Magna announces first quarter results
AURORA, ON, May 10, 2007 -- Magna International Inc. (TSX: MG.A, MG.B; NYSE: MGA) today reported financial results for the first quarter ended March 31, 2007.
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THREE MONTHS ENDED
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March 31, March 31,
2007 2006
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Sales $ 6,423 $ 6,019
Operating income $ 305 $ 309
Net income $ 218 $ 212
Diluted earnings per share $ 1.96 $ 1.91
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All results are reported in millions of U.S. dollars,
except per share figures.
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We posted record sales of $6.4 billion for the first quarter ended March 31, 2007, an increase of 7% over the first quarter of 2006. This higher sales level was achieved as a result of increases in our North American, European and Rest of World production sales, and our complete vehicle assembly sales, offset in part by a reduction in our tooling, engineering and other sales.
During the first quarter of 2007, our North American and European average dollar content per vehicle increased 10% and 14%, respectively, over the first quarter of 2006. During the first quarter of 2007, North American vehicle production declined 7% while European vehicle production increased 6%, each compared to the first quarter of 2006.
Complete vehicle assembly sales increased 6% to $1.10 billion for the first quarter of 2007 compared to $1.04 billion for the first quarter of 2006, while complete vehicle assembly volumes declined 5% to 60,769 units.
Our operating income was $305 million for the first quarter of 2007 compared to $309 million for first quarter of 2006, and our net income for the first quarter of 2007 was $218 million compared to $212 million for the first quarter of 2006. Diluted earnings per share were $1.96 for the first quarter of 2007 compared to $1.91 for the first quarter of 2006.
During the first quarter of 2007, we generated cash from operations before changes in non cash operating assets and liabilities of $436 million, and invested $171 million in non cash operating assets and liabilities. Total investment activities for the first quarter of 2007 were $191 million, including $125 million in fixed asset additions, $46 million to purchase subsidiaries, and a $20 million increase in other assets.
A more detailed discussion of our consolidated financial results for the first quarter ended March 31, 2007 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.
DIVIDENDS AND 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 March 31, 2007. The dividend of U.S. $0.24 per share is payable on June 15, 2007 to shareholders of record on May 31, 2007. This dividend has been determined on the basis of the dividend formula we announced in April 2007.
We also announced today that Magna, the Stronach Trust and Russian Machines (a wholly owned subsidiary of Basic Element) entered into a transaction agreement whereby Russian Machines would make a major strategic investment in Magna. Please refer to the Press Release issued jointly by Magna and Basic Element on May 10, 2007.
2007 OUTLOOK ------------
For the full year 2007, we expect consolidated sales to be between $23.5 billion and $24.8 billion, based on full year 2007 light vehicle production volumes of approximately 15.3 million units in North America and approximately 15.5 million units in Europe. Full year 2007 average dollar content per vehicle is expected to be between $785 and $815 in North America and between $390 and $415 in Europe. We expect full year 2007 complete vehicle assembly sales to be between $3.7 billion and $4.0 billion.
In addition, we expect that full year 2007 spending for fixed assets will be in the range of $800 million to $850 million.
In our 2007 outlook we have assumed no significant acquisitions or divestitures, and no significant labour disruptions in our principal markets. In addition, we have assumed that foreign exchange rates for the most common currencies in which we conduct business relative to our U.S. dollar reporting currency will approximate current rates.
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, South America and Africa. Our capabilities include the design, engineering, testing and manufacture of automotive metal body and structural systems; interior systems; seating systems; exterior systems; roof systems; powertrain systems; vision systems; electronic systems; closure systems; as well as complete vehicle engineering and assembly.
We have approximately 83,000 employees in 235 manufacturing operations and 62 product development and engineering centres in 23 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 ended March 31, 2007 included in this Press Release, and the audited consolidated financial statements and MD&A for the year ended December 31, 2006 included in our 2006 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the three months ended March 31, 2007 and the audited consolidated financial statements for the year ended December 31, 2006 are both prepared in accordance with Canadian generally accepted accounting principles.
