Magna announces fourth quarter and 2005 results
AURORA, ON, Feb. 28, 2006 -- Magna International Inc. today reported financial results for the fourth quarter and year ended December 31, 2005.
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THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
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2005 2004 2005 2004
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Sales $ 5,854 $ 5,653 $22,811 $20,653
Operating income $ 125 $ 250(1) $ 942 $ 1,125(1)
Net income $ 83 $ 177(1) $ 639 $ 676(1)
Diluted earnings per share $ 0.75 $ 1.81(1) $ 5.90 $ 6.95(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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YEAR ENDED DECEMBER 31, 2005
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We posted record sales of $22.8 billion for the year ended December 31, 2005, an increase of 10% over the year ended December 31, 2004. The higher sales level for the year ended December 31, 2005 reflects increases of 17% in North American average dollar content per vehicle and 11% in European average dollar content per vehicle, each over the year ended December 31, 2004. During the year ended December 31, 2005, North American vehicle production was essentially level and European vehicle production declined 4%, each in comparison to the year ended December 31, 2004. Complete vehicle assembly volumes increased 1% for the year ended December 31, 2005, compared to the year ended December 31, 2004. However, as a result of lower assembly volumes for all vehicles accounted for on a full cost basis, complete vehicle assembly sales declined 8% or $340 million to $4.1 billion for the year ended December 31, 2005 compared to $4.5 billion for the year ended December 31, 2004.
Our operating income was $942 million for the year ended December 31, 2005 compared to $1.1 billion for the year ended December 31, 2004, and we earned net income for the year ended December 31, 2005 of $639 million, compared to $676 million for the year ended December 31, 2004.
Diluted earnings per share were $5.90 for the year ended December 31, 2005, compared to $6.95 for the year ended December 31, 2004.
For the year ended December 31, 2005, we generated cash from operations before changes in non-cash operating assets and liabilities of $1.5 billion, and generated $158 million in non-cash operating assets and liabilities. Total investment activities for the year ended December 31, 2005 were $1.2 billion, including $848 million in fixed asset additions, $187 million to purchase subsidiaries and a $127 million increase in other assets.
THREE MONTHS ENDED DECEMBER 31, 2005 ------------------------------------
We posted sales of $5.9 billion for the fourth quarter ended December 31, 2005, an increase of 4% over the fourth quarter of 2004. North American average dollar content per vehicle increased 8% and European average dollar content per vehicle was essentially unchanged, each compared to the fourth quarter of 2004. During the fourth quarter of 2005, North American vehicle production increased 3% and European vehicle production was essentially level, each compared with the fourth quarter of 2004. Complete vehicle assembly volumes increased 12% for the fourth quarter ended December 31, 2005, compared to the fourth quarter of 2004. However, as a result of lower assembly volumes in aggregate for vehicles accounted for on a full cost basis, complete vehicle assembly sales declined 12% or $145 million to $1.1 billion for the fourth quarter of 2005 compared to $1.2 billion for the fourth quarter of 2004.
Our operating income was $125 million for the fourth quarter of 2005 compared to $250 million for the fourth quarter of 2004, and we earned net income for the fourth quarter ended December 31, 2005 of $83 million, compared to $177 million for the fourth quarter ending December 31, 2004.
Diluted earnings per share were $0.75 for the fourth quarter ended December 31, 2005, compared to $1.81 for the fourth quarter ending December 31, 2004.
During the three months ended December 31, 2005, we generated cash from operations before changes in non-cash operating assets and liabilities of $408 million, and generated $750 million in non-cash operating assets and liabilities. Total investment activities for the third quarter of 2005 were $367 million, including $321 million in fixed asset additions, $19 million to purchase subsidiaries and a $27 million increase in other assets.
IMPAIRMENT CHARGES, RESTRUCTURING CHARGES AND OTHER CHARGES AND GAINS ---------------------------------------------------------------------
During the years ended December 31, 2005 and 2004, we recorded a number of unusual items, including impairment charges associated with long-lived assets and goodwill, restructuring charges associated with our assessment of our global operating structure and capacity, and other special charges and gains.
For the years ended December 31, 2005 and 2004, the aggregate net charge before income taxes and minority interest for unusual items totalled $145 million and $45 million, respectively. On a per share basis, the aggregate net charge for unusual items totalled $1.05 and $0.28, respectively.
For the fourth quarter ended December 31, 2005 and 2004, the aggregate net charge before income taxes and minority interest for unusual items totalled $157 million and $19 million, respectively. On a per share basis, the aggregate net charge for unusual items totalled $1.07 and $0.06, respectively.
In addition, we expect to incur additional restructuring and rationalization charges during 2006 in the range of $30 to $40 million, related to activities that were initiated in 2005.
A more detailed discussion of our consolidated financial results for the fourth quarter and year ended December 31, 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.
