/FIRST AND FINAL ADD - TO197 - Magna International Inc. Earnings/
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2005
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Sales For the six months
ended June 30,
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2005 2004 Change
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Vehicle Production Volumes (millions of units)
North America 8.090 8.310 - 3%
Europe 8.385 8.765 - 4%
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Average Dollar Content Per Vehicle
North America $ 716 $ 600 + 19%
Europe $ 317 $ 273 + 16%
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Sales
North American Production $ 5,796 $ 4,988 + 16%
European Production 2,662 2,397 + 11%
European Complete Vehicle Assembly 2,180 2,156 + 1%
Tooling, Engineering and Other 938 675 + 39%
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Total Sales $ 11,576 $ 10,216 + 13%
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North American Production Sales
North American production sales increased 16% or $808 million to $5.8 billion for the six months ended June 30, 2005 compared to $5.0 billion for the six months ended June 30, 2004. This increase in production sales reflects a 19% increase in our North American average dollar content per vehicle, partially offset by a 3% decline in North American vehicle production volumes.
Our average dollar content per vehicle grew by 19% or $116 to $716 for the six months ended June 30, 2005 compared to $600 for the six months ended June 30, 2004, primarily as a result of:
- the launch of new programs during or subsequent to the first half of
2004, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Cadillac STS;
- the Chevrolet Equinox;
- the Chrysler 300/300C;
- the Mercury Mariner;
- the Ford Mustang;
- the Mercedes M-Class;
- the Jeep Grand Cherokee; and
- the Hummer H3;
- the acquisition of the 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 the Chrysler
minivans and the Ford F-150.
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 Ford Explorer and Mercury Mountaineer;
- the Dodge Ram Pickup; and
- the Ford Expedition;
- the end of production on certain programs during or subsequent to the
first half of 2004; and
- incremental customer price concessions.
European Production Sales
European production sales increased 11% or $265 million to $2.7 billion for the six months ended June 30, 2005 compared to $2.4 billion for the six months ended June 30, 2004. This increase in sales reflects a 16% increase in our European average dollar content per vehicle, partially offset by a 4% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 16% or $44 to $317 for the six months ended June 30, 2005 compared to $273 for the six months ended June 30, 2004, primarily as a result of:
- an increase in reported U.S. dollar sales due to the strengthening of
European currencies against the U.S. dollar, in particular the euro;
- programs that launched during or subsequent to the first half of
2004, including:
- the Land Rover Discovery;
- the Mercedes A-Class; and
- the BMW 1-Series;
- 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 the MG
Rover situation.
European Complete Vehicle Assembly Sales
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. This increase in sales is primarily the result of:
- an increase in reported U.S. dollar sales related to the
strengthening of the euro against the U.S. dollar;
- an increase in complete vehicle assembly volumes for the BMW X3; and
- the start of assembly in June 2005 of the Chrysler 300 for
distribution in European markets and certain other markets outside
North America.
These increases were partially offset by lower assembly volumes for the Mercedes E-Class 4MATIC and the Jeep Grand Cherokee which launched in the first quarter of 2005.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 39% or $263 million to $938 million for the six months ended June 30, 2005 compared to $675 million for the six months ended June 30, 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 first six months 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 launched in 2005;
- the Hummer H3 launched in 2005; and
- the Jeep Grand Cherokee launched in 2005.
EBIT
EBIT decreased 13% or $89 million to $580 million for the six months ended June 30, 2005 compared to $669 million for the six months ended June 30, 2004. On a comparable basis, our EBIT 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;
- increased depreciation and amortization as a result of the
privatizations of Tesma, Decoma and Intier and the acquisition of the
NVG business;
- restructuring costs and impairment charges related substantially to
three European facilities;
- charges recorded related to our MG Rover assets and supplier
obligations as a result of the MG Rover situation;
- costs to rationalize a facility in North America;
- operating inefficiencies at certain facilities; and
- the expensing of capitalized bank facility fees.
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;
- the one-time charge to compensation expense of $12 million recorded
in the first quarter of 2004;
- programs that launched during or subsequent to the first half of
2004;
- increased complete vehicle assembly sales;
- operational improvements at certain facilities; and
- charges recorded during the first quarter of 2004 with respect to the
closure of facilities in Europe.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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Cash Flow from Operations
For the three months
ended June 30,
--------------------
2005 2004 Change
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Net income $ 225 $ 188
Items not involving current cash flows 176 214
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$ 401 $ 402 $ (1)
Changes in non-cash operating assets and
liabilities (272) (48)
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Cash provided from operating activities $ 129 $ 354 $(225)
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Cash flow from operations before changes in non-cash operating assets and liabilities decreased $1 million to $401 million for the second quarter of 2005 compared to $402 million for the second quarter of 2004. The decrease in cash flow from operations was due to a $38 million decrease in items not involving current cash flows partially offset by a $37 million increase in net income (as explained above).
