to $22 million for the second quarter of 2005 compared to $35 million for the second quarter of 2004. The decrease in EBIT was largely a result of:
- lower operating margin earned as a result of lower sales levels,
especially at a number of North American facilities with a high
concentration of sales to GM;
- increased material costs, including the impact of higher steel and
purchased components costs;
- incremental customer price concessions;
- higher operating losses due to operating issues at certain facilities
in North America;
- lower capacity utilization and increased infrastructure and carrying
costs at certain facilities that have made significant investments in
preparation for program launches.
Magna Steyr
Sales
Magna Steyr's sales increased by 20% or $300 million to $1.8 billion for the second quarter of 2005 compared to $1.5 billion for the second quarter of 2004. The increase in sales was a result of:
- the acquisition of the NVG business;
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar; and
- an increase in transfer case sales related to programs launched
during or subsequent to the second quarter of 2004, including the
Land Rover Discovery and the Chrysler 300/300C at Magna Drivetrain.
These increases were partially offset by a decrease in complete vehicle assembly sales.
Magna Steyr's complete vehicle assembly volumes for the second quarter of 2005 and the second quarter of 2004 were as follows:
For the three months
ended June 30,
--------------------
Complete Vehicle Assembly Volumes (Units) 2005 2004 Change
-------------------------------------------------------------------------
Full-Costed 39,526 43,910 - 10%
Value-Added 22,078 16,388 + 35%
-------------------------------------------------------------------------
61,604 60,298 + 2%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The terms of Magna Steyr's various vehicle assembly contracts differ with respect to the ownership of components and supplies related to the assembly process and the method of determining the selling price to the OEM customer. Under certain contracts, Magna Steyr is acting as principal, and purchased components and systems in assembled vehicles are included in its inventory and cost of sales. These costs are reflected on a full cost basis in the selling price of the final assembled vehicle to the OEM customer. Contracts to assemble Mercedes E Class and G Class, Saab 93 Convertible and BMW X3 vehicles are accounted for in this manner. Other contracts provide that third party components and systems are held on consignment by Magna Steyr, and the selling price to the OEM customer reflects a value-added assembly fee only. Contracts to assemble the Chrysler Voyager, Jeep Grand Cherokee and Chrysler 300 are accounted for in this manner.
Production levels of the various vehicles assembled by Magna Steyr have an impact on the level of its sales and profitability. In addition, the relative proportion of programs accounted for on a full cost basis and programs accounted for on a value-added basis also impact Magna Steyr's levels of sales and operating margin percentage, but may not necessarily affect its overall level of profitability. Assuming no change in total vehicles assembled, a relative increase in the assembly of vehicles accounted for on a full cost basis has the effect of increasing the level of total sales and, because purchased components are included in cost of sales, profitability as a percentage of total sales is reduced. Conversely, a relative increase in the assembly of vehicles accounted for on a value-added basis has the effect of reducing the level of total sales and increasing profitability as a percentage of total sales.
Complete vehicle assembly sales decreased 8% or $90 million to $1.05 billion for the second quarter of 2005 compared to $1.14 billion for the second quarter of 2004. This decrease in sales is primarily the result of lower assembly volumes for the BMW X3 and Mercedes E-Class 4MATIC.
These decreases were partially offset by:
- an increase in reported U.S. dollar sales related to the
strengthening of the euro against the U.S. dollar;
- higher volumes for other assembly contracts, including:
- the Jeep Grand Cherokee;
- the Saab 93 Convertible; and
- the Chrysler Voyager; and
- the start of assembly in June 2005 of the Chrysler 300 for
distribution in certain European markets and other markets outside
North America.
EBIT
Magna Steyr's EBIT increased by 25% or $16 million to $79 million for the second quarter of 2005 compared to $63 million for the second quarter of 2004. The increase in EBIT is primarily a result of:
- the recovery of costs associated with the cancellation of an
engineering program;
- the acquisition of the NVG business;
- an increase in reported U.S. dollar EBIT as a result of the
strengthening of the euro against the U.S. dollar; and
- the increase in operating margin generated by increased sales,
including the launches of the Land Rover Discovery and the Chrysler
300/300C at Magna Drivetrain.
Partially offsetting these increases were:
- a reduction in EBIT as a result of a one-time payment received in the
second quarter of 2004 relating to prior year pricing issues on a
certain production program; and
- lower operating margin earned as a result of the decrease in complete
vehicle assembly sales.
Other Automotive Operations
Sales
Our Other Automotive Operations' sales increased 17% or $211 million to $1.5 billion for the second quarter of 2005 compared to $1.2 billion for the second quarter of 2004. The increase in sales was a result of an increase in tooling sales and increases in the segment's North American and European average dollar content per vehicle, partially offset by a 1% decline in North American vehicle production volumes and a 3% decline in European vehicle production volumes.
In North America, the increase in average dollar content per vehicle is primarily a result of:
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar;
- increased volumes on certain programs including:
- the Dodge Durango;
- the Saturn ION; and
- the Ford Escape; and
- the launch of new programs during or subsequent to the second quarter
of 2004 including:
- various stampings for the Ford Mustang;
- Class A stampings for the Mercedes M-Class; and
- Class A stampings for the Chrysler 300/300C and Dodge Magnum.
These increases were partially offset by:
- lower volumes on certain high content GM and Ford programs, in
particular:
- the GMT800 platform; and
- the Ford Freestar and Mercury Monterey; and
- incremental customer price concessions.
In Europe, the increase in average dollar content per vehicle is primarily the result of an increase in reported U.S. dollar sales due to the strengthening of the euro against the U.S. dollar, partially offset by reductions in volumes on several programs including the Smart and various Volkswagen stampings and assemblies, and incremental price concessions.
Tooling sales increased as a result of revenues earned on tooling for several programs including:
- the Ford Fusion, Mercury Milan and Lincoln Zephyr; and - the Mercedes M-Class. EBIT
Our Other Automotive Operations' EBIT decreased 19% or $24 million to $101 million for the second quarter of 2005 compared to $125 million for the second quarter of 2004. The decrease in EBIT is primarily a result of:
- lower operating margin earned on lower sales on certain high content
programs;
- incremental customer price concessions;
- costs incurred to support facilities in Kentucky and Mexico;
- restructuring costs incurred at a facility in Europe; and
- increased commodity prices for steel and resins combined with lower
scrap steel revenues.
These decreases were partially offset by higher gross margin earned from programs which launched during or subsequent to the second quarter of 2004.
Corporate and Other
Corporate and Other EBIT increased 157% or $11 million to $18 million for the second quarter of 2005 compared to $7 million for the second quarter of 2004. The increase in EBIT is primarily a result of:
- an $18 million foreign currency gain on the repatriation of funds
from Europe;
- increased affiliation and other fee income earned as a result of
higher sales; and
- provisions recorded during the second quarter of 2004 against the
carrying value of certain long-term assets.
These increases in EBIT were partially offset by:
- increased stock compensation expense as a result of the assumption of
the stock option plans of Tesma, Intier and Decoma;
- restructuring charges related to the privatizations of Tesma, Decoma
and Intier; and
- increased customer price concessions.
FIRST AND FINAL ADD TO FOLLOW