Magna Announces Third Quarter Results
AURORA, ON, Nov. 8, 2005 -- Magna International Inc. (TSX: MG.SV.A, MG.MV.B; NYSE: MGA) today reported financial results for the third quarter and nine month period ended September 30, 2005.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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2005 2004 2005 2004
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Sales $ 5,381 $ 4,784 $ 16,957 $ 15,000
Operating income $ 240 $ 223(1) $ 817 $ 875(1)
Net income $ 159 $ 132(1) $ 556 $ 499(1)
Diluted earnings per share $ 1.44 $ 1.37(1) $ 5.16 $ 5.13(1)
(1) Operating income, net income and diluted earnings per share have been
restated to reflect the accounting policy change described in Note 2
of the unaudited interim consolidated financial statements attached
to this press release.
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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 SEPTEMBER 30, 2005
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We posted sales of $5.4 billion for the third quarter ended September 30, 2005, an increase of 12% over the third quarter of 2004. The higher sales level in the third quarter of 2005 reflects increases of 24% in North American average dollar content per vehicle and 14% in European average dollar content per vehicle, each over the comparable quarter in 2004. During the third quarter of 2005, North American vehicle production increased 2% and European vehicle production declined 6%, each from the comparable quarter in 2004. European complete vehicle assembly sales decreased 20% or $219 million to $879 million for the third quarter of 2005 compared to $1.1 billion for the third quarter of 2004.
Our operating income was $240 million for the third quarter of 2005 compared to $223 million for the third quarter of 2004.
We earned net income for the third quarter ended September 30, 2005 of $159 million, compared to $132 million for the third quarter ending September 30, 2004.
Diluted earnings per share were $1.44 for the third quarter ended September 30, 2005, compared to $1.37 for the third quarter ending September 30, 2004.
During the three months ended September 30, 2005, we generated cash from operations before changes in non-cash operating assets and liabilities of $357 million, and invested $482 million in non-cash operating assets and liabilities. Total investment activities for the third quarter of 2005 were $229 million, including $198 million in fixed asset additions and a $31 million increase in other assets.
NINE MONTHS ENDED SEPTEMBER 30, 2005 ------------------------------------
We posted record sales of $17.0 billion for the nine months ended September 30, 2005, an increase of 13% over the comparable period in 2004. The higher sales level in the first nine months of 2005 reflects increases of 21% in North American average dollar content per vehicle and 15% in European average dollar content per vehicle, each over the comparable period in 2004. During the first nine months of 2005, North American vehicle production declined 1% and European vehicle production declined 5%, each from the comparable period in 2004. European complete vehicle assembly sales declined 6% or $195 million to $3.1 billion for the nine months ended September 30, 2005 compared to $3.3 billion for the nine months ended September 30, 2004.
Our operating income was $817 million for the nine months ended September 30, 2005 compared to $875 million for the comparable period in 2004.
We earned net income for the nine months ended September 30, 2005 of $556 million, compared to $499 million for the comparable period in 2004.
Diluted earnings per share were $5.16 for the nine months ended September 30, 2005, compared to $5.13 for the comparable period in 2004.
During the nine months ended September 30, 2005, we generated cash from operations before changes in non-cash operating assets and liabilities of $1.1 billion, and invested $592 million in non-cash operating assets and liabilities. Total investment activities for the first nine months of 2005 were $795 million, including $527 million in fixed asset additions, $168 million to purchase subsidiaries and a $100 million increase in other assets.
A more detailed discussion of our consolidated financial results for the third quarter and nine months ended September 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 quarter ended September 30, 2005. The dividend of U.S. $0.38 per share is payable on December 15, 2005 to shareholders of record on November 30, 2005.
2005 OUTLOOK ------------
All amounts below exclude the impact of any potential future acquisitions.
We expect our results will 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, we expect that our 2005 results will be negatively impacted by certain unusual items, including rationalization and other charges associated with certain of our operations, including operations that supplied MG Rover, as well as restructuring charges arising from our recently completed privatizations.
We expect 2005 average dollar content per vehicle to be between $730 and $740 in North America and between $320 and $330 in Europe. We expect 2005 European complete vehicle assembly sales to be between $4.0 billion and $4.1 billion. Further, we have assumed 2005 vehicle production volumes will be approximately 15.7 million units in North America and approximately 15.9 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 consolidated sales for 2005 to be between $22.3 billion and $22.9 billion, compared to 2004 consolidated sales of $20.7 billion. In addition, we expect that 2005 spending for fixed assets will be between $825 million and $875 million.
In 2005, excluding the impact of the unusual items noted above, we anticipate lower diluted earnings per share than 2004.
We are the most diversified automotive supplier in the world. We design, develop and manufacture 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. Our capabilities include the design, engineering, testing and manufacture of automotive interior and closure systems; metal body and structural systems; exterior and interior mirror and engineered glass systems; exterior systems including front and rear end modules, plastic body panels, exterior trim and other systems, various powertrain and drivetrain systems; as well as complete vehicle engineering and assembly.
We have over 82,000 employees in 222 manufacturing operations and 58 product development and engineering centres in 22 countries.
------------------------------------------------------------------------- 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 nine months ended September 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 nine months ended September 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 November 7, 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 and second quarters of 2005, we completed the privatizations of Tesma International Inc. ("Tesma"), Decoma International Inc. ("Decoma") and Intier Automotive Inc. ("Intier") (the "Privatizations"). 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 third quarter of 2005, our segmented information continues to be provided utilizing our former global systems groups, consistent with the second quarter of 2005.
HIGHLIGHTS -------------------------------------------------------------------------
Once again in the third quarter of 2005, we faced challenges, as compared to the third quarter of 2004, including lower production volumes on certain of our high content platforms, higher commodity prices and incremental price concessions.
Considering these ongoing challenges, we reported strong results in the third quarter of 2005. Our sales increased 12% or $597 million to $5.4 billion, operating income increased 8% to $240 million and diluted earnings per share increased 5% to $1.44, all in comparison to the third quarter of 2004.