Siegfried Wolf, Magna's co-Chief Executive Officer commented: "2005 was a year of significant transition for Magna. Following the privatizations of our former public subsidiaries, we completed an assessment of our global operating footprint. While the results of this assessment ultimately had a negative impact on our short-term financial results, we believe management's decisions were necessary to better position us for the future."
Don Walker, Magna's co-Chief Executive Officer added: "Looking back at 2005, despite difficult industry conditions, including significantly higher commodity costs, lower production volumes on key Magna programs, and increased pressure for price concessions from our customers, we reported solid operating results. This is the result of the hard work and dedication of our employees around the world."
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 December 31, 2005. The dividend of U.S. $0.38 per share is payable on March 24, 2006 to shareholders of record on March 10, 2006.
2006 OUTLOOK ------------
All amounts below exclude the impact of any potential future acquisitions.
Our outlook is unchanged from the outlook provided in our Press Release dated January 12, 2006.
For the full year 2006, we expect sales to be between $22.0 billion and $23.3 billion, based on full year 2006 light vehicle production volumes of approximately 15.8 million units in North America and approximately 15.8 million units in Europe. Full year 2006 average dollar content per vehicle is expected to be between $750 and $780 in North America and between $300 and $325 in Europe. We expect our full year 2006 complete vehicle assembly volumes to be relatively unchanged, and expect our full year 2006 complete vehicle assembly sales to be between $3.3 billion and $3.6 billion. We expect our full year 2006 operating margin, excluding unusual items(2), to be approximately 5%. We expect our full year 2006 income tax rate, excluding unusual items(2), to be between 31% and 32%. We expect earnings growth in full year 2006 compared to 2005, excluding unusual items(2), from both years.
In addition, we expect that full year 2006 spending for fixed assets will be in the range of $850 million to $900 million.
(2) Unusual items for 2005 include charges associated with
rationalization and restructuring activities, (including
restructuring charges arising from the privatization of our former
public subsidiaries during 2005), charges associated with operations
that supplied MG Rover, impairment charges, and certain non-recurring
gains. Unusual items for 2006 are expected to include charges
associated with rationalization and restructuring activities
commenced in 2005.
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, 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 systems, seating systems, closure systems; metal body and structural systems; exterior and interior mirror and engineered glass systems; plastic body, lighting and exterior trim systems, various powertrain and drivetrain systems; retractable hard top and soft top roof systems; as well as complete vehicle engineering and assembly.
We have over 82,000 employees in 224 manufacturing operations and 60 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 accompanying unaudited consolidated financial statements for the three months and year ended December 31, 2005, which are prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). This MD&A has been prepared as of February 27, 2006.
OVERVIEW -------------------------------------------------------------------------
We are a leading global supplier of technologically advanced automotive systems, assemblies, modules and components. We follow a corporate policy of functional and operational decentralization. We conduct our operations through divisions, which function as autonomous business units that operate within corporate policies. As at December 31, 2005, we had 224 manufacturing divisions and 60 product development and engineering centres in 22 countries. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles for sale to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia and South America. Our product capabilities span a number of major automotive areas including: interiors; seating; closures; metal body systems; exterior and interior mirrors and engineered glass; electronics; plastic body, lighting and exterior trim systems; various powertrain and drivetrain systems; retractable hard top and soft top roof systems; and complete vehicle engineering and assembly.
Historically, we had supplied these products and services through global product groups, three of which were publicly traded companies in which we had a controlling interest. In April 2005, we completed our previously announced plans to take each of these publicly traded subsidiaries private (the "Privatizations").
Shortly after we completed the Privatizations, we began to reorganize and segment our operations on a geographic basis, among North America, Europe and Rest of World (primarily Asia and South America).
Our success is primarily dependent upon the levels of North American and European (and currently to a lesser extent Asian and South American) car and light truck production by our customers. OEM production volumes in different regions may be impacted by factors which may vary from one region to the next, including general economic conditions, interest rates, fuel prices and availability, infrastructure, legislative changes, environmental emission and safety issues and labour and/or trade relations.
Given these differences between the regions in which we operate, we have segmented our operations on a geographic basis between North America, Europe, and Rest of World. The role of the North American and European management teams is to manage our interests to ensure a coordinated effort across our different product capabilities. In addition to maintaining key customer, supplier and government contacts in their respective markets, our regional management teams centrally manage key aspects of our operations while permitting our divisions enough flexibility through our decentralized structure to foster an entrepreneurial environment.
HIGHLIGHTS -------------------------------------------------------------------------
During 2005, we reported solid financial results, including record sales of $22.8 billion. The higher sales level was achieved as a result of increases in our North American and European dollar content per vehicle. In North America, vehicle production was unchanged at 15.7 million units, while our content per vehicle increased 17% to $731, both as compared to 2004. In Europe, Western European vehicle production declined 4% to 16.0 million units, while our content per vehicle increased 11% to $317, both as compared to 2004.