The decrease in items not involving current cash flows was due to:
- a $27 million decrease in minority interest primarily as a result of
the privatizations of Tesma, Intier and Decoma;
- a $27 million decrease in other non-cash charges including:
- the $18 million foreign currency gain on the repatriation of funds
from Europe; and
- the $16 million gain on disposal of a non-core seat component
facility; partially offset by
- a $5 million non-cash impairment charge; and
- an $18 million decrease in future income taxes.
These decreases were partially offset by a $33 million increase in depreciation and amortization and a $1 million decrease in equity income.
Cash invested in operating assets and liabilities amounted to $272 million for the second quarter of 2005. The cash used for operating assets and liabilities was primarily attributable to increases in accounts receivable and prepaid expenses and other of $428 million and $5 million, respectively. The increase in accounts receivable is primarily due to the increase in tooling sales, which generally have extended payment terms compared to production sales. Partially offsetting the cash invested in accounts receivable and prepaid expenses and other was cash generated from an increase in accounts payable and other accrued liabilities, taxes payable and deferred revenues of $148 million, combined with a decrease in inventory of $13 million.
Capital and Investment Spending For the three months
ended June 30,
--------------------
2005 2004 Change
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Fixed assets $ (205) $ (172)
Other assets (22) (10)
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Fixed assets and other additions $ (227) $ (182)
Purchase of subsidiaries (33) (53)
Proceeds from disposals 43 4
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Cash used in investing activities $ (217) $ (231) $ 14
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In the second quarter of 2005 we invested $205 million in fixed assets. While investments were made to refurbish or replace assets consumed in the normal course and for productivity improvements, most of the investment was for component manufacturing, painting and assembly equipment and facilities for programs launching in future periods. The major programs that will be launching or that have not fully ramped up production for which we invested capital were:
- the new Ford Explorer and F-Series Super Duty pickup trucks in
Kentucky;
- GM's next generation full-size pickup and sport utilities platform;
- the Peugeot 207 in Metz, France; and
- the Ford Fusion, Mercury Milan and Lincoln Zephyr in Mexico.
We invested $22 million in other assets in the second quarter of 2005 primarily representing fully reimbursable planning and engineering costs relating to programs that will be launching subsequent to the second quarter of 2005.
Purchases of subsidiaries on the statement of cash flows includes the $50 million cash portion of the Intier privatization. Specifically, on April 3, 2005 we acquired the outstanding 15% equity interest in Intier that we did not previously own. Total consideration paid for the outstanding Class A Subordinate Voting Shares of Intier not owned by us was approximately $225 million, which was satisfied by issuing 2.3 million Magna Class A Subordinate Voting Shares and cash of $50 million. The cash portion of the Intier privatization was partially offset by a $17 million cash adjustment received with respect to the acquisition of the NVG business.
During the second quarter of 2004, we completed two small acquisitions for which the cash consideration totalled $53 million.
Proceeds from disposals reflect $25 million received on the sale of a non-core seat component facility and proceeds from normal course fixed and other asset disposals.
Financing For the three months
ended June 30,
--------------------
2005 2004 Change
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Issues of debt $ 23 $ 35
Repayments of debt (18) (62)
Issues of Class A Subordinate Voting Shares 3 20
Issues of shares by subsidiaries - 4
Dividends paid to minority interests - (5)
Dividends (42) (37)
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Cash used in financing activities $ (34) $ (45) $ 11
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During the second quarter of 2004, the repayments of debt relate primarily to a $47 million government debt repayment by Magna Steyr in Europe.
During the second quarter of 2005, we issued $3 million in Class A Subordinate Voting Shares on the exercise of stock options compared to issuing $20 million in Class A Subordinate Voting Shares on the exercise of stock options during the second quarter of 2004. The issue of shares by our subsidiaries in 2004 is comprised primarily of the issue of $4 million of Intier Class A Subordinate Voting Shares to the Intier employee deferred profit sharing program and on the exercise of stock options.
Dividends paid during the second quarter of 2005 were $42 million. These payments relate to dividends declared in respect of the three-month period ended March 31, 2005. The increase in quarterly dividends paid in the second quarter of 2005 compared to the second quarter of 2004 relates to the increase in the number of Class A Subordinate Voting Shares outstanding, primarily as a result of the privatizations. There were no dividends paid to minority interests in the second quarter of 2005 as a result of the privatizations.