There is significant distress in the automotive supply base, brought on by continued competitive pressures, commodity price increases, relatively weak automotive production in North America, particularly at General Motors and Ford, highly leveraged capital structures, and other factors. As a result, a number of automotive component suppliers have sought court protection in order to restructure their businesses. While we have experienced modest negative impact from the distress in the automotive supply base, the relative weakness of some of our direct competitors has provided, and we believe will continue to provide business opportunities for us, given our strong financial position, ongoing profitability and continued investment in technology.
In July, DaimlerChrysler, announced the development of a deeper relationship with a select group of key suppliers. Magna was identified as one of DaimlerChrysler's Highly Integrated Partnership Organizations ("HI-POs"). This improved model of co-operation with suppliers is intended to provide numerous benefits to the HI-POs, including early involvement in the product development of future models. As an example of this early involvement, DaimlerChrysler identified that Magna had been awarded the vehicle interior, excluding seats, for a future model of the Chrysler Group, scheduled for launch in model year 2008.
Similarly, in September, Ford announced that it was entering into new long term "Aligned Business Framework" agreements with select suppliers, and identified Magna and six other automotive component suppliers as the first of the strategic suppliers in the initial phase of Ford's new framework. The framework anticipates a significant reduction over time in the number of suppliers to Ford.
We launched significant programs in newly completed production facilities in the third quarter: our plant in Hermosillo, Mexico began to supply various stampings for the launch of the Ford Fusion, Mercury Milan and Lincoln Zephyr; and our facility in Bowling Green, Kentucky began to supply frames for the launch of the new Ford Explorer. Next year, this frame facility will also support the launch of the new Ford F-Series Super Duty pickup trucks. Although we expect these facilities to be profitable as they reach full production, these facilities generated start-up losses which are normal during the launch of new programs.
We were awarded our first ever transfer case business from a major Japanese based OEM for two vehicle programs, one of which is built in North America and the other in Japan. These important awards demonstrate our ability to introduce our four-wheel and all-wheel drive competence to new customers.
The most significant issues that affected our results in the third quarter of 2005 included:
- Unusual items: During the third quarter of 2005, we recorded certain
unusual items, including the following:
- the receipt of $26 million awarded by a court in a lawsuit
commenced by us in 1998 in respect of defective materials
installed by a supplier in a real estate project; and
- restructuring charges totalling $14 million substantially related
to a European facility and the Privatizations.
- Commodity Prices: During the third quarter of 2005, we continued to
pay more for raw materials, including purchased components, used in
our production compared to the third quarter of 2004. Although a
significant portion of our steel, resins and other components are
covered under customer resale programs or long-term contracts,
increased commodity prices negatively impacted our results in the
third quarter of 2005, as compared to the third quarter of 2004 and
we expect this trend to continue for the balance of the year. At the
same time, scrap steel prices have decreased which has negatively
impacted our results in the third quarter of 2005, as compared to the
third quarter of 2004.
- Pricing Pressures: Given the increasingly competitive nature of the
industry, we faced increased price concessions in the third quarter
of 2005 as compared to the third quarter of 2004.
- Underperforming Divisions: We continue to experience inefficiencies
and operating losses at Decoma's fascia moulding and paint facility
in Georgia as it launches and ramps up production on new programs. In
Europe, Decoma continues to experience increased losses associated
with under-utilized paint capacity, performance issues and program
launch costs.
- Plant Rationalizations and Restructuring: As discussed above, during
the third quarter of 2005 we incurred certain restructuring costs. In
connection with the Privatizations and industry conditions, during
2005 we have been assessing our global operating structure and
capacity. As a result of this assessment, we are implementing a
facility rationalization strategy that includes operating group
restructuring and plant consolidations, sales and/or closures, and
the associated expenses have had, and will continue to have, an
adverse effect on our 2005 profitability.
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, leading to 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 and automotive component suppliers. Increased raw
material prices, including steel and resins, are also adversely
affecting automobile manufacturers and automotive component
suppliers. 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 further 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. 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. However, one such
supplier has challenged its agreements with one of our operating
groups while steel prices were rising and, to the extent that it
successfully continues to dispute, terminate or otherwise refuse to
honour its 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 or 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. Additionally, the financial distress or the insolvency or
bankruptcy of a significant supplier to one of our customers could
disrupt the supply of products to such customer, resulting in a
reduction in production by our customer. Such a reduction in our
customer's production could negatively impact our production,
resulting in unrecoverable losses. Any prolonged disruption in the
supply of critical components by our suppliers or suppliers to one of
our customers, 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 a material
adverse effect on our operations and/or 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 are 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 or probable 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. 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.
- We anticipate that our fourth quarter results will be impacted by
losses at certain of our operating divisions in both North America
and Europe. We are currently reviewing our long-term plans for some
of these operating divisions. As a result, there is a risk that we
may not be able to recover certain long-term assets at some of these
operating divisions. Although we are currently unable to quantify any
such amounts, any unrecoverable amount could have a material adverse
effect on our short-term profitability.
- In connection with the recent Privatizations of our former publicly
traded subsidiaries, we expect certain functions will be reorganized
to streamline such functions in a manner consistent with the stated
objectives of the Privatizations. 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.
- From time to time, we may be contingently liable for contractual and
other claims with customers, suppliers and former employees. On an
ongoing basis, we attempt to assess the likelihood of any adverse
judgements or outcomes to these claims, although it is difficult to
predict final outcomes with any degree of certainty. At this time, we
do not believe that any of the claims which we are party to will have
a material adverse effect on our financial position, however, we
cannot provide any assurance to this effect.