Operating income for 2005 decreased 16% to $942 million from $1.1 billion for 2004. Excluding the unusual items recorded in 2005 and 2004 (see "Unusual Items" below), operating income for 2005 decreased $83 million or 7%. The decrease in operating income was primarily as a result of higher commodity prices, lower production volumes on certain of our high content programs, incremental customer price concessions, the negative impact of start-up costs at new facilities during 2005, and non-cash costs related to the Privatizations, including additional depreciation and amortization and stock compensation expense. The factors contributing to the decrease in operating income were partially offset by additional margins earned as a result of the launch of new programs during or subsequent to 2004, the acquisition of the New Venture Gear, Inc. ("NVG") business in September 2004, productivity and efficiency improvements at certain facilities, and the closure of several facilities that were incurring losses during 2004.
Net income for 2005 decreased 5% to $639 million from $676 million for 2004. Excluding the unusual items recorded in 2005 and 2004 (see "Unusual Items" below), net income for 2005 increased $51 million or 7%. The increase in net income was primarily as a result of reductions in income taxes and minority interest partially offset by the decrease in operating income.
Diluted earnings per share for 2005 decreased 15% to $5.90 from $6.95 for 2004. Excluding the unusual items recorded in 2005 and 2004 (see "Unusual Items" below), diluted earnings per share decreased $0.28 from 2004 to 2005 as a result of an increase in the weighted average number of diluted shares outstanding during the year, primarily as a result of the Class A Subordinate Voting Shares issued on completion of the Privatizations, partially offset by the increase in net income (excluding unusual items).
Unusual Items
During 2005 and 2004, we recorded certain unusual items as follows:
2005 2004
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Diluted Diluted
Earnings Earnings
Operating Net per Operating Net per
Income Income Share Income Income Share
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Impairment
charges(1) $ (131) $ (98) $(0.90) $ (36) $ (22) $(0.23)
Restructuring
charges(2) (59) (48) (0.44) (26) (17) (0.17)
Charges associated
with MG Rover(3) (15) (13) (0.12) - - -
Settlement gain(4) 26 16 0.15 - - -
Foreign currency
gain(4) 18 18 0.17 - - -
Gain on sale of
facility(4) 16 10 0.09 - - -
Pension curtailment
gain(4) - - - 29 18 0.18
Stock option
modification(4) - - - (12) (12) (0.12)
Future tax
recovery(4) - - - - 6 0.06
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Total unusual items $ (145) $ (115) $(1.05) $ (45) $ (27) $(0.28)
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(1) Impairment Charges
In conjunction with our annual goodwill impairment analysis and
consideration of other indicators of impairment of long-lived assets
at certain operations, we recorded impairment charges as follows:
2005 2004
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Operating Net Operating Net
Income Income Income Income
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(a) Long-lived asset
impairments:
Europe $ 89 $ 63 $ 20 $ 15
North America 21 14 16 7
(b) Goodwill impairment:
Europe 21 21 - -
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$ 131 $ 98 $ 36 $ 22
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(a) Long-lived Asset Impairments
During 2005, we recorded asset impairments of $89 million in
Europe relating to certain exterior systems facilities in the
United Kingdom, Belgium and Germany, and a closure systems
facility in the Czech Republic. In North America, we recorded an
asset impairment of $21 million related to an exterior systems
facility in Canada and certain powertrain facilities in the
United States.
During 2004, we recorded asset impairments of $20 million in
Europe relating to certain exterior systems facilities in Germany
and Belgium. In North America, we recorded an asset impairment of
$16 million related to our plan to cease operations at an
exterior systems facility in Canada.
(b) Goodwill Impairment
In conjunction with our annual business planning cycle, we
completed our goodwill impairment analysis. As a result of this
analysis, we recorded a $21 million goodwill impairment charge
related to our exterior systems reporting unit in Europe.
(2) Restructuring Charges
In connection with the Privatizations and industry conditions
generally, during 2005 we completed an assessment of our global
operating structure and capacity. As a result of this assessment, we
began to implement a rationalization strategy that includes operating
group restructuring and plant consolidations, sales and closures.
These actions are necessary to ensure that we remain globally
competitive.
In Europe, restructuring charges totalled $33 million in 2005
compared to $7 million in 2004. The restructuring charges in 2005
related primarily to severance costs at three facilities:
- a mirrors facility in Ireland;
- an exterior systems facility in Belgium; and
- an engineering centre in France.
The European restructuring charges in 2004 related to costs incurred
with respect to the reorganization and closure of certain interiors
facilities in Germany and the United Kingdom.