This MD&A has been prepared as at May 9, 2007. 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, pursuant to which we conduct our operations through divisions, each of which is an autonomous business unit operating within pre-determined guidelines. As at March 31, 2007, we had 235 manufacturing divisions and 62 product development and engineering centres in 23 countries. We design, develop and manufacture automotive systems, assemblies, modules and components, and engineer and assemble complete vehicles, primarily for sale to original equipment manufacturers ("OEMs") of cars and light trucks in North America, Europe, Asia, South America and Africa. Our product capabilities span a number of major automotive areas including: complete vehicle engineering and assembly; metal body and structural systems; interior systems; seating systems; exterior systems; roof systems; powertrain systems; vision systems; electronic systems; and closure systems.
Our operations are segmented on a geographic basis between North America, Europe, and Rest of World (primarily Asia and South America). A Co-Chief Executive Officer heads management in each of our two primary markets, North America and Europe. 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.
INDUSTRY TRENDS AND RISKS -------------------------------------------------------------------------
Our success is primarily dependent upon the levels of North American and European car and light truck production by our customers and the relative amount of content we have on the various programs. OEM production volumes in different regions may be impacted by factors which may vary from one region to the next, including general economic and political conditions, interest rates, energy and fuel prices, international conflicts, labour relations issues, regulatory requirements, trade agreements, infrastructure, legislative changes, and environmental emissions and safety issues. A number of other economic, industry and risk factors discussed in our Annual Information Form and Annual Report on Form 40-F, each in respect of the year ended December 31, 2006, also affect our success, including such things as relative currency values, commodities prices, price reduction pressures from our customers, the financial condition of our supply base and competition from manufacturers with operations in low cost countries.
The economic, industry and risk factors discussed in our Annual Information Form and Annual Report on Form 40-F, each in respect of the year ended December 31, 2006, remain substantially unchanged in respect of the first quarter ended March 31, 2007, except that:
- our maximum potential exposure in connection with our dispute with a
major steel supplier has increased by approximately $10 million to
$145 million as at March 31, 2007; and
- as previously disclosed, we continue to review potential alternatives
regarding the future of the Chrysler group, including any
constructive role we may play in a potential transaction.
Participation in any such transaction would be material, although the
specific opportunities and risks would vary depending on the nature
of such participation, if any.
HIGHLIGHTS
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During the first quarter of 2007, we posted record sales of $6.4 billion, an increase of 7% over the first quarter of 2006. This higher sales level was achieved as a result of increases in our North American, European and Rest of World production sales, and our complete vehicle assembly sales, offset in part by a reduction in our tooling, engineering and other sales. During the first quarter of 2007, North American and European average dollar content per vehicle increased 10% and 14%, respectively, over the first quarter of 2006. During the first quarter of 2007, North American vehicle production declined 7% while European vehicle production increased 6%, each compared to the first quarter of 2006.
During the first quarter of 2007 two of our largest OEM customers in North America continued to reduce vehicle production levels compared to the first quarter of 2006. While overall North American vehicle production volumes declined 7% in the first quarter of 2007 compared to the first quarter of 2006, both General Motors ("GM") and Ford vehicle production declined by 15%.
The production declines reflect a number of factors that continue to impact our largest customers in North America, including declining market share, high inventory levels on certain vehicles, and a shift in consumer preferences away from certain light trucks. The lower production levels at our largest OEM customers, negatively impacted our sales and earnings, as our content on a number of these programs is higher than our consolidated average dollar content per vehicle in North America.
Operating income for the first quarter of 2007 decreased 1% or $4 million to $305 million from $309 million for the first quarter of 2006. Excluding the unusual items recorded in 2006 (see "Unusual Items" below), operating income for the first quarter of 2007 decreased $14 million or 4% compared to the first quarter of 2006. The decrease in operating income excluding unusual items was primarily due to operational inefficiencies and other costs at certain facilities, launch costs incurred at certain facilities in preparation for programs that will launch during or subsequent to 2007, decreased margins earned as a result of lower production volumes on certain programs in North America, as well as incremental customer price concessions. These factors were partially offset by additional margins earned on the launch of new programs during or subsequent to the first quarter of 2006, increased margins earned on higher volumes for certain assembly programs, and productivity and efficiency improvements at certain underperforming divisions.