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 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 months Nine months
ended ended
September 30, September 30,
2004 2004
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Increase in interest expense $ 10 $ 29
Decrease in income taxes (4) (11)
Decrease in minority interest (1) (3)
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Decrease in net income (5) (15)
Decrease in financing charges on Preferred
Securities and other paid-in-capital 5 15
Decrease in foreign exchange gain on
redemption of Preferred Securities (18) (18)
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Decrease in net income available to Class A
Subordinate Voting and Class B Shareholders $ (18) $ (18)
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Reduction of earnings per Class A Subordinate
voting or Class B Share
Basic $ (0.18) $ (0.18)
Diluted $ (0.18) $ (0.18)
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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 our complete vehicle assembly business (see "European Complete Vehicle Assembly Sales" below). Effective with the first quarter of 2004, European production sales and European 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 For the nine
months ended months ended
September 30, September 30,
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2005 2004 Change 2005 2004 Change
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1 Canadian dollar equals
U.S. dollars 0.834 0.766 + 9% 0.818 0.753 + 9%
1 euro equals U.S. dollars 1.221 1.223 - 1.262 1.225 + 3%
1 British pound equals
U.S. dollars 1.788 1.816 - 2% 1.843 1.821 + 1%
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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 SEPTEMBER 30, 2005
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Sales
For the three
months ended
September 30,
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2005 2004 Change
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Vehicle Production Volumes (millions of units)
North America 3.722 3.632 + 2%
Europe 3.509 3.724 - 6%
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Average Dollar Content Per Vehicle
North America $ 756 $ 608 + 24%
Europe $ 338 $ 297 + 14%
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Sales
North American Production $ 2,813 $ 2,210 + 27%
European Production 1,187 1,107 + 7%
European Complete Vehicle Assembly 879 1,098 - 20%
Tooling, Engineering and Other 502 369 + 36%
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Total Sales $ 5,381 $ 4,784 + 12%
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Total sales reached a third quarter record, increasing 12% or $597 million to $5.4 billion compared to $4.8 billion for the third quarter of 2004.
North American Production Sales
North American production sales increased 27% or $603 million to $2.8 billion for the third quarter of 2005 compared to $2.2 billion for the third quarter of 2004. This increase in production sales reflects a 24% increase in our North American average dollar content per vehicle combined with a 2% increase in North American vehicle production volumes.
Our average dollar content per vehicle grew by 24% or $148 to $756 for the third quarter of 2005 compared to $608 for the third quarter of 2004, primarily as a result of:
- the launch of new programs during or subsequent to the third quarter
of 2004, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Hummer H3;
- the Dodge Charger;
- the Chevrolet HHR;
- the Mercedes M-Class;
- the Ford Mustang; and
- the Pontiac Torrent;
- 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 and/or content on certain programs, including
the Chrysler minivans.
These increases were partially offset by:
- the impact of lower production and/or content on certain high content
programs, including:
- the GMT800 platform;
- the Dodge Ram pickup;
- the Ford Expedition;
- the Chevrolet Canyon and GMC Colorado;
- the Ford Freestar and Mercury Monterey; and
- the Dodge Magnum;
- programs that ended production during or subsequent to the third
quarter of 2004; and
- incremental customer price concessions.
European Production Sales
European production sales increased 7% or $80 million to $1.2 billion for the third quarter of 2005 compared to $1.1 billion for the third quarter of 2004. This increase in production sales reflects a 14% increase in our European average dollar content per vehicle, partially offset by a 6% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 14% or $41 to $338 for the third quarter of 2005 compared to $297 for the third quarter of 2004, primarily as a result of:
- programs that launched during or subsequent to the third quarter of
2004, including the Mercedes A-Class and B-Class;
- the acquisition of the European operations of NVG; and
- increased production on certain programs including the MINI Cooper.
These increases were partially offset by:
- the impact of lower production volumes on certain programs, including
the Mercedes E-Class;
- lower production volumes on the recently launched Audi A4 compared to
the production volumes on the previous Audi A4 in the third quarter
of 2004;
- 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
during the second quarter of 2005 in the United Kingdom, which is
similar to Chapter 11 bankruptcy protection in the United States (the
"MG Rover situation").
European Complete Vehicle Assembly Sales
European complete vehicle assembly sales decreased 20% or $219 million to $879 million for the third quarter of 2005 compared to $1.1 billion for the third quarter of 2004. Our complete vehicle assembly volumes for the third quarter of 2005 and the third quarter of 2004 were as follows:
For the three
months ended
September 30,
--------------
Complete Vehicle Assembly Volumes (Units) 2005 2004 Change
-------------------------------------------------------------------------
Full-Costed:
BMW X3, Mercedes E-Class and G-Class,
Saab 9(3) Convertible 32,105 41,109 - 22%
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager 23,930 16,426 + 46%
-------------------------------------------------------------------------
56,035 57,535 - 3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The terms of our 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, we are acting as principal, and purchased components and systems in assembled vehicles are included in our 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. Other contracts provide that third party components and systems are held on consignment by us, and the selling price to the OEM customer reflects a value-added assembly fee only.
Production levels of the various vehicles assembled by us have an impact on the level of our 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 our levels of sales and operating margin percentage, but may not necessarily affect our 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.
The decrease in complete vehicle assembly sales is primarily the result of:
- lower assembly volumes for vehicles accounted for on a full-cost
basis, including:
- the BMW X3;
- the Saab 9(3) Convertible; and
- the Mercedes G-Class; and
- lower assembly volumes for the Chrysler Voyager which is accounted
for on a value-added basis.
These decreases were partially offset by:
- increased assembly volumes for certain vehicles which are accounted
for on a value-added basis including:
- the launch in June 2005 of the Chrysler 300 for distribution in
European markets and certain other markets outside North America;
and
- the launch of the Jeep Grand Cherokee in the first quarter of 2005
which had higher volumes than the previous model in the third
quarter of 2004; and
- increased assembly volumes for the Mercedes E-Class 4MATIC which is
accounted for on a full-cost basis.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 36% or $133 million to $502 million for the third quarter of 2005 compared to $369 million for the third 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 including:
- General Motors' next generation full-size pickup and sport
utilities platform;
- the Mercedes M-Class; and
- the next generation MINI Cooper; and
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar.
Gross Margin
Gross margin increased $44 million to $702 million for the third quarter of 2005 compared to $658 million for the third quarter of 2004. Gross margin as a percentage of total sales decreased to 13.0% for the third quarter of 2005 compared to 13.8% for the third 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;
- a decrease in production volumes for several of our high content
programs including the GMT800 platform, and the Ford Freestar and
Mercury Monterey;
- 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 recently launched Ford
Explorer and the next generation F Series Super Duty pickup
trucks; and
- a new fascia moulding and paint facility in Georgia to support the
launch of the Mercedes M-Class and R-Class; 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:
- the closure during 2004 of certain underperforming divisions in
Europe;
- productivity improvements at certain divisions;
- price reductions from our suppliers; and
- 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.