In North America, restructuring charges totalled $21 million in 2005
compared to $19 million in 2004. The restructuring charges in 2005
related primarily to severance costs incurred as a result of the
Privatizations and the consolidation and/or closure of certain
exterior systems, powertrain and stampings facilities in Canada and
the United States. The restructuring charges in 2004 related
primarily to accelerated depreciation and amortization on certain
program specific assets that went out of service earlier than
originally planned.
In addition, we expect to incur additional restructuring and
rationalization charges during 2006 in the range of $30 million to
$40 million related to activities that were initiated in 2005.
Specifically, in January 2006, we reached an agreement with the
workers council at an exterior systems facility in Belgium that
covers non-contractual termination benefits for employees at this
facility. As a result, we will record the $8 million cost of this
agreement in the first quarter of 2006.
(3) MG Rover
In April 2005, MG Rover Group Limited ("MG Rover") was placed into
administration, which is similar to Chapter 11 bankruptcy protection
in the United States (the "MG Rover situation"). As a result, we
recorded charges of $15 million related to our MG Rover assets and
supplier obligations during 2005.
(4) Other Unusual Items
In addition to the above, during 2005 we also recorded the following
unusual items:
- 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;
- an $18 million foreign currency gain on the repatriation of funds
from Europe; and
- a $16 million gain on sale of a non-core seat component facility
in North America.
- In addition to the above, during 2004 we also recorded the
following unusual items:
- a $29 million pension curtailment gain as a result of freezing
certain defined benefit pension plans since no further benefits
accrue under these plans;
- a $12 million one-time charge to compensation expense as a result
of modifying option agreements with certain of our former
employees; and
- a $6 million future income tax recovery as a result of a reduction
in future income tax rates in Europe.
Significant Issues
In addition to the unusual items described above, the most significant issues that affected our financial results in 2005 included:
1. Commodity Pricing
During 2005, we paid more for raw materials, including purchased
components, used in our production compared to 2004. Although a
significant portion of our steel, resins and other components are
covered under customer resale programs or short-term and long-term
contracts, increased commodity prices negatively impacted our results
in 2005, as compared to 2004. At the same time, scrap steel prices
have decreased which negatively impacted our results in 2005, as
compared to 2004.
2. Production on Key Programs
In the North American market, 2005 saw the continued trend of
declining production and market share of General Motors ("GM") and
Ford, two of our largest customers. While North American vehicle
production volumes in 2005 remained relatively consistent with 2004
vehicle production volumes, GM and Ford production volumes declined
by 7% and 6%, respectively. More importantly, production volumes on
certain of our high content programs declined even further.
Production volumes for the Ford Freestar and Mercury Monterey, the
Ford Explorer and Mercury Mountaineer and the GMT800 platform
declined 42%, 30% and 13%, respectively in 2005.
Although we experienced declines in volumes on these key programs, we
had increases in production volumes on certain other high content
programs. Production volumes for the Chrysler 300 and 300C, and the
Dodge Caravan, Grand Caravan and Chrysler Town & Country increased
38% and 11%, respectively.
3. Pricing Pressures
Given the increasingly competitive nature of the automotive industry,
we faced additional price concessions from our customers in 2005 as
compared to 2004.
4. Launches
During 2005, some of our recently completed production facilities
launched significant programs, including:
- a plant in Hermosillo, Mexico that began to supply various
stampings for the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- a facility in Bowling Green, Kentucky that began to supply frames
for the new Ford Explorer and Mercury Mountaineer; and
- a fascia mould and paint facility in Georgia that began to supply
fascias, rocker panels and body side mouldings for the Mercedes
M-Class and R-Class.
Within the next year, the facility in Kentucky will launch the frame
for the new Ford F-Series Super Duty pickup trucks.
As anticipated, the new facilities in Mexico, Kentucky and Georgia
incurred start-up losses in 2005, however, we expect an improvement
in profitability at these facilities as they continue to ramp-up
production.
In addition to the programs launched at these new facilities, we also
launched several new programs at existing facilities, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Ford Mustang;
- the Dodge Charger;
- the Mercedes A-Class, B-Class and M-Class; and
- the Land Rover Discovery.
5. Privatizations
During 2005, we successfully completed the privatizations of our
former public subsidiaries: Tesma International Inc.; Decoma
International Inc.; and Intier Automotive Inc. The Privatizations
have allowed us to improve our strategic positioning, particularly
with respect to the development of vehicle modules that cross our
traditional product lines, and to better exploit our various
competencies, particularly our complete vehicle expertise. In
addition, the Privatizations have allowed us to re-align our product
portfolio, as we did by combining the powertrain capabilities of our
former Tesma and Magna Drivetrain businesses, and to avoid
duplication of investment, particularly in new markets. We were also
able to improve our financial liquidity by completing a new five-year
revolving term facility that expires on October 12, 2010. The
facility has a North American tranche of $1.57 billion, a European
tranche of (euro) 300 million and an Asian tranche of $50 million.