Net income for the first quarter of 2007 increased 3% or $6 million to $218 million from $212 million for the first quarter of 2006. Excluding the unusual items recorded in 2006 (see "Unusual Items" below), net income for the first quarter of 2007 decreased 1% or $3 million. The decrease in net income excluding unusual items was a result of the decrease in operating income (excluding unusual items) partially offset by lower income taxes (excluding unusual items).
Diluted earnings per share for the first quarter of 2007 increased 3% or $0.05 to $1.96 from $1.91 for the first quarter of 2006. Excluding the unusual items recorded in 2006 (see "Unusual Items" below), diluted earnings per share decreased 2% or $0.03 as a result of the decrease in net income (excluding unusual items) combined with an increase in the weighted average number of diluted shares outstanding in the first quarter of 2007, primarily as a result of the Class A Subordinate Voting Shares issued on the exercise of stock options during or subsequent to the first quarter of 2006.
Subsequent to the first quarter of 2007, we announced that we are reviewing potential alternatives regarding the future of the Chrysler Group.
Unusual Items
During the first quarter of 2006, we incurred restructuring and rationalization charges of $10 million (net income - $9 million; diluted earnings per share - $0.08) related primarily to non-contractual termination benefits for employees at an exteriors facility in Belgium.
RESULTS OF OPERATIONS ------------------------------------------------------------------------- Accounting Change
In January 2005, the Canadian Institute of Chartered Accountants approved Handbook Sections 1530, "Comprehensive Income", 3855 "Financial Instruments - Recognition and Measurement", 3861 "Financial Instruments - Disclosure and Presentation", and 3865 "Hedges". We adopted these new recommendations effective January 1, 2007 with no restatement of prior periods, except to classify the currency translation adjustment as a component of accumulated other comprehensive income. With the adoption of these new standards, our accounting for financial instruments and hedges complies with U.S. GAAP in all material respects on January 1, 2007.
Financial Instruments
Under the new standards, all of our financial assets and financial liabilities are classified as held for trading, held to maturity investments, loans and receivables, available-for-sale financial assets or other financial liabilities. Held for trading financial instruments, which include cash and cash equivalents, are measured at fair value and all gains and losses are included in net income in the period in which they arise. Held to maturity investments are recorded at amortized cost using the effective interest method, and include long-term interest bearing government securities held to partially fund certain Austrian lump sum termination and long service payment arrangements. Loans and receivables, which include accounts receivable and long-term receivables, accounts payable, accrued salaries and wages, and certain other accrued liabilities are recorded at amortized cost using the effective interest method. We do not currently have any available for sale financial assets.
Comprehensive Income
Other comprehensive income includes the unrealized gains and losses on translation of our net investment in self-sustaining foreign operations, and to the extent that cash flow hedges are effective, the change in their fair value, net of income taxes. Other comprehensive income is presented below net income on the Consolidated Statements of Income and Comprehensive Income. Comprehensive income is composed of our net income and other comprehensive income.
Accumulated other comprehensive income is a separate component of shareholders' equity, which includes the accumulated balances of all components of other comprehensive income which are recognized in comprehensive income but excluded from net income.
Hedges
Previously, under Canadian GAAP derivative financial instruments that met hedge accounting criteria were accounted for on an accrual basis, and gains and losses on hedge contracts were accounted for as a component of the related hedged transaction. The new standards require that all derivative instruments, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value. The fair values of derivatives are recorded in other assets or other liabilities. To the extent that cash flow hedges are effective, the change in their fair value is recorded in other comprehensive income. Amounts accumulated in other comprehensive income are reclassified to net income in the period in which the hedged item affects net income.
The impact of this accounting policy change on the consolidated balance sheet as at January 1, 2007 was as follows:
Increase in prepaid expenses and other $ 28
Increase in other assets 17
Increase in future tax assets 14
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Increase in other accrued liabilities $ 32
Increase in other long-term liabilities 17
Increase in future tax liabilities 13
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Decrease in accumulated other comprehensive income $ 3
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Average Foreign Exchange
For the three months
ended March 31,
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2007 2006 Change
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1 Canadian dollar equals
U.S. dollars 0.854 0.866 - 1%
1 euro equals U.S. dollars 1.311 1.203 + 9%
1 British pound equals U.S. dollars 1.954 1.752 + 12%
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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 ended March 31, 2007 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 movements in exchange rates. We record foreign currency transactions at the hedged rate where applicable.
Finally, holding gains and losses on foreign currency denominated monetary items, which are recorded in selling, general and administrative expenses, impact reported results.
Sales
For the three months
ended March 31,
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2007 2006 Change
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Vehicle Production Volumes
(millions of units)
North America 3.829 4.130 - 7%
Europe 4.249 4.007 + 6%
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Average Dollar Content Per Vehicle
North America $ 832 $ 759 + 10%
Europe $ 390 $ 343 + 14%
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Sales
External Production
North America $ 3,187 $ 3,135 + 2%
Europe 1,657 1,373 + 21%
Rest of World 87 55 + 58%
Complete Vehicle Assembly 1,104 1,040 + 6%
Tooling, Engineering and Other 388 416 - 7%
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Total Sales $ 6,423 $ 6,019 + 7%
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Total sales reached a record level in the first quarter of 2007, increasing 7% or $404 million to $6.4 billion compared to $6.0 billion for the first quarter of 2006.
External Production Sales - North America
External production sales in North America increased 2% or $52 million to $3.187 billion for the first quarter of 2007 compared to $3.135 billion for the first quarter of 2006. This increase in production sales reflects a 10% increase in our North American average dollar content per vehicle partially offset by a 7% decrease in North American vehicle production volumes. More importantly, production volumes at two of our largest North American customers for the first quarter of 2007 continued to deteriorate when compared to the first quarter of 2006. While North American vehicle production volumes declined 7% during the first quarter of 2007 compared to the first quarter of 2006, production volumes at both GM and Ford declined 15%.
Our average dollar content per vehicle grew by 10% or $73 to $832 for the first quarter of 2007 compared to $759 for the first quarter of 2006, primarily as a result of:
- the launch of new programs during or subsequent to the first quarter
of 2006, including:
- the Ford Edge and Lincoln MKX;
- GM's full-size pickups;
- the Jeep Wrangler;
- the Saturn Outlook and GMC Acadia;
- the BMW X5;
- the Dodge Nitro;
- the Dodge Caliber; and
- the Dodge Avenger and Chrysler Sebring; and
- increased production and/or content on certain programs, including
the Dodge Grand Caravan and Chrysler Town & Country.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Dodge Ram;
- the Ford Fusion, Mercury Milan and Lincoln MKZ/Zephyr;
- the Chrysler 300 and 300C, and Dodge Charger and Magnum;
- the Ford Explorer and Mercury Mountaineer;
- the Pontiac Montana SV6, Saturn Relay, Buick Terraza and
Chevrolet Uplander;
- the GMC Envoy, Buick Rainier and Chevrolet Trailblazer; and
- the Chevrolet HHR;
- programs that ended production during or subsequent to the first
quarter of 2006, including the Ford Freestar and Mercury Monterey;
- a decrease in reported U.S. dollar sales due to the weakening of the
Canadian dollar against the U.S. dollar; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 21% or $284 million to $1.657 billion for the first quarter of 2007 compared to $1.373 billion for the first quarter of 2006. This increase in production sales reflects a 14% increase in our European average dollar content per vehicle combined with a 6% increase in European vehicle production volumes for the first quarter of 2007, each as compared to the first quarter of 2006.
Our average dollar content per vehicle grew by 14% or $47 to $390 for the first quarter of 2007 compared to $343 for the first quarter of 2006, primarily as a result of:
- an increase in reported U.S. dollar sales due to the strengthening of
the euro and British Pound, each against the U.S. dollar;
- the launch of new programs during or subsequent to the first quarter
of 2006, including:
- the MINI Cooper; and
- the Mercedes-Benz C-Class;
- acquisitions completed subsequent to the first quarter of 2006,
including the acquisition of two facilities from Pressac Investments
Limited ("Pressac") in January 2007; and
- increased production and/or content on certain programs, including
the Opel Astra Twin Top.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Nissan Micra; and
- the Mercedes-Benz E-Class; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 58% or $32 million to $87 million for the first quarter of 2007 compared to $55 million for the first quarter of 2006. The increase in production sales is primarily as a result of:
- increased production and/or content on certain programs in Korea,
China and Brazil;
- the launch of new programs during or subsequent to the first quarter
of 2006 in Korea, China and Brazil;
- the acquisition of a mirrors facility in South Africa during 2006; and
- an increase in reported U.S. dollar sales as a result of the
strengthening of the Korean Won and Chinese Renminbi, each against
the U.S. dollar.
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 impacts our level 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, however, 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.
For the three months
ended March 31,
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2007 2006 Change
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Complete Vehicle Assembly Sales $ 1,104 $ 1,040 + 6%
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Complete Vehicle Assembly Volumes
(Units)
Full-Costed:
BMW X3, Mercedes-Benz E-Class
and G-Class, and Saab 9(3)
Convertible 38,237 39,347 - 3%
Value-Added:
Jeep Grand Cherokee, Chrysler
300, Chrysler Voyager, and
Jeep Commander 22,532 24,810 - 9%
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60,769 64,157 - 5%
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Complete vehicle assembly sales increased 6% or $64 million to $1.104 billion for the first quarter of 2007 compared to $1.040 billion for the first quarter of 2006 while assembly volumes decreased 5% or 3,388 units. The increase in complete vehicle assembly sales is primarily as a result of:
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar; and
- higher assembly volumes for the BMW X3.
These factors were partially offset by:
- the end of production of the Mercedes-Benz E-Class 4MATIC at our Graz
assembly facility in the fourth quarter of 2006, as DaimlerChrysler
is assembling this vehicle in-house; and
- a decrease in assembly volumes for the Saab 9(3) Convertible and
Mercedes-Benz G-Class.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 7% or $28 million to $388 million for the first quarter of 2007 compared to $416 million for the first quarter of 2006.
In the first quarter of 2007 the major programs for which we recorded tooling, engineering and other sales were:
- the Saturn Vue; - GM's full-size pickups; - the MINI Cooper; - the Dodge Grand Caravan and Chrysler Town & Country; and - the Ford Flex.
In the first quarter of 2006 the major programs for which we recorded tooling, engineering and other sales were:
- the MINI Cooper; - the BMW X5; - GM's full-size pickup and SUV platform; - the Ford Edge and Lincoln MKX; and - the Ford F-Series SuperDuty.
In addition, tooling, engineering and other sales increased as a result of the strengthening of the euro against the U.S. dollar.
Gross Margin
Gross margin increased $23 million to $843 million for the first quarter of 2007 compared to $820 million for the first quarter of 2006 while gross margin as a percentage of total sales decreased to 13.1% for the first quarter of 2007 compared to 13.6% for the first quarter of 2006.
The unusual items discussed in the "Highlights" section above, negatively impacted gross margin as a percent of total sales in the first quarter of 2006 by 0.2%. Excluding these unusual items, the 0.7% decrease in gross margin as a percentage of total sales was primarily as a result of:
- continued underperformance at certain of our interior systems
facilities;
- operational inefficiencies and other costs at certain facilities; and
- incremental customer price concessions.
These factors were partially offset by:
- incremental gross margin earned on new programs that launched during
or subsequent to the first quarter of 2006;
- productivity and efficiency improvements at certain underperforming
divisions; and
- the end of production of the Mercedes-Benz E-Class 4MATIC at our Graz
assembly facility, since this program was accounted for on a
full-cost basis.
Depreciation and Amortization
Depreciation and amortization costs increased 8% or $15 million to $203 million for the first quarter of 2007 compared to $188 million for the first quarter of 2006. The increase in depreciation and amortization was primarily as a result of:
- the launch of new programs during or subsequent to the first quarter
of 2006, including GM's full-size pickups and the Ford F-Series
SuperDuty;
- accelerated depreciation on certain program specific assets in North
America;
- an increase in assets employed to support the growth of our business;
and
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the euro against the U.S. dollar.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales was 5.4% for the first quarter of 2007, unchanged from the first quarter of 2006. SG&A expenses increased 8% or $26 million to $350 million for the first quarter of 2007 compared to $324 million for the first quarter of 2006. Excluding the unusual items discussed in the "Highlights" section above, SG&A expenses increased by $28 million primarily as a result of:
- an increase in reported U.S. dollar SG&A expenses due to the
strengthening of the euro against the U.S. dollar;
- higher infrastructure costs to support the increase in sales,
including spending related to programs that launched during or
subsequent to the first quarter of 2006; and
- increased spending as a result of the acquisition of two facilities
from Pressac in January 2007.
Earnings before Interest and Taxes ("EBIT")(1)
For the three months
ended March 31,
--------------------------
2007 2006 Change
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North America $ 146 $ 219 - 33%
Europe 120 69 + 74%
Rest of World 5 - -
Corporate and Other 25 22 + 14%
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Total EBIT $ 296 $ 310 - 5%
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(1) EBIT is defined as operating income as presented on our unaudited
interim consolidated financial statements before net interest
(income) expense.
Included in EBIT for the first quarter of 2006 were the following unusual items, which have been discussed in the "Highlights" section above.
For the three months
ended March 31,
--------------------------
2007 2006
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North America
Restructuring charges $ - $ (2)
Europe
Restructuring charges - (8)
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$ - $ (10)
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North America
EBIT in North America decreased 33% or $73 million to $146 million for the first quarter of 2007 compared to $219 million for the first quarter of 2006. Excluding the North American unusual item discussed in the "Highlights" section above, the $75 million decrease in EBIT was primarily as a result of:
- operational inefficiencies and other costs at certain facilities;
- lower earnings as a result of a decrease in production and/or content
on certain programs;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
These factors were partially offset by:
- margins earned on new programs that launched during or subsequent to
the first quarter of 2006;
- margins earned on increased production and/or content on certain
programs; and
- productivity and efficiency improvements at certain underperforming
divisions.
Europe
EBIT in Europe increased 74% or $51 million to $120 million for the first quarter of 2007 compared to $69 million for the first quarter of 2006. Excluding the European unusual item discussed above, the remaining $43 million increase in EBIT was primarily as a result of:
- increased margins earned as a result of higher complete vehicle
assembly sales;
- productivity and efficiency improvements at certain underperforming
divisions;
- increased margins earned on production programs that launched during
or subsequent to the first quarter of 2006; and
- an increase in reported U.S. dollar EBIT as a result of the
strengthening of the euro against the U.S. dollar.
These factors were partially offset by:
- operating inefficiencies at certain interior systems facilities;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Rest of World
Rest of World EBIT increased $5 million to $5 million for the first quarter of 2007. The increase in EBIT was primarily as a result of:
- additional margin earned on the increase in production sales
discussed above;
- improved operating efficiencies at certain new facilities, primarily
in China; and
- equity income earned on our 41% interest in Shin Young Metal Ind. Co.,
which we acquired during 2006.
These factors were partially offset by costs incurred at other new facilities, primarily in China, as we continue to pursue opportunities in this growing market.
Corporate and Other
Corporate and Other EBIT increased 14% or $3 million to $25 million for the first quarter of 2007 compared to $22 million for the first quarter of 2006. The increase in EBIT was primarily as a result of:
- an increase in affiliation fees earned from our divisions;
- lower charitable donations, related primarily to lower Hurricane
Katrina disaster relief spending; and
- an increase in equity income.
These factors were partially offset by:
- an increase in salaries and wages; and
- higher depreciation and amortization.
Interest (Income) Expense, net
During the first quarter of 2007, we earned net interest income of $9 million, compared to net interest expense of $1 million for the first quarter of 2006. The $10 million positive variance is primarily as a result of:
- a reduction in interest expense, primarily as a result of:
- the repayment in January 2007 of the third series of our senior
unsecured notes related to the acquisition of New Venture Gear
("NVG"); and
- the $59 million and $48 million repayment of senior unsecured notes
in May 2006 and October 2006, respectively; and
- an increase in interest income earned.
Operating Income
Operating income decreased 1% or $4 million to $305 million for the first quarter of 2007 compared to $309 million for the first quarter of 2006. Excluding the unusual items discussed in the "Highlights" section above, operating income for the first quarter of 2007 decreased 4% or $14 million. This decrease in operating income was the result of the decrease in EBIT (excluding unusual items), partially offset by the increase in net interest income earned, all as discussed above.
Income Taxes
Our effective income tax rate on operating income (excluding equity income) decreased to 29.1% for the first quarter of 2007 compared to 31.6% for the first quarter of 2006. In the first quarter of 2006, the income tax rate was negatively impacted by the unusual items discussed in the "Highlights" section above. Excluding the unusual items, our effective income tax rate for the first quarter of 2006 was 30.9%. Excluding the unusual items, the remaining decrease in the effective income tax rate was primarily as a result of:
- a change in mix of earnings, whereby proportionately more income was
earned in jurisdictions with lower income tax rates; and
- a decrease in losses not benefited, primarily at certain interior
systems facilities in Europe.
Net Income
Net income increased by 3% or $6 million to $218 million for the first quarter of 2007 compared to $212 million for the first quarter of 2006. Excluding unusual items (discussed in the "Highlights" section above), net income decreased $3 million as a result of the decrease in operating income (excluding unusual items), partially offset by lower income taxes (excluding unusual items), all as discussed above.
Earnings per Share
For the three months
ended March 31,
--------------------------
2007 2006 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate
Voting or Class B Share
Basic $ 2.00 $ 1.95 + 3%
Diluted $ 1.96 $ 1.91 + 3%
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and Class B
Shares outstanding (millions)
Basic 109.0 108.4 + 1%
Diluted 111.8 111.2 + 1%
-------------------------------------------------------------------------
Diluted earnings per share increased 3% or $0.05 to $1.96 for the first quarter of 2007 compared to $1.91 for the first quarter of 2006. Excluding the unusual items (discussed in the "Highlights" section above), diluted earnings per share decreased $0.03 from the first quarter of 2006 as a result of a decrease in net income (excluding unusual items) combined with an increase in the weighted average number of diluted shares outstanding during the quarter.
The increase in the weighted average number of diluted shares outstanding was primarily as a result of additional Class A Subordinate Voting Shares that were issued on the exercise of stock options during or subsequent to the first quarter of 2006.
Return on Funds Employed ("ROFE")(1)
An important financial ratio that we use across all of our operations to measure return on investment is ROFE.
ROFE for the first quarter of 2007 was 18.8%, a decrease from 19.6% for the first quarter of 2006. The unusual items discussed in the "Highlights" section above negatively impacted ROFE for the first quarter of 2006 by 0.6%.
Excluding these unusual items, the 1.4% decrease in ROFE can be attributed to a decrease in EBIT (excluding unusual items), as described above, partially offset by a $46 million decrease in average funds employed for the first quarter of 2007 compared to the first quarter of 2006. The decrease in our average funds employed was primarily as a result of a decrease in our average investment in non-cash operating assets and liabilities, partially offset by acquisitions completed during or subsequent to the first quarter of 2006.
-------------------------------------------------------------------------
(1) ROFE is defined as EBIT divided by the average funds employed for the
period. Funds employed is defined as long-term assets, excluding
future tax assets, plus non-cash operating assets and liabilities.
Non-cash operating assets and liabilities are defined as the sum of
accounts receivable, inventory, income taxes recoverable and prepaid
assets less the sum of accounts payable, accrued salaries and wages,
other accrued liabilities, income taxes payable and deferred
revenues.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
Cash Flow from Operations
For the three months
ended March 31,
--------------------------
2007 2006 Change
-------------------------------------------------------------------------
Net income $ 218 $ 212
Items not involving current
cash flows 218 215
-------------------------------------------------------------------------
$ 436 $ 427 $ 9
Changes in non-cash operating
assets and liabilities (171) (225)
-------------------------------------------------------------------------
Cash provided from operating
activities $ 265 $ 202 $ 63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash operating assets and liabilities increased $9 million to $436 million for the first quarter of 2007 compared to $427 million for the first quarter of 2006. The increase in cash flow from operations was due to a $6 million increase in net income (as discussed above) and a $3 million increase in items not involving current cash flows.
Cash invested in operating assets and liabilities amounted to $171 million for the first quarter of 2007 which was comprised of the following sources (and uses) of cash:
For the three months
ended March 31,
---------------------------
2007 2006
-------------------------------------------------------------------------
Accounts receivable $ (455) $ (520)
Inventory (61) (42)
Prepaid expenses and other (4) (13)
Accounts payable and other accrued liabilities 362 345
Income taxes payable (10) 10
Deferred revenue (3) (5)
-------------------------------------------------------------------------
Changes in non-cash operating assets and
liabilities $ (171) $ (225)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in accounts receivable in the first quarter of 2007 was primarily due to an increase in production receivables related to higher production sales, in particular during the month of March compared to the month of December, since December typically has relatively less sales due to lower OEM production schedules. In addition to the increase in production sales, payments from several customers occurred prior to quarter end in December 2006, whereas similar payments were received subsequent to quarter end in April 2007. The increase in accounts payable and other accrued liabilities was primarily due to the increase in production in March 2007 compared to December 2006.
Capital and Investment Spending
For the three months
ended March 31,
--------------------------
2007 2006 Change
-------------------------------------------------------------------------
Fixed assets $ (125) $ (167)
Other assets (20) (9)
-------------------------------------------------------------------------
Fixed and other assets additions $ (145) $ (176)
Purchase of subsidiaries (46) (203)
Proceeds from disposals 15 24
-------------------------------------------------------------------------
Cash used in investing activities $ (176) $ (355) $ 179
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed and other assets additions
In the first quarter of 2007 we invested $125 million in fixed assets. While investments were made to refurbish or replace assets consumed in the normal course of business and for productivity improvements, a large portion of the investment in the first quarter of 2007 was for manufacturing equipment for programs that launched during the first quarter of 2007, or will be launching subsequent to the first quarter of 2007.
In the first quarter of 2007, we invested $20 million in other assets related primarily to fully reimbursable planning and engineering costs relating to programs that will be launching during or subsequent to 2007.
Purchase of subsidiaries
During the first quarter of 2007, we acquired two facilities from Pressac for total consideration of $52 million, consisting of $46 million paid in cash, net of cash acquired, and $6 million of assumed debt. During the first quarter of 2006, we acquired CTS Fahrzeug-Dachsysteme GmbH, Bietingheim- Bissingen, for total consideration of $271 million, consisting of $203 million paid in cash and $68 million of assumed debt.
Proceeds from disposal
For the first quarter of 2007, proceeds from disposal were $15 million, which represents normal course fixed and other asset disposals.
Financing
For the three months
ended March 31,
--------------------------
2007 2006 Change
-------------------------------------------------------------------------
Repayments of debt $ (56) $ (59)
Issues of debt 23 48
Issues of Class A Subordinate
Voting Shares 4 8
Dividends (21) (41)
-------------------------------------------------------------------------
Cash used in financing activities $ (50) $ (44) $ (6)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The repayments of debt in the first quarters of 2006 and 2007 include the repayment of the second and third series, respectively, of senior unsecured notes issued in connection with the NVG acquisition.
The issues of debt relate primarily to increases in bank indebtedness to support the increase in working capital.
During the first quarter of 2007, we received cash proceeds of $4 million on the exercise of stock options for Class A Subordinate Voting Shares compared to $8 million during the first quarter of 2006.
Cash dividends paid per Class A Subordinate Voting or Class B Share were $0.19 for the first quarter of 2007 compared to $0.38 for the first quarter of 2006.
Our Dividend Policy entitles Magna Class A Subordinate Voting and Class B shareholders to dividends which, in aggregate in respect of a financial year, shall be: (a) equal to at least 10% of Magna's After Tax Profits (as defined in the Corporate Constitution) for that financial year; and (b) on average, equal to at least 20% of Magna's After Tax Profits for that year and the two immediately preceding financial years. Magna has complied with this requirement since 1992 and intends to continue to fully comply in the following