Depreciation and Amortization
Depreciation and amortization costs increased 16% or $24 million to $174 million for the third quarter of 2005 compared to $150 million for the third quarter of 2004. The increase in depreciation and amortization for the third quarter of 2005 was primarily due to:
- depreciation and amortization on increased assets employed in the
business to support future growth;
- depreciation and amortization on assets acquired on the acquisition
of NVG;
- amortization of fair value increments related to the Privatizations;
and
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar against the U.S. dollar.
These increases were partially offset by accelerated depreciation recorded in the third quarter of 2004 on certain program-specific assets that went out of service earlier than originally planned.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales decreased to 5.3% for the third quarter of 2005 compared to 5.9% for the third quarter of 2004. SG&A expenses increased $6 million to $287 million for the third quarter of 2005 compared to $281 million for the third quarter of 2004.
The $6 million increase in SG&A expenses includes the following items:
- the receipt of $26 million during the third quarter of 2005 which was
awarded by a court in a lawsuit commenced by us in 1998 in respect of
defective materials installed by a supplier in a real estate project;
- restructuring charges totalling $14 million substantially related to
a European facility and the Privatizations; and
- a $2 million loss recorded in the third quarter of 2004 on the sale
of a facility in Europe.
Excluding these items, the remaining $20 million increase in SG&A expenses is primarily a result of:
- increased SG&A spending as a result of the acquisition of NVG;
- an increase in reported U.S. dollar expenses due to the strengthening
of the Canadian dollar against the U.S. dollar; and
- higher infrastructure costs to support upcoming launches.
Interest Expense
Interest expense decreased $3 million to $2 million for the third quarter of 2005 compared to $5 million for the third 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 NVG; and
- lower interest income earned as a result of lower average cash
balances during the third quarter of 2005 compared to the third
quarter of 2004.
Operating Income
Operating income increased 8% or $17 million to $240 million for the third quarter of 2005 compared to $223 million for the third quarter of 2004. The discussion above provides an analysis of the $17 million increase in our operating income. In particular, on a comparable basis, our operating income was positively impacted by:
- the receipt of $26 million during the third quarter of 2005 which was
awarded by a court in a lawsuit commenced by us in 1998 in respect of
defective materials installed by a supplier in a real estate project;
- programs that launched during or subsequent to the third quarter of
2004;
- the acquisition of the NVG business;
- improved operations at certain facilities;
- accelerated depreciation recorded in the third quarter of 2004 on
certain program-specific assets that went out of service earlier than
originally planned;
- a loss recorded during the third quarter of 2004 on the sale of a
facility in Europe;
- productivity improvements at certain facilities;
- price reductions from our suppliers; and
- the disposal of our Anotech facility during the first quarter of 2005
which improved our results as this division incurred operating losses
during the third quarter of 2004.
Partially offsetting these increases was the negative impact of:
- increased commodity prices;
- incremental price concessions;
- restructuring charges totalling $14 million substantially related to
a European facility and the Privatizations;
- increased depreciation and amortization as a result of the
Privatizations and the acquisition of NVG; and
- operating inefficiencies at certain facilities.
Income Taxes
Our effective income tax rate on operating income (excluding equity income) decreased to 33.9% for the third quarter of 2005 from 36.0% for the third 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 and a reduction in losses not benefited, partially offset by a change in mix of earnings whereby proportionately more operating income (excluding equity income) was earned in jurisdictions with higher tax rates.
Minority Interest
Minority interest expense decreased $11 million because no minority interest expense was recorded in the third quarter of 2005 as a result of the Privatizations.
Net Income
Net income increased 20% or $27 million to $159 million for the third quarter of 2005 compared to $132 million for the third quarter of 2004. The increase in net income is a result of the $17 million increase in operating income combined with the $11 million decrease in minority interest, partially offset by the $1 million increase in income taxes (see above).
Earnings per Share
For the three
months ended
September 30,
--------------
2005 2004 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share:
Basic $ 1.47 $ 1.37 + 7%
Diluted $ 1.44 $ 1.37 + 5%
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting
and Class B Shares outstanding (millions):
Basic 108.4 96.8 + 12%
Diluted 111.2 97.4 + 14%
-------------------------------------------------------------------------
Diluted earnings per share increased 5% or $0.07 to $1.44 for the third quarter of 2005 compared to $1.37 for the third quarter of 2004. Included in the $0.07 increase in diluted earnings per share is the net increase in diluted earnings per share of $0.10 related to the following items in the third quarters of 2005 and 2004:
- the receipt of $26 million during the third quarter of 2005 which was
awarded by a court in a lawsuit commenced by us in 1998 in respect of
defective materials installed by a supplier in a real estate project;
- restructuring charges recorded in the third quarter of 2005
substantially related to a facility in Europe and the Privatizations;
- accelerated depreciation on certain program-specific assets recorded
in the third quarter of 2004; and
- a loss recorded in the third quarter of 2004 on the sale of a
facility in Europe.
Excluding these items, diluted earnings per share decreased $0.03 from the third quarter of 2004 as a result of an increase in the weighted average number of diluted shares outstanding during the quarter, partially 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 11.9 million additional shares that were included in
the weighted average number of shares outstanding as a result of the
Privatizations;
- approximately 1.1 million additional shares that are issuable as a
result of assuming Decoma's obligation for its 6.5% Convertible
Subordinated Debentures;
- 0.3 million additional shares that were issued on the exercise of
stock options during the third quarter of 2004 and the first nine
months 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 third quarter of 2005 was 14.9%, a decline from 18.6% for the third quarter of 2004. In the third quarters of 2005 and 2004, we had the following items that accounted for a net 1.3% increase in our ROFE:
- the receipt of $26 million during the third quarter of 2005 which was
awarded by a court in a lawsuit commenced by us in 1998 in respect of
defective materials installed by a supplier in a real estate project;
- restructuring charges recorded in the third quarter of 2005
substantially related to a facility in Europe and the Privatizations;
- accelerated depreciation on certain program specific assets recorded
in the third quarter of 2004; and
- a loss recorded in the third quarter of 2004 on the sale of a
facility in Europe.
Excluding these items, the remaining 5.0% decrease in ROFE can be attributed to a decrease in our EBIT(2) (excluding unusual items) combined with an increase in our average funds employed(3) for the third quarter of 2005 compared to the third quarter of 2004. The increase in our average funds employed was primarily a result of:
- the acquisition of the NVG business;
- the Privatizations, which added approximately $600 million of funds
employed;
- an increase in our average investment in non-cash operating assets
and liabilities as discussed below in the "Cash Flow from Operations"
section; and
- increased funds employed for new facilities associated with new or
upcoming launches.
SEGMENTS
-------------------------------------------------------------------------
For the three months
ended September 30,
-------------------------------------------
2005 2004
--------------------- ---------------------
Total Total
sales EBIT sales EBIT
-------------------------------------------------------------------------
Decoma $ 765 $ 5 $ 639 $ 12
Intier 1,308 26 1,278 41
Tesma 363 25 322 20
Magna Steyr 1,554 60 1,432 51
Other Automotive Operations 1,442 86 1,153 76
Corporate and Other (i) (51) 40 (40) 28
-------------------------------------------------------------------------
$ 5,381 $ 242 $ 4,784 $ 228
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.
(3) Funds employed is defined as long term assets, excluding future tax
assets 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 20% or $126 million to $765 million for the third quarter of 2005 from $639 million for the third 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 and an increase in Decoma's tooling, engineering and other sales, combined with a 2% increase in North American vehicle production volumes, partially offset by a 6% 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 production and/or content on several programs, related
principally to the launch of new programs during or subsequent to the
third quarter of 2004 including:
- the Mercedes M-Class;
- the Chrysler 300/300C, Dodge Magnum and Charger;
- the Cadillac DTS;
- the Chevrolet Equinox, Cobalt and Impala;
- the Pontiac Pursuit; and
- the Jeep Grand Cherokee.
These increases were partially offset by incremental customer price concessions.
In Europe, the increase in Decoma's average dollar content per vehicle was primarily attributable to:
- increased production and/or content on several programs, related
principally to the launch of new programs during or subsequent to the
third quarter of 2004 including:
- the launch of the fascia and front end module for the Mercedes
A-Class and B-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.
These increases were partially offset by incremental customer price concessions and the end of production on all MG Rover programs as a result of the MG Rover situation.
EBIT
Decoma's EBIT decreased 58% or $7 million to $5 million for the third quarter of 2005 compared to $12 million for the third quarter of 2004. This decrease is primarily attributable to:
- operating losses at Decoma's fascia moulding and paint facility in
Georgia as it launches and ramps up production on new programs;
- inefficiencies at facilities in Europe, including increased losses
associated with under-utilized paint capacity, performance issues and
program launch costs;
- incremental customer price concessions; and
- increased raw material costs.
These decreases were partially offset by:
- operational improvements realized at certain facilities;
- price reductions from our suppliers;
- the disposal of Decoma's Anotech facility during the first quarter of
2005 which improved results as this division incurred operating
losses during the third quarter of 2004; and
- contributions from new launches.
Intier
Sales
Intier's sales increased by 2% or $30 million to $1.31 billion for the third quarter of 2005 compared to $1.28 billion for the third quarter of 2004. The increase in sales is primarily the result of an increase in Intier's North American and European average dollar content per vehicle combined with a 2% increase in North American vehicle production volumes, partially offset by a 6% decline in European vehicle production volumes.
In North America, the increase in Intier'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;
- the launch of new programs during or subsequent to the third quarter
of 2004, including:
- the complete interior, excluding seats, for the Hummer H3;
- the complete seats for the Chevrolet Cobalt and the Pontiac
Pursuit; and
- the complete seats, headliner, instrument panel, front console
and latches for the Pontiac Torrent; and
- increased production and/or content on certain programs including:
- the second and third row stow-in-floor seats for Chrysler
minivans;
- the complete seats for the Chrysler Pacifica; and
- the side door latches for the Ford Freestyle.
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 Expedition;
- 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 third quarter
of 2004 including:
- a side door latch for the Seat Altea and Volkswagen Passat; and
- the floorspace for the Mercedes S-Class; and
- increased volume on a number of programs including a modular side
door latch for a number of Audi programs.
These increases were partially offset by:
- incremental customer price concessions;
- lower volumes on certain programs including the Audi A6 and the
Mercedes E-Class; and
- the end of production on all MG Rover programs as a result of the
MG Rover situation.
EBIT
Intier's EBIT decreased by 37% or $15 million to $26 million for the third quarter of 2005 compared to $41 million for the third quarter of 2004. The decrease is primarily a result of:
- reduced operating margin resulting from lower vehicle volumes on
certain of Intier's high content programs;
- reduced operating margin resulting from reduced content on the Dodge
Ram pickup;
- increased raw material prices, including purchased components,
partially offset by price reductions from certain suppliers;
- incremental customer price concessions;
- operating inefficiencies at certain facilities;
- costs incurred to support future launches; and
- costs incurred in Asia on new joint-venture facilities.
These decreases in EBIT were partially offset by:
- additional gross margin earned on sales from new product launches and
increased volumes on certain programs;
- an increase in reported U.S. dollar EBIT due to the strengthening of
the Canadian dollar against the U.S. dollar;
- a $2 million loss recorded in the third quarter of 2004 on the sale
of a facility in Europe; and
- operational improvements at certain facilities.
Tesma
Sales
Tesma's sales increased by 13% or $41 million to $363 million for the third quarter of 2005 compared to $322 million for the third quarter of 2004. The increase in sales is primarily the result of an increase in Tesma's North American and European average dollar content per vehicle, combined with a 2% increase in North America vehicle production volumes, partially offset by a 6% decline in European vehicle production volumes.
In North America, Tesma's average dollar content per vehicle increased over the prior year, as a result of an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar and increased production and/or content on certain programs including:
- the launch of assemblies including oil pans, flexplates and an
integrated front cover with water pump for General Motors' 3.9L
engine program;
- General Motors' Line 4, 5 and 6 engines, which are installed into
mid-size sport utility vehicles ("SUVs") and mid-size pick-up trucks;
- water pump modules, flexplates and tensioner assemblies for the 5.7L
Hemi engine for the Dodge Durango, Chrysler 300/300C and Dodge
Magnum;
- various stamped components included in 6-speed and continuously
variable transmission applications for Ford; and
- engine front cover and water pump modules for Hyundai's high volume
Lambda V6 engine program.