Financing Resources
As at
As at December
June 30, 31,
2005 2004(i) Change
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Liabilities
Bank indebtedness $ 151 $ 136
Long-term debt due within one year 123 84
Long-term debt 669 984
Minority interest - 634
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943 1,838
Shareholders' equity 6,344 5,335
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Total capitalization $ 7,287 $ 7,173 $ 114
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(i) As required by CICA 3860, restated to reclassify our 7.08%
Subordinated Debentures and 6.5% Convertible Subordinated Debentures
to long-term debt from shareholders' equity and minority interest,
respectively.
Total capitalization increased by $114 million in the six months ended June 30, 2005 to $7.3 billion. The increase in capitalization is a result of a $1.0 billion increase in shareholders' equity offset in part by a $895 million decrease in liabilities. The increase in equity is a result of the Class A Subordinate Voting Shares issued as part of the purchase price for the acquisition of the remaining minority interest of Tesma, Intier and Decoma and on the exercise of stock options and net income earned during the six months ended June 30, 2005, partially offset by dividends paid and a decrease in the currency translation adjustment.
The Decoma plan of arrangement resulted in the amalgamation of Magna and Decoma. As a result of this amalgamation, Decoma's three-year term credit facility (see below) and Decoma's 6.5% Convertible Subordinated Debentures maturing March 31, 2010 became our direct obligations.
The decrease in liabilities is primarily due to the decrease in minority interest as a result of the acquisitions of the remaining minority interest in Tesma, Intier and Decoma and decreases in long-term debt as a result of the repayment of the first series of our senior unsecured notes related to the acquisition of NVG and the outstanding debt on Decoma's term debt facility as discussed above.
During the second quarter of 2005, our cash resources decreased by $168 million to $1.3 billion as discussed above. In addition to our cash resources, we had unused and available operating lines of credit of $136 million and term lines of credit of $790 million. During the first quarter of 2005, we repaid the outstanding borrowings of Cdn $197 million under the former Decoma term credit facility and the facility was cancelled. On March 31, 2005, we amended and extended our existing Cdn $500 million 364- day revolving credit facility to increase the permitted borrowing under the facility to $745 million.
In addition to the above unused and available financing resources, we sponsor a tooling finance program for tooling suppliers to finance tooling under construction for use in our operations. The maximum facility amount is Cdn $100 million. As at June 30, 2005, Cdn $7 million had been advanced to tooling suppliers under this facility. This amount is included in accounts payable on our consolidated balance sheet.
Maximum Number of Shares Issuable
The following table presents the maximum number of shares that would be outstanding if all of the outstanding options and Subordinated Debentures issued and outstanding at August 5, 2005 were exercised or converted:
Class A Subordinate Voting and Class B Shares 109,129,049
Subordinated Debentures(i) 1,096,582
Stock options(ii) 4,758,415
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114,984,046
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(i) The above amounts include shares issuable if the holders of the 6.5%
Convertible Subordinated Debentures exercise their conversion option
but exclude Class A Subordinate Voting Shares issuable, only at our
option, to settle interest and principal related to the 6.5%
Convertible Subordinated Debentures. The number of Class A
Subordinate Voting Shares issuable at our option is dependent on the
trading price of Class A Subordinate Voting Shares at the time we
elect to settle 6.5% Convertible Subordinated Debenture interest and
principal with shares.
The above amounts also exclude Class A Subordinate Voting Shares
issuable, only at our option, to settle the 7.08% Subordinated
Debentures on redemption or maturity. The number of shares issuable
is dependent on the trading price of Class A Subordinate Voting
Shares at redemption or maturity of the 7.08% Subordinated
Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting provisions
and upon payment of the exercise price as may be determined from
time to time and pursuant to our 1987 Incentive Stock Option Plan,
as amended, Tesma's amended and restated Stock Option Plan, Decoma's
Option Plan and Intier's 2001 Incentive Stock Option Plan.
Contractual Obligations and Off Balance Sheet Financing
There have been no material changes with respect to the contractual obligations requiring annual payments during the second quarter of 2005 that are outside the ordinary course of our business. Refer to our MD&A included in our 2004 Annual Report.
Long-term receivables in other assets are reflected net of outstanding borrowings from a customer's finance subsidiary of $60 million since we have the legal right of set-off of our long-term receivable against such borrowings and we are settling the related amounts simultaneously.