The new facility replaced the various existing credit lines in place
prior to the Privatizations.
Our operating results for 2005 were negatively impacted by non-cash
costs related to the Privatizations, including $30 million due to the
amortization of fair value increments (reflected in the preliminary
purchase accounting) and $7 million due to additional stock option
compensation expense. Offsetting the additional amortization was a
reduction in minority interest expense since no minority interest
expense was recorded subsequent to the first quarter of 2005.
Finally, our diluted earnings per share were negatively impacted as a
result of the 11.9 million additional Class A Subordinate Voting
Shares that were included in the weighted average number of diluted
shares outstanding as a result of the Privatizations.
6. Income taxes
During 2005, we realized a significant decrease in our effective
income tax rate (excluding the unusual items above) compared to 2004,
primarily as a result of a decrease in income tax rates in Austria
and Mexico, an increase in utilization of losses not previously
benefited, a reduction in losses not benefited and tax settlements in
certain jurisdictions. In addition to the lower income tax rates, we
believe that our effective income tax rate will remain below
historical levels as we expect to capitalize on income tax planning
strategies that may continue to be available as a result of the
Privatizations.
Key Achievements
In addition to managing the significant issues described above, we also took important steps to further strengthen and better position our Company for the future, including:
1. Strengthened Management
With the successful completion of the Privatizations, our management
team was further strengthened. In April 2005, we announced that
Donald Walker and Siegfried Wolf had been appointed as co-Chief
Executive Officers with responsibility for North America and Europe,
respectively. Don and Siegfried, along with Manfred Gingl, Mark Hogan
and Vincent Galifi, combine to create a strong management partnership
that has the complementary skills necessary to lead us in our
continuing evolution and to protect the decentralized and
entrepreneurial culture needed for Magna to remain a leader in the
global automotive industry. This culture, combined with the
commitment and dedication of our many managers and employees, has
been and will remain the cornerstone of our success.
2. Strengthened Customer Relationships
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
announced 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.
3. Progress in Diversifying our Customer Base
During 2005, we continued our progress in broadening our customer
base:
- we were awarded our first ever transfer case business from Nissan
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;
- we were awarded significant new interiors and stamping business
with an Asian-based OEM for a vehicle built in North America;
- we recently launched a new metal stamping facility in France to
supply PSA on various vehicle programs;
- we were awarded seating and interiors business in Korea; and
- we signed a joint venture agreement to supply mirrors in India.
4. Acquisition of Car Top Systems
In December, we announced that we had signed an agreement to purchase
CTS Fahrzeug-Dachsysteme GmbH ("CTS") from Porsche AG. CTS, which
stands for Car Top Systems, is one of the world's leading
manufacturers of retractable hard top and soft top roof systems, a
product area that we believe has good growth potential. The
acquisition, which was completed in February of 2006, will allow us
to leverage our current closure systems and complete vehicle
capabilities. For the year ended December 31, 2004, CTS reported
sales of approximately (euro) 400 million. CTS has six facilities in
Europe and two facilities in North America, with approximately
1,100 employees.
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:
- growth of Asian-based OEMs in North America and Europe and declining
production volumes at certain of our traditional North American and
European customers;
- increased pressure by OEMs on automotive component suppliers to
reduce their prices, including through annual retroactive price
reductions, and to bear various additional costs;
- growth of the automotive industry in China, India and other Asian
countries, as well as parts of eastern Europe, and the migration of
manufacturing to such lower cost countries;
- deterioration of the financial condition of the supply base and
certain OEMs;
- increased engineering capabilities required in order to be awarded
new business for more complex systems and modules;
- increased prevalence of vehicles built off high-volume global vehicle
platforms;
- volatility of steel, resin and other commodity prices; and
- increases in gas prices prompting consumers to purchase passenger
cars instead of large SUVs.
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 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 by any of our
significant customers 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 a number of North American and European OEMs and
automotive component suppliers. Increased raw material prices,
including steel and resins, are also adversely affecting OEMs and
automotive component suppliers. Other economic conditions, such as
increased gas prices, have affected and could further threaten sales
of certain models, such as full-size sport utility vehicles. All of
these conditions, coupled with a decline in market share and overall
production volumes, could further threaten the financial condition of
some of our customers, putting additional pressure on us to reduce
our prices and exposing us to greater credit risk. 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 and
financial condition.
- Although we supply parts to all of the leading OEMs, a significant
majority of our sales are to four OEMs, two of which are rated as
below investment grade by credit rating agencies. We are attempting
to further diversify our customer base, particularly to increase our
business with Asian-based OEMs. A decline in overall production
volumes by any of our four largest customers could have an adverse
effect on our 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 (including shifts
away from vehicles we assemble) or the early termination, loss,
renegotiation of the terms of, or delay in the implementation of any
significant production or assembly contract could have an adverse
effect on our profitability.
- The competitive environment in the automotive industry has been
intensifying as our customers seek to take advantage of lower
operating costs in China, other countries in Asia and parts of
eastern Europe. As a result, we are facing increased competition from
suppliers which have manufacturing operations in low cost countries.
While we continue to expand our manufacturing footprint with a view
to taking advantage of manufacturing opportunities in low cost
countries, we cannot guarantee that we will be able to fully realize
such opportunities. Additionally, establishment of manufacturing
operations in emerging market countries carries its own risks,
including those relating to political and economic instability;
trade, customs and tax risks; currency exchange rates; currency
controls; insufficient infrastructure; and other risks associated
with conducting business internationally.
- 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
2006 compared to levels earlier this decade. Approximately half of
our steel is acquired through resale programs operated by the OEMs,
which do not expose us to steel price increases, and the balance is
acquired through spot, short-term and long-term contracts. However,
a steel supplier has challenged its long-term agreements with us for
certain steel products while steel prices were rising and, to the
extent that it successfully continues to dispute, terminate or
otherwise refuses 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 commodity prices by engineering
products with reduced steel, resin or other commodity content, or by
passing additional steel and resin costs to our customers, such
additional commodity 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 prices 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 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,
which could have an adverse effect on our profitability. 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
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, which could have an adverse effect
on our profitability.
- We have entered into, and will continue to enter into, long-term
supply arrangements with our customers 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/or
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. To the extent that we are not able to offset price
concessions through cost reductions or improved operating
efficiencies, such concessions could have a material adverse effect
on our profitability.
- 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 OEMs. In particular, some OEMs 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 government regulators and/or our
customers decide to recall a product due to a known or suspected
performance issue, and we are required to participate either
voluntarily or involuntarily. 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 profitability and
financial condition.
- Contracts from our customers consist of blanket purchase orders which
generally provide for the supply of a customer's annual requirements
for a particular vehicle, instead of a specified quantity of
products. These blanket purchase orders can be terminated by a
customer at any time and, if terminated, could result in us incurring
various pre-production, engineering and other costs which we may not
recover from our customer and which could have an adverse effect on
our profitability.
- 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. 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 and a
per claim deductible. A successful claim against us in excess of our
available insurance coverage could have an adverse effect on our
profitability 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 profitability and financial condition.
- In response to the increasingly competitive automotive industry
conditions, we may further rationalize some of our production
facilities. In the course of such rationalization, we will incur
costs related to plant closings and relocations and employee
severance costs. Such costs could have an adverse effect on our
short-term profitability. In addition, we are working to turnaround
financially underperforming divisions, however, there is no guarantee
that we will be successful in doing so with respect to some or all
such divisions.
- We recorded significant impairment charges in 2005 and may do so in
the future. Goodwill must be tested for impairment annually, or more
frequently when an event occurs that more likely than not reduces the
fair value of a reporting unit below its carrying value. We also
evaluate fixed assets and other long-lived assets for impairment
whenever indicators of impairment exist. The bankruptcy of a
significant customer or the early termination, loss, renegotiation of
the terms of, or delay in the implementation of any significant
production contract could be indicators of impairment. In addition,
to the extent that forward-looking assumptions regarding the impact
of improvement plans on current operations, in-sourcing and other new
business opportunities, program price and cost assumptions on current
and future business, the timing of new program launches and future
forecasted production volumes are not met, any resulting impairment
loss could have a material adverse impact on our 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 to be reflected as a liability. The amendments require us to present our Preferred Securities and Subordinated Debentures as liabilities, with the exception of the equity value ascribed to the holders' option to convert the 6.5% Convertible Subordinated Debentures into Class A Subordinate Voting Shares, and to present the related liability carrying costs as a charge to net income. We adopted these new recommendations effective January 1, 2005 on a retroactive basis.
The impact of this accounting policy change on the consolidated balance sheet as at December 31, 2004 was as follows:
Increase in other assets $ 2 ------------------------------------------------------------------------- Decrease in income taxes payables $ 1 Increase in long-term debt 216 Decrease in debentures' interest obligation 38 Decrease in minority interest 68 ------------------------------------------------------------------------- Decrease in other paid-in-capital $ 75 Increase in retained earnings 2 Decrease in currency translation adjustment 34 -------------------------------------------------------------------------
The impact of this accounting policy change on the consolidated statements of income was as follows:
Three months Year
ended ended
December 31, December 31,
2004 2004
-------------------------------------------------------------------------
Increase in interest expense $ 2 $ 31
Decrease in income taxes - (11)
Decrease in minority interest (1) (4)
-------------------------------------------------------------------------
Decrease in net income (1) (16)
Decrease in financing charges on Preferred
Securities and other paid-in-capital 1 16
Decrease in foreign exchange gain on
redemption of Preferred Securities - (18)
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Change in net income available to Class A
Subordinate Voting and Class B Shareholders $ - $ (18)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reduction of earnings per Class A
Subordinate Voting or Class B Share
Basic $ - $ (0.18)
Diluted $ - $ (0.18)
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Comparative Period Amounts
European Average Dollar Content per Vehicle
Our reporting of European average dollar content per vehicle has historically included sales related to our complete vehicle assembly business. Effective with the first quarter of 2005, European average dollar content per vehicle includes only European production sales. The comparative period European average dollar content per vehicle has been restated to conform to the current period's presentation. We do not have any complete vehicle assembly sales in North America.
Average Foreign Exchange
For the three months For the year
ended December 31, ended December 31,
--------------------- ---------------------
2005 2004 Change 2005 2004 Change
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1 Canadian dollar equals
U.S. dollars 0.853 0.821 + 4% 0.826 0.770 + 7%
1 euro equals U.S. dollars 1.188 1.302 - 9% 1.244 1.245 -
1 British pound equals
U.S. dollars 1.747 1.872 - 7% 1.819 1.834 - 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 for the three months and year ended December 31, 2005 impacted the reported U.S. dollar amounts of our sales, expenses and income.
The results of operations whose functional currency is not the U.S. dollar are translated into U.S. dollars using the average exchange rates in the table above for the relevant period. Throughout this MD&A, reference is made to the impact of translation of foreign operations on reported U.S. dollar amounts where relevant.
Our results can also be affected by the impact of movements in exchange rates on foreign currency transactions (such as raw material purchases or sales denominated in foreign currencies). However, as a result of hedging programs employed by us, primarily in Canada, foreign currency transactions in the current period have not been fully impacted by the recent movements in exchange rates. We record foreign currency transactions at the hedged rate where applicable.
Finally, holding gains and losses on foreign currency denominated monetary items, which are recorded in selling, general and administrative expenses, impact reported results.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2005
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Sales
2005 2004 Change
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Vehicle Production Volumes
(millions of units)
North America 15.722 15.732 -
Europe 15.959 16.558 - 4%
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Average Dollar Content Per Vehicle
North America $ 731 $ 623 + 17%
Europe $ 317 $ 285 + 11%
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Sales
External Production
North America $ 11,499 $ 9,798 + 17%
Europe 5,058 4,724 + 7%
Rest of World 171 139 + 23%
Complete Vehicle Assembly 4,110 4,450 - 8%
Tooling, Engineering and Other 1,973 1,542 + 28%
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Total Sales $ 22,811 $ 20,653 + 10%
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Total sales reached a record level, increasing 10% or $2.2 billion to $22.8 billion for 2005 compared to $20.7 billion for 2004.
External Production Sales - North America
External production sales in North America increased 17% or $1.7 billion to $11.5 billion for 2005 compared to $9.8 billion for 2004. This increase in production sales reflects a 17% increase in our North American average dollar content per vehicle as North American vehicle production volumes for 2005 remained relatively consistent with 2004 vehicle production volumes.
Our average dollar content per vehicle grew by 17% or $108 to $731 for 2005 compared to $623 for 2004, primarily as a result of:
- the launch of new programs during or subsequent to the year ended
December 31, 2004, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Hummer H3;
- the Ford Mustang;
- the Chevrolet HHR;
- the Mercedes M-Class; and
- the Pontiac Montana SV6, Saturn Relay, Buick Terazza and Chevrolet
Uplander;
- the acquisition of the North American operations of NVG 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 300 and 300C; and
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country.
The factors contributing to the growth in our average dollar content per vehicle were partially offset by:
- the impact of lower production and/or content on certain high content
programs, including:
- the GMT800 platform;
- the Ford Freestar and Mercury Monterey;
- the Dodge Ram Pickup;
- the Mazda Tribute and Ford Escape; and
- the GMC Canyon and Chevrolet Colorado;
- programs that ended production during or subsequent to the year ended
December 31, 2004; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 7% or $334 million to $5.1 billion for 2005 compared to $4.7 billion for 2004. This increase in production sales reflects an 11% increase in our European average dollar content per vehicle partially offset by a 4% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 11% or $32 to $317 for 2005 compared to $285 for 2004, primarily as a result of:
- the launch of new programs during or subsequent to the year ended
December 31, 2004, including:
- the Mercedes A-Class;
- the Mercedes B-Class;
- the Land Rover Discovery;
- the Land Rover Range Rover Sport; and
- the Volkswagen Passat;
- the acquisition of the European operations of NVG in September 2004;
and
- increased production and/or content on certain programs, including:
- the BMW 1-Series; and
- the Volkswagen Transporter and Multivan.
The factors contributing to the growth in our average dollar content per vehicle were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Mercedes E-Class; and
- the Volkswagen Golf;
- the end of production on certain programs, including the end of
production on all MG Rover programs as a result of the MG Rover
situation; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 23% or $32 million to $171 million for 2005 compared to $139 million for 2004. The increase in production sales is primarily a result of:
- the ramp-up of production at new facilities in China; - increased production at our powertrain facilities in Korea; and - increased production at a closure systems facility in Brazil.
The factors contributing to the increase in production sales were partially offset by the closure of an exterior systems facility in Brazil and an engineered glass facility in Malaysia.
Complete Vehicle Assembly Sales
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.
2005 2004 Change
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Complete Vehicle Assembly Sales $ 4,110 $ 4,450 - 8%
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Complete Vehicle Assembly Volumes (Units)
Full-Costed:
BMW X3, Mercedes E-Class and G-Class,
Saab 9(3) Convertible 151,027 163,169 - 7%
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager 79,478 64,075 + 24%
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230,505 227,244 + 1%
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Although assembly volumes increased 1% or 3,261 units, complete vehicle assembly sales decreased 8% or $340 million to $4.1 billion for 2005 compared to $4.5 billion for 2004. The decrease in complete vehicle assembly sales is primarily the result of lower assembly volumes for all vehicles accounted for on a full-cost basis, partially offset by:
- higher assembly volumes for the Jeep Grand Cherokee which is
accounted for on a value-added basis as a result of the launch of a
new model in January 2005; and
- the start of assembly in the second quarter of 2005 of the
Chrysler 300 for distribution in European markets and certain other
markets outside North America.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 28% or $431 million to $2.0 billion for 2005 compared to $1.5 billion for 2004.
In 2005 the major programs for which we recorded tooling, engineering and other sales were:
- the BMW X5; - the Jeep Wrangler; - the Mercedes M-Class and R-Class; - GM's next generation full-size pickup and sport utilities platform; - the Ford F-Series Super Duty; - the Ford Fusion, Mercury Milan and Lincoln Zephyr; - the Hummer H3; and - the Dodge Caliber.
In 2004 the major programs for which we recorded tooling, engineering and other sales were:
- the Ford Fusion and Mercury Milan; - the Ford Explorer and Mercury Mountaineer; and - the Mercedes M-Class and R-Class.
In addition, tooling, engineering and other sales increased as a result of the strengthening of the Canadian dollar against the U.S. dollar.
Gross Margin
Gross margin increased $23 million to $2.98 billion for 2005 compared to $2.96 billion for 2004. Gross margin as a percentage of total sales decreased to 13.1% for 2005 compared to 14.3% for 2004.
On a year-over-year basis, the unusual items, discussed in the "Highlights" section above, negatively impacted gross margin by $40 million and accounted for a 0.1% decrease in gross margin as a percentage of sales. In addition to these items, 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 during 2005 at new facilities in preparation for
programs that launched during 2005 or for programs that will be
launching subsequent to the end of the year, including:
- a new frame facility in Kentucky for the recently launched Ford
Explorer and the upcoming launch of the next generation F-Series
Super Duty pickup trucks; and
- a new fascia moulding and paint facility in Georgia to support the
launches of the Mercedes M-Class and R-Class; and
- an increase in tooling and other sales that earn low or no margins.
The factors contributing to the decrease in gross margin as a percentage of sales were partially offset by:
- productivity and efficiency improvements at certain divisions;
- price reductions from our suppliers;
- decreased complete vehicle assembly sales for certain vehicles
accounted for on a full-cost basis; and
- incremental gross margin earned on program launches.
Depreciation and Amortization
Depreciation and amortization costs increased 19% or $113 million to $711 million for 2005 compared to $598 million for 2004. Depreciation and amortization costs for 2004 included $14 million of accelerated depreciation recorded on certain program specific assets that went out of service earlier than originally planned. Excluding this accelerated depreciation, the $127 million increase in depreciation was primarily as a result of:
- an increase in assets employed in the business to support future
growth;
- amortization of fair value increments related to the Privatizations;
- acquisitions completed during or subsequent to 2004; and
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar against the U.S. dollar.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales decreased to 5.3% for 2005 compared to 5.7% for 2004. SG&A expenses increased 1% or $12 million to $1,198 million for 2005 compared to $1,186 million for 2004.
The unusual items discussed in the "Highlights" section above effectively reduced SG&A expenses by $21 million on a year-over-year basis. Excluding these items, the $33 million increase in SG&A expenses is primarily a result of:
- increased spending as a result of the acquisition of NVG;
- additional stock compensation expense as a result of the
Privatizations;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the Canadian dollar against the U.S. dollar; and
- higher infrastructure costs to support the increase in sales levels,
including spending to support program launches.
Impairment Charges
Impairment charges increased $95 million to $131 million for 2005 compared to $36 million for 2004. For a complete discussion of the impairment charges see the "Highlights" section above and note 3 of the accompanying unaudited consolidated financial statements for the three months and year ended December 31, 2005.