Partially offsetting these sales were incremental customer price concessions and lower production volumes on certain programs at General Motors and Ford including:
- the General Motors GEN IV engine, and 4L60E and LCT 1000
transmissions, which are installed in General Motors' larger pickup
trucks and SUVs;
- the General Motors L850/LE5 engine program used in smaller compact
cars and SUVs; and
- the Ford Modular V8 engine which is used in Ford's high volume pickup
trucks and larger cars.
In Europe, Tesma's average dollar content per vehicle increased as a result of:
- the launch of stainless steel fuel tank assemblies for
DaimlerChrysler's W221/211 vehicle platforms;
- increased volumes and content for stainless steel fuel tank
assemblies for Audi's D3 platform;
- higher shipments of fuel filler pipes for Ford's high volume Focus
program; and
- volume increases and new launches of water pumps for Fiat.
EBIT
Tesma's EBIT increased 25% or $5 million to $25 million for the third quarter of 2005 compared to $20 million for the third quarter of 2004. The increase in EBIT was largely a result of:
- decreased year-over-year material costs driven by lower steel
surcharge levels and price reductions from certain suppliers;
- higher operating margin earned as a result of higher sales levels;
and
- operational improvements at certain underperforming facilities in
North America.
These increases were partially offset by incremental customer price concessions.
Magna Steyr Sales
Magna Steyr's sales increased by 9% or $122 million to $1.6 billion for the third quarter of 2005 compared to $1.4 billion for the third quarter of 2004. The increase in sales was a result of:
- the acquisition of the NVG business;
- an increase in transfer case sales for the Land Rover Discovery and
BMW 3-Series and 5-Series;
- increased assembly volumes for certain vehicles which are accounted
for on a value-added basis including:
- the launch in June 2005 of the Chrysler 300 for distribution in
European markets and certain other markets outside North
America; and
- the launch of the Jeep Grand Cherokee in the first quarter of
2005 which had higher volumes than the previous model in the
third quarter of 2004; and
- increased assembly volumes for the Mercedes E-Class 4MATIC which is
accounted for on a full-cost basis.
These increases were partially offset by:
- lower complete vehicle assembly volumes for vehicles accounted for on
a full-cost basis, including:
- the BMW X3;
- the Saab 9(3) Convertible; and
- the Mercedes G-Class;
- lower complete vehicle assembly volumes for the Chrysler Voyager
which is accounted for on a value-added basis; and
- lower volumes for the BMW X3 for which we have production content in
addition to the assembly contract.
EBIT
Magna Steyr's EBIT increased by 18% or $9 million to $60 million for the third quarter of 2005 compared to $51 million for the third quarter of 2004. The increase in EBIT is primarily a result of:
- the acquisition of the NVG business;
- the increase in operating margin generated by increased sales,
including the launch of the Chrysler 300/300C; and
- lower planning, engineering and start-up costs associated with
General Motors' next generation full-size pick-ups and sport
utilities program in comparison to the third quarter of 2004.
Partially offsetting these increases were lower operating margins earned as a result of the decrease in complete vehicle assembly sales.
Other Automotive Operations Sales
Our Other Automotive Operations' sales increased 25% or $289 million to $1.4 billion for the third quarter of 2005 compared to $1.2 billion for the third quarter of 2004. The increase in sales was primarily a result of an increase in tooling sales and increases in the segment's North American and European average dollar content per vehicle combined with a 2% increase in North America vehicle production volumes, partially offset by a 6% decline in European vehicle production volumes.
In North America, the increase in average dollar content per vehicle is primarily a result of:
- the launch of new programs during or subsequent to the third quarter
of 2004 including:
- frames and liftgate window encapsulation for the new
Ford Explorer;
- various stampings for the Ford Mustang;
- Class A stampings and all window encapsulation for the
Mercedes M-Class;
- various stampings for the Ford Fusion, Mercury Milan and
Lincoln Zephyr;
- various stampings for the Chevrolet HHR; and
- Class A stampings for the Dodge Charger; and
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar.
These increases were partially offset by:
- lower volumes on certain 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:
- the launch of new programs including the Mercedes S-Class and
Volkswagen Passat, partially offset by reductions in volumes on
several programs including the BMW 5-Series and electrochromic
mirrors on various platforms, and incremental price concessions.
Tooling sales increased as a result of revenues earned on tooling for several programs including:
- General Motors' next generation full-size pickup and sport utilities
platform;
- the Mercedes M-Class;
- the Dodge Charger; and
- the Ford Fusion, Mercury Milan and the Lincoln Zephyr.
EBIT
Our Other Automotive Operations' EBIT increased 13% or $10 million to $86 million for the third quarter of 2005 compared to $76 million for the third quarter of 2004. The increase in EBIT is primarily a result of:
- higher gross margin earned from programs which launched during or
subsequent to the third quarter of 2004;
- price reductions from our suppliers; and
- accelerated depreciation recorded during the third quarter of 2004 on
program-specific assets that went out of service earlier than
originally planned.
These increases were partially offset by:
- lower operating margin earned on lower sales on certain high content
programs;
- incremental customer price concessions;
- restructuring costs incurred at a facility in Europe; and
- increased commodity prices for steel and resins combined with lower
scrap steel prices.
Corporate and Other
Corporate and Other EBIT increased 43% or $12 million to $40 million for the third quarter of 2005 compared to $28 million for the third quarter of 2004. The increase in EBIT is primarily a result of:
- the receipt of $26 million during the third quarter of 2005 which was
awarded by a court in a lawsuit commenced by us in 1998 in respect of
defective materials installed by a supplier in a real estate project;
and
- increased affiliation and other fee income earned as a result of
higher sales.
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;
- increased incentive compensation;
- additional depreciation recorded as a result of the Privatizations;
and
- a decrease in investment tax credits.
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
-------------------------------------------------------------------------
Sales
For the nine
months ended
September 30,
--------------
2005 2004 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (millions of units)
North America 11.812 11.942 - 1%
Europe 11.894 12.489 - 5%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 729 $ 603 + 21%
Europe $ 324 $ 281 + 15%
-------------------------------------------------------------------------
Sales
North American Production $ 8,609 $ 7,198 + 20%
European Production 3,849 3,504 + 10%
European Complete Vehicle Assembly 3,059 3,254 - 6%
Tooling, Engineering and Other 1,440 1,044 + 38%
-------------------------------------------------------------------------
Total Sales $ 16,957 $ 15,000 + 13%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North American Production Sales
North American production sales increased 20% or $1.4 billion to $8.6 billion for the nine months ended September 30, 2005 compared to $7.2 billion for the nine months ended September 30, 2004. This increase in production sales reflects a 21% increase in our North American average dollar content per vehicle, partially offset by a 1% decline in North American vehicle production volumes.
Our average dollar content per vehicle grew by 21% or $126 to $729 for the nine months ended September 30, 2005 compared to $603 for the nine months ended September 30, 2004, primarily as a result of:
- the launch of new programs during or subsequent to the nine months
ended September 30, 2004, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Hummer H3;
- the Ford Mustang;
- the Cadillac STS;
- the Chrysler 300/300C;
- the Dodge Charger;
- the Mercedes M-Class;
- the Chevrolet Equinox; and
- the Mercury Mariner;
- 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 and/or content on certain programs, including
Chrysler minivans.
These increases were partially offset by:
- the impact of lower volumes and/or content on certain programs
including:
- the GMT800 platform;
- the Ford Freestar and Mercury Monterey;
- the Dodge Ram pickup;
- the GMC Canyon and Chevrolet Colorado; and
- the Ford Expedition;
- programs that ended production during or subsequent to the nine
months ended September 30, 2004; and
- incremental customer price concessions.
European Production Sales
European production sales increased 10% or $345 million to $3.8 billion for the nine months ended September 30, 2005 compared to $3.5 billion for the nine months ended September 30, 2004. This increase in sales reflects a 15% increase in our European average dollar content per vehicle, partially offset by a 5% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 15% or $43 to $324 for the nine months ended September 30, 2005 compared to $281 for the nine months ended September 30, 2004, primarily as a result of:
- programs that launched during or subsequent to the first nine months
of 2004, including:
- the Land Rover Discovery;
- the Mercedes A and B-Class; 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;
and
- the acquisition of the European operations of NVG.
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 decreased 6% or $195 million to $3.1 billion for the nine months ended September 30, 2005 compared to $3.3 billion for the nine months ended September 30, 2004. This decrease in sales is primarily the result of:
- lower assembly volumes for vehicles accounted for on a full-cost
basis, including:
- the BMW X3;
- the Mercedes E-Class 4MATIC;
- the Mercedes G-Class; and
- the Saab 9(3) Convertible; and
- lower assembly volumes for the Chrysler Voyager which is accounted
for on a value-added basis.
These decreases were partially offset by increased assembly volumes for certain vehicles which are accounted for on a value-added basis including:
- the launch in June 2005 of the Chrysler 300 for distribution in
European markets and certain other markets outside North America; and
- the launch of the Jeep Grand Cherokee in the first quarter of 2005
which had higher volumes than the previous model in the third quarter
of 2004.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 38% or $396 million to $1.4 billion for the nine months ended September 30, 2005 compared to $1.0 billion for the nine months ended September 30, 2004. The increase was attributable to higher level of tooling and engineering revenue activities and an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar and euro, each against the U.S. dollar. Tooling and engineering revenue recorded in the first nine months of 2005 relates to a number of programs, including:
- the Ford Fusion, Mercury Milan and Lincoln Zephyr launched in 2005;
- General Motors' next generation full-size pickup and sport utilities
platform;
- the next generation MINI Cooper launching subsequent to the third
quarter of 2005;
- the Mercedes M-Class launched in 2005;
- the Hummer H3 launched in 2005; and
- the Jeep Grand Cherokee launched in 2005.
Operating Income
Operating income decreased 7% or $58 million to $817 million for the nine months ended September 30, 2005 compared to $875 million for the nine months ended September 30, 2004. On a comparable basis, our operating income was negatively impacted by:
- reduced volumes on certain high content GM and Ford programs;
- incremental price concessions;
- increased commodity prices;
- costs incurred at new facilities in preparation for upcoming launches
or for programs that have not fully ramped up production;
- increased depreciation and amortization as a result of the
Privatizations and the acquisition of NVG;
- restructuring costs and impairment charges;
- 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:
- the receipt of $26 million during the third quarter of 2005 which was
awarded by a court in a lawsuit commenced by us in 1998 in respect of
defective materials installed by a supplier in a real estate project;
- 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 nine months
of 2004;
- operational improvements at certain facilities;
- productivity improvements at certain divisions;
- price reductions from our suppliers;
- charges recorded during the first quarter of 2004 with respect to the
closure of facilities in Europe;
- accelerated depreciation recorded in the third quarter of 2004 for
assets that were going out of service earlier than originally
planned; and
- the loss on sale of a facility in Europe during the third quarter of
2004.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
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Cash Flow from Operations
For the three
months ended
September 30,
--------------
2005 2004 Change
-------------------------------------------------------------------------
Net income $ 159 $ 132
Items not involving current cash flows 198 179
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$ 357 $ 311 $ 46
Changes in non-cash operating assets and
liabilities (482) (74)
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Cash provided from (used in) operating
activities $ (125) $ 237 $(362)
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Cash flow from operations before changes in non-cash operating assets and liabilities increased $46 million to $357 million for the third quarter of 2005 compared to $311 million for the third quarter of 2004. The increase in cash flow from operations was due to a $27 million increase in net income (as explained above) combined with a $19 million increase in items not involving current cash flows.
The increase in items not involving current cash flows was due to:
- a $24 million increase in depreciation and amortization as explained
above;
- a $3 million increase in future income taxes; and
- a $3 million increase in other non-cash charges.
These increases were partially offset by an $11 million decrease in minority interest primarily as a result of the Privatizations.
Cash invested in operating assets and liabilities amounted to $482 million for the third quarter of 2005 which was comprised of the following sources and (uses) of cash:
Accounts receivable $ (505) Inventory (116) Prepaid expenses and other (11) Accounts payable and other accrued liabilities 140 Income taxes payable 8 Deferred revenues 2 ------------------------------------------------------------------------- Changes in non-cash operating assets and liabilities $ (482) ------------------------------------------------------------------------- -------------------------------------------------------------------------
The increase in accounts receivable is primarily due to the timing of cash receipts whereby approximately $500 million of cash was received shortly after the end of the third quarter.
The increase in inventory is a result of increased tooling inventory on certain programs that will be launching subsequent to the third quarter of 2005, an increase in work-in-process at one of our assembly facilities as a result of temporary supply disruptions and an increase in raw material inventory to support future production.
The increase in accounts payable and other accrued liabilities is consistent with the inventory build described above.
Capital and Investment Spending
For the three
months ended
September 30,
--------------
2005 2004 Change
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Fixed assets $ (198) $ (211)
Other assets (31) (2)
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Fixed assets and other additions $ (229) $ (213)
Purchase of subsidiaries 1 (353)
Proceeds from disposals 7 6
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Cash used in investing activities $ (221) $ (560) $ 339
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In the third quarter of 2005 we invested $198 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 for programs launching in future periods.
We invested $31 million in other assets in the third quarter of 2005 primarily representing fully reimbursable planning and engineering costs relating to programs that will be launching subsequent to the third quarter of 2005.
Purchase of subsidiaries in the third quarter of 2004 relates primarily to the acquisition of the NVG business. The cash portion of the purchase price, net of $3 million of cash acquired, amounted to $348 million. During the third quarter of 2005, we received a $1 million cash adjustment with respect to the acquisition of the NVG business.
Proceeds from disposals reflect proceeds from normal course fixed and other asset disposals.
Financing
For the three
months ended
September 30,
--------------
2005 2004 Change
-------------------------------------------------------------------------
Issues of debt $ 60 $ 287
Repayments of debt (16) (25)
Redemption of Preferred Securities - (300)
Issues of Class A Subordinate Voting Shares 6 -
Issues of shares by subsidiaries - 3
Dividends paid to minority interests - (5)
Dividends (41) (37)
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Cash provided from (used in) financing
activities $ 9 $ (77) $ 86
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In association with the acquisition of the NVG business in the third quarter of 2004, we issued five series of senior unsecured zero-coupon notes with an aggregate issue price of Cdn$365 million ($287 million on issue date). The issues of debt in the third quarter of 2005 relate primarily to increases in bank indebtedness.
During the third quarter of 2004, we redeemed all of our outstanding Preferred Securities for $300 million in cash.
During the third quarter of 2005, we issued $6 million in Class A Subordinate Voting Shares on the exercise of stock options. The issue of shares by our subsidiaries in 2004 is comprised primarily of the issue of $3 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 third quarter of 2005 were $41 million. These payments relate to dividends declared in respect of the three-month period ended June 30, 2005. The increase in quarterly dividends paid in the third quarter of 2005 compared to the third 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 third quarter of 2005 as a result of the Privatizations.
Financing Resources
As at As at
Sept 30, Dec 31,
2005 2004(i) Change
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Liabilities
Bank indebtedness $ 186 $ 136
Long-term debt due within one year 124 84
Long-term debt 705 984
Minority interest - 634
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1,015 1,838 $(823)
Shareholders' equity 6,556 5,335 1,221
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Total capitalization $ 7,571 $ 7,173 $ 398
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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 $398 million in the nine months ended September 30, 2005 to $7.6 billion. The increase in capitalization is a result of a $1.2 billion increase in shareholders' equity offset in part by an $823 million decrease in liabilities.
The increase in shareholders' equity is a result of:
- the Class A Subordinate Voting Shares issued as part of the purchase
price for the Privatizations and on the exercise of stock options;
and
- net income earned during the nine months ended September 30, 2005.
These increases were partially offset by:
- dividends paid;
- a decrease in the currency translation adjustment; and
- a reduction in share capital as a result of the repurchase of Class A
Subordinate Voting Shares for issuance to certain executives on a
restricted basis.
The acquisition of the remaining interest in Decoma 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 direct obligations of Magna.
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.
During the third quarter of 2005, our cash resources decreased by $528 million to $991 million as a result of the cash used in operating and investing activities, partially offset by the cash provided from financing activities, all as discussed above. In addition to our cash resources, we had unused and available operating lines of credit of $27 million and term lines of credit of $814 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.
Subsequent to the third quarter of 2005, we completed a new five-year revolving term facility that expires on October 12, 2010. The facility has a North American tranche of $1.57 billion and a European tranche of (euro) 300 million. An Asian tranche of $50 million has been committed to by the bank group and is in the process of being finalized. On closing, we cancelled our existing facility of $745 million and Intier's facility of $365 million and (euro) 100 million.
In addition to the above unused and available financing resources, we sponsored a tooling finance program for tooling suppliers to finance tooling under construction for use in our operations. The maximum facility amount was Cdn $100 million. This tooling finance program has been cancelled for new business. As at September 30, 2005, less than Cdn $1 million remains outstanding under this facility and 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 November 7, 2005 were exercised or converted:
Class A Subordinate Voting and Class B Shares 109,266,709
Subordinated Debentures (i) 1,096,582
Stock options (ii) 4,606,189
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114,969,480
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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 third 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.
We expect our results will 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, we expect that our 2005 results will be negatively impacted by certain unusual items, including rationalization and other charges associated with certain of our operations, including operations that supplied MG Rover, as well as restructuring charges arising from our recently completed privatizations.
We expect 2005 average dollar content per vehicle to be between $730 and $740 in North America and between $320 and $330 in Europe. We expect 2005 European complete vehicle assembly sales to be between $4.0 billion and $4.1 billion. Further, we have assumed 2005 vehicle production volumes will be approximately 15.7 million units in North America and approximately 15.9 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 consolidated sales for 2005 to be between $22.3 billion and $22.9 billion, compared to 2004 consolidated sales of $20.7 billion. In addition, we expect that 2005 spending for fixed assets will be between $825 million and $875 million.
In 2005, excluding the impact of the unusual items noted above, we anticipate lower diluted earnings per share than 2004.
FIRST AND FINAL ADD TO FOLLOW