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.
COMMITMENTS AND CONTINGENCIES -------------------------------------------------------------------------
From time to time, we may be contingently liable for litigation and other claims. Refer to note 28 of our 2004 audited consolidated financial statements, which describe these claims.
FORWARD-LOOKING STATEMENTS -------------------------------------------------------------------------
The previous discussion contains 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. We use words such as "may", "would", "could", "will", "likely", "expect", "anticipate", "believe", "intend", "plan", "forecast", "project", "estimate" and similar expressions to identify forward-looking statements. 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 include, but are not limited to: changes in consumer demand due to global economic and political conditions (including acts of terrorism); decreases in automotive production volumes; shifts in market share away from vehicles or vehicle platforms on which we have high content and margins; our reliance on a small number of automobile manufacturers, some of which have been experiencing declining overall production volumes; our success in diversifying our customer base; the impact of the declining competitiveness and deteriorating financial condition of some of our customers and suppliers; a decline in outsourcing by automobile manufacturers; pressure from our customers to reduce our prices and absorb certain fixed costs; the competitiveness of the automotive supply industry; our ability to reduce our exposure to, or recover, increases in prices for commodities such as steel and resins; increased crude oil and energy prices; product warranty and recall costs, as well as product liability risks; fluctuations in relative currency values; risks associated with doing business in foreign countries; the success of our proposed rationalization of production and/or the streamlining of administrative functions due to the privatization of our former publicly traded subsidiaries; rapid technological and regulatory changes; the threat of labour disruptions affecting us, our customers or our suppliers; program cancellations and delays in launching new programs; delays in constructing new facilities; changes in governmental regulations; the impact of environmental law and regulations; the impact of legal proceedings to which we are or may become a party; our relationship with our controlling shareholder; and other factors set out in our Annual Information Form filed with securities commissions in Canada 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.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(United States dollars in millions, except per share figures)
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
Note 2005 2004 2005 2004
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(restated (restated
note 2) note 2)
Sales $ 5,858 $ 5,113 $ 11,576 $ 10,216
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Cost of goods sold 5,065 4,337 10,058 8,690
Depreciation and
amortization 173 140 341 275
Selling, general and
administrative 7 292 298 597 591
Interest expense, net 2 10 3 17
Equity income (2) (3) (5) (9)
Impairment charges 5 - 5 -
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Income from operations
before income taxes
and minority interest 323 331 577 652
Income taxes 98 116 169 235
Minority interest 3 - 27 11 50
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Net income $ 225 $ 188 $ 397 $ 367
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Earnings per Class A
Subordinate Voting or
Class B Share:
Basic $ 2.10 $ 1.94 $ 3.78 $ 3.79
Diluted $ 2.06 $ 1.93 $ 3.73 $ 3.77
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Cash dividends paid per
Class A Subordinate
Voting or Class B Share $ 0.38 $ 0.38 $ 0.76 $ 0.72
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Average number of Class A
Subordinate Voting and
Class B Shares outstanding
during the period
(in millions):
Basic 107.2 96.8 105.0 96.6
Diluted 109.9 97.4 106.9 97.3
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CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(United States dollars in millions)
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
Note 2005 2004 2005 2004
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Retained earnings,
beginning of period $ 3,068 $ 2,550 $ 2,935 $ 2,384
Net income 225 188 397 367
Dividends on Class A
Subordinate Voting
and Class B Shares (42) (37) (83) (70)
Adjustment for change in
accounting policy related
to financial instruments 2 - - 2 20
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Retained earnings,
end of period $ 3,251 $ 2,701 $ 3,251 $ 2,701
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(United States dollars in millions)
Three months ended Six months ended
June 30, June 30,
-------------------- ---------------------
Note 2005 2004 2005 2004
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(restated (restated
note 2) note 2)
Cash provided from
(used for):
OPERATING ACTIVITIES
Net income $ 225 $ 188 $ 397 $ 367
Items not involving
current cash flows 176 214 366 428
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401 402 763 795
Changes in non-cash
operating assets
and liabilities (272) (48) (110) 152
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129 354 653 947
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INVESTMENT ACTIVITIES
Fixed asset additions (205) (172) (329) (320)
Purchase of subsidiaries 3 (33) (53) (169) (64)
Increase in other assets (22) (10) (69) (33)
Proceeds from disposition 43 4 58 22
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(217) (231) (509) (395)
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FINANCING ACTIVITIES
Issues of debt 23 35 62 29
Repayments of debt 4 (18) (62) (278) (81)
Issues of Class A
Subordinate Voting Shares 3 20 13 26
Issues of shares by
subsidiaries - 4 1 10
Dividends paid to minority
interests - (5) (1) (9)
Dividends (42) (37) (83) (70)
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(34) (45) (286) (95)
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Effect of exchange rate
changes on cash and
cash equivalents (46) 5 (83) (27)
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Net increase (decrease)
in cash and cash
equivalents during the
period (168) 83 (225) 430
Cash and cash equivalents,
beginning of period 1,462 1,875 1,519 1,528
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Cash and cash equivalents,
end of period $ 1,294 $ 1,958 $ 1,294 $ 1,958
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See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(United States dollars in millions)
June 30, December
Note 2005 31, 2004
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(restated
note 2)
ASSETS
Current assets
Cash and cash equivalents $ 1,294 $ 1,519
Accounts receivable 3,583 3,276
Inventories 1,290 1,376
Prepaid expenses and other 112 110
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6,279 6,281
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Investments 136 139
Fixed assets, net 4,049 3,967
Goodwill 3 913 747
Future tax assets 195 195
Other assets 310 282
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$ 11,882 $ 11,611
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 151 $ 136
Accounts payable 3,070 3,006
Accrued salaries and wages 436 449
Other accrued liabilities 417 350
Income taxes payable 6 35
Long-term debt due within one year 123 84
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4,203 4,060
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Deferred revenue 65 70
Long-term debt 4 669 984
Other long-term liabilities 234 240
Future tax liabilities 367 288
Minority interest 3 - 634
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5,538 6,276
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Shareholders' equity
Capital stock 6
Class A Subordinate Voting Shares (issued:
107,981,310; December 31, 2004 - 95,850,377) 2,472 1,610
Class B Shares (convertible into Class A
Subordinate Voting Shares) (issued: 1,093,983) - -
Other paid-in capital 3 -
Contributed surplus 7 61 16
Retained earnings 3,251 2,937
Currency translation adjustment 557 772
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6,344 5,335
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$ 11,882 $ 11,611
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See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions unless
otherwise noted)
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1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in U.S. dollars following Canadian
generally accepted accounting principles, as well as following the
accounting policies as set out in the 2004 annual consolidated
financial statements, except for the accounting change set out in
note 2.
The unaudited interim consolidated financial statements do not
conform in all respects to the requirements of generally accepted
accounting principles for annual financial statements. Accordingly,
these unaudited interim consolidated financial statements should be
read in conjunction with the 2004 annual consolidated financial
statements.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at June 30, 2005 and the results of operations and
cash flows for the three month and six-month periods ended June 30,
2005 and 2004.
2. 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 the Company to present 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. The Company 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
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Decrease in income taxes payable $ 1
Increase in long-term debt 216
Decrease in debentures' interest obligation 38
Decrease in minority interest 68
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Decrease in other paid-in-capital $ 75
Increase in retained earnings 2
Decrease in currency translation adjustment 34
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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 for the three or six month periods ended June 30, 2004 and
2005.
3. ACQUISITIONS
(a) Tesma
On February 1, 2005, the shareholders of Tesma International Inc.
("Tesma") approved a plan of arrangement that became effective on
February 6, 2005 under which Magna acquired the outstanding 56%
equity interest in Tesma that it did not previously own. Total
consideration for the outstanding Class A Subordinate Voting
Shares of Tesma not owned by the Company was approximately
$613 million, which was satisfied by issuing 6.7 million Magna
Class A Subordinate Voting Shares (note 6) and cash of
approximately $103 million. In addition, Magna assumed
responsibility for the existing stock options of Tesma, resulting
in an increase in the purchase price of approximately
$17 million, representing the approximate fair value of the stock
options assumed. This fair value has been credited to contributed
surplus (note 7). The excess of the purchase price over the
Company's incremental interest in the book value of the assets
acquired and liabilities assumed was $270 million.
(b) Decoma
On February 28, 2005, the shareholders of Decoma International
Inc. ("Decoma") approved a plan of arrangement that became
effective on March 6, 2005 under which Magna acquired the
outstanding 27% equity interest in Decoma that it did not
previously own. Total consideration for the outstanding Class A
Subordinate Voting Shares of Decoma not owned by the Company was
approximately $239 million, which was satisfied by issuing
2.9 million Magna Class A Subordinate Voting Shares (note 6) and
cash of approximately $31 million. In addition, Magna assumed
responsibility for the existing stock options of Decoma,
resulting in an increase in the purchase price of approximately
$2 million, representing the approximate fair value of the stock
options assumed. This fair value has been credited to contributed
surplus (note 7). The excess of the purchase price over the
Company's incremental interest in the book value of the assets
acquired and liabilities assumed was $78 million.
The Decoma plan of arrangement resulted in the amalgamation of
Magna and Decoma. As a result of this amalgamation, Decoma's
three-year term credit facility maturing September 30, 2007 and
Decoma's 6.5% Convertible Subordinated Debentures maturing March
31, 2010 became direct obligations of the Company. In March 2005,
the Company repaid outstanding borrowings of Cdn $197 million
under the former Decoma term credit facility and the facility was
cancelled (note 4).
(c) Intier
On March 30, 2005 the shareholders of Intier Automotive Inc.
("Intier") approved a plan of arrangement that became effective
on April 3, 2005 under which Magna acquired the outstanding 15%
equity interest in Intier that it did not previously own. Total
consideration for the outstanding Class A Subordinate Voting
Shares of Intier not owned by the Company was approximately
$202 million, which was satisfied by issuing 2.3 million Magna
Class A Subordinate Voting Shares (note 6) and cash of
approximately $50 million. In addition, Magna assumed
responsibility for the existing stock options of Intier,
resulting in an increase in the purchase price of approximately
$23 million, representing the approximate fair value of the stock
options assumed. This fair value has been credited to contributed
surplus (note 7). The excess of the purchase price over the
Company's incremental interest in the book value of the assets
acquired and liabilities assumed was $87 million.
The purchase price allocations for these acquisitions and certain
2004 acquisitions are preliminary and adjustments to the purchase
price and related preliminary allocations may occur as a result
of obtaining more information regarding asset valuations,
liabilities assumed, purchase price adjustments pursuant to the
purchase agreements, and revisions of preliminary estimates of
fair value made at the date of purchase. On a preliminary basis,
an allocation of the excess purchase price over the Company's
incremental interest in the book value of the assets acquired and
liabilities assumed has been made to fixed assets for each of the
Tesma, Decoma and Intier acquisitions.
4. LONG-TERM DEBT
During the three months ended March 31, 2005, the Company repaid the
outstanding borrowings of Cdn $197 million under the former Decoma
term credit facility and the facility was cancelled. On March 31,
2005, Magna amended and extended its existing Cdn $500 million 364-
day revolving credit facility to increase the permitted borrowing
under the facility to $745 million.
5. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Defined benefit pension
plans and other $ 5 $ 5 $ 7 $ 10
Termination and long
service arrangements 3 4 8 7
Retirement medical
benefits plan 3 2 5 4
---------------------------------------------------------------------
$ 11 $ 11 $ 20 $ 21
---------------------------------------------------------------------
---------------------------------------------------------------------
6. CAPITAL STOCK
(a) Changes in the Class A Subordinate Voting Shares for the three
and six months ended June 30, 2005 are shown in the following
table (numbers of shares in the following table are expressed in
whole numbers):
Subordinate Voting
------------------------
Number of Stated
shares value
---------------------------------------------------------------------
Issued and outstanding at December 31, 2004 95,850,377 $ 1,610
Issued on privatization of Tesma(i) 6,687,709 510
Issued on privatization of Decoma(i) 2,854,400 208
Issued for cash under the Incentive
Stock Option Plan 170,106 13
Issued under the Dividend Reinvestment Plan 2,438 -
Exchange of subsidiary restricted stock or
Magna restricted stock(i) - (19)
---------------------------------------------------------------------
Issued and outstanding at March 31, 2005 105,565,030 2,322
Issued on privatization of Intier 2,332,748 152
Issued for cash under the Incentive
Stock Option Plan 80,486 6
Issued under the Dividend Reinvestment Plan 3,046 -
Exchange of subsidiary restricted stock or
Magna restricted stock(i) - (8)
---------------------------------------------------------------------
Issued and outstanding at June 30, 2005 107,981,310 $ 2,472
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) During 2003 and 2004, a subsidiary of the Company purchased
275,462 Tesma Class A Subordinate Voting Shares, 1,138,941
Decoma Class A Subordinate Voting Shares and 525,665 Intier
Class A subordinate Voting Shares for cash consideration of
$6 million, $9 million and $8 million, respectively, which were
then awarded on a restricted basis to certain executives. Also
during 2004, Decoma purchased 451,685 Decoma Class A
Subordinate Voting Shares for cash consideration of $4 million,
which were then awarded on a restricted basis to an executive
of Decoma.
The shares issued on privatization of Tesma, Decoma and Intier
include the shares issued by Magna in exchange for these
shares, and since this stock has not been released to the
executives, it has been reflected as a reduction in the stated
value of Magna's Class A Subordinate Voting Shares. Previously,
these amounts had been reflected in minority interest (note 7).
(b) The following table presents the maximum number of shares that
would be outstanding if all dilutive instruments outstanding at
August 5, 2005 were exercised:
Class A Subordinate Voting and Class B Shares
outstanding at August 5, 2005 109,129,049
Subordinated Debentures(i) 1,096,582
Stock options(ii) 4,758,415
---------------------------------------------------------------------
114,984,046
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) The above amounts include shares issuable if the holders of the
6.5% Convertible Subordinated Debentures exercise their
conversion option but exclude Class A Subordinate Voting Shares
issuable, only at the Company's option, to settle interest and
principal related to the 6.5% Convertible Subordinated
Debentures. The number of Class A Subordinate Voting Shares
issuable at the Company's option is dependent on the trading
price of the Class A Subordinate Voting Shares at the time the
Company elects to settle the 6.5% Convertible Subordinated
Debenture interest and principal with shares.
The above amounts also exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle the
7.08% Subordinated Debentures on redemption or maturity. The
number of shares issuable is dependent on the trading price of
Class A Subordinate Voting Shares at redemption or maturity of
the 7.08% Subordinated Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting
provisions and upon payment of the exercise price as may be
determined from time to time and pursuant to our 1987 Incentive
Stock Option Plan, as amended, Tesma's amended and restated
Stock Option Plan, Decoma's Option Plan and Intier's 2001
Incentive Stock Option Plan.
7. STOCK BASED COMPENSATION
(a) The following is a continuity schedule of options outstanding
(number of options in the table below are expressed in whole
numbers):
2005
----------------------------------
Options outstanding
---------------------
Exercise Options
Options price(i) exercisable
No. Cdn$ No.
---------------------------------------------------------------------
Beginning of year 2,614,376 85.74 2,042,876
Assumed on privatization 1,053,353 71.31 864,688
Granted 35,000 85.75 -
Exercised (170,106) 61.09 (170,106)
Vested - - 9,291
Cancelled - - -
---------------------------------------------------------------------
March 31 3,532,623 82.62 2,746,749
Assumed on privatization 1,377,067 54.11 973,668
Exercised (80,486) 53.67 (80,486)
Vested - - 11,775
Cancelled (17,033) 84.60 -
---------------------------------------------------------------------
June 30 4,812,171 74.94 3,651,706
---------------------------------------------------------------------
---------------------------------------------------------------------
2004
----------------------------------
Options outstanding
---------------------
Exercise Options
Options price(i) exercisable
No. Cdn$ No.
---------------------------------------------------------------------
Beginning of year 3,046,450 82.31 1,991,950
Assumed on privatization - - -
Granted 15,000 105.19 -
Exercised (117,600) 62.63 (117,600)
Vested - - 43,625
Cancelled (3,000) 97.47 -
---------------------------------------------------------------------
March 31 2,940,850 83.20 1,917,975
Assumed on privatization
Exercised (414,474) 71.43 (414,474)
Vested - - -
Cancelled - - -
---------------------------------------------------------------------
June 30 2,526,376 85.13 1,503,501
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) The exercise price noted above, represents the weighted average
exercise price in Canadian dollars.
(b) Effective January 1, 2003, the Company adopted the fair value
recognition provisions of CICA 3870 for all options granted after
January 1, 2003. The fair value of stock options is estimated at
the date of grant using the Black Scholes option pricing model.
The weighted average assumptions used in measuring the fair value
of stock options, the weighted average fair value of options
granted, modified or assumed on privatization and the
compensation expense recorded in selling, general and
administrative expenses are as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Risk free interest rate 3.32% - 3.24% 3.29%
Expected dividend yield 2.40% - 2.18% 1.63%
Expected volatility 23% - 23% 32%
Expected time until
exercise 2 years - 2 years 4 years
---------------------------------------------------------------------
Weighted average fair
value of options
granted or modified
in period (Cdn$) $ 19.33 $ - $ 18.48 $ 29.64
---------------------------------------------------------------------
Compensation expense
recorded in selling,
general and administrative
expenses $ 6 $ - $ 9 $ 13
---------------------------------------------------------------------
In connection with the privatization of Tesma, Decoma and Intier,
the terms of outstanding Tesma, Decoma and Intier stock options
were modified through either the exchange of Tesma, Decoma and
Intier options for Magna replacement options or through
adjustment provisions to existing options such that holders of
Tesma, Decoma and Intier continuing options would be entitled to
receive Magna Class A Subordinate Voting shares in lieu of Tesma,
Decoma or Intier Class A Subordinate Voting Shares when
exercised. Where the original options were granted prior to
January 1, 2003 and were unvested at the date of privatization,
the above modifications create incremental compensation expense
over the remaining vesting period.
During the three month period ended March 31, 2004, option
agreements with certain former employees of the Company were
modified, which resulted in a one time charge to compensation
expense of $12 million. This charge represents the remaining
measured but unrecognized compensation expense related to the
options granted during 2003, and the fair value at the date of
modification of all of the options that were granted prior to
January 1, 2003.
If the fair value recognition provisions would have been adopted
effective January 1, 2002 for all stock options granted after
January 1, 2002, the Company's pro forma net income and pro forma
basic and diluted earnings per Class A Subordinate Voting or
Class B Share for the three and six month periods ended June 30,
2005 and 2004 would have been as follows:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Pro forma net income $ 224 $ 187 $ 395 $ 369
Pro forma earnings per
Class A Subordinate
Voting or Class B Share
Basic $ 2.09 $ 1.93 $ 3.77 $ 3.82
Diluted $ 2.05 $ 1.92 $ 3.72 $ 3.79
---------------------------------------------------------------------
(c) At June 30, 2005, unamortized compensation expense related to the
restricted stock arrangements was $30 million, and has been
presented as a reduction of shareholders' equity.
(d) Contributed surplus consists of accumulated stock option
compensation expense less the fair value of options at the grant
date that have been exercised and reclassified to share capital,
the fair value of options assumed through the privatization of
Tesma, Decoma and Intier, and the accumulated restricted stock
compensation expense less the portion of restricted stock that
has been released to the executives and reclassified to share
capital. The following is a continuity schedule of contributed
surplus:
2005 2004
---------------------------------------------------------------------
Balance, beginning of year $ 16 $ 3
Impact of privatization transactions (note 6) 20 -
Stock-based compensation expense 2 12
Exercise of options (5) (1)
---------------------------------------------------------------------
Balance, March 31, 33 14
Impact of privatization transaction (note 6) 25 -
Stock-based compensation expense 5 -
Exercise of options (2) -
---------------------------------------------------------------------
Balance, June 30, $ 61 $ 14
---------------------------------------------------------------------
---------------------------------------------------------------------
8. SEGMENTED INFORMATION
Three months ended Three months ended
June 30, 2005 June 30, 2004
-------------------------- --------------------------
Fixed Fixed
Total assets, Total assets,
sales EBIT(i) net sales EBIT(i) net
---------------------------------------------------------------------
Decoma $ 799 $ 19 $ 661 $ 689 $ 44 $ 689
Intier 1,518 86 533 1,410 67 543
Tesma 369 22 407 341 35 347
Magna Steyr 1,771 79 725 1,471 63 524
Other Automotive
Operations 1,458 101 1,380 1,247 125 1,188
Corporate and
other (57) 18 343 (45) 7 75
---------------------------------------------------------------------
Total reportable
segments $ 5,858 $ 325 4,049 $ 5,113 $ 341 3,366
Current assets 6,279 6,077
Investments,
goodwill and
other assets 1,554 1,147
---------------------------------------------------------------------
Consolidated
Total Assets $11,882 $10,590
---------------------------------------------------------------------
---------------------------------------------------------------------
Six months ended Six months ended
June 30, 2005 June 30, 2004
-------------------------- --------------------------
Fixed Fixed
Total assets, Total assets,
sales EBIT(i) net sales EBIT(i) net
---------------------------------------------------------------------
Decoma $ 1,568 $ 29 $ 661 $ 1,409 $ 93 $ 689
Intier 2,986 133 533 2,803 119 543
Tesma 746 46 407 703 74 347
Magna Steyr 3,636 141 725 2,846 100 524
Other Automotive
Operations 2,748 178 1,380 2,536 250 1,188
Corporate and
other (108) 53 343 (81) 33 75
---------------------------------------------------------------------
Total reportable
segments $11,576 $ 580 4,049 $10,216 $ 669 3,366
Current assets 6,279 6,077
Investments,
goodwill and
other assets 1,554 1,147
---------------------------------------------------------------------
Consolidated
Total Assets $11,882 $10,590
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) EBIT represents operating income before interest income or
expense.
9. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current period's method of presentation.
END FIRST AND FINAL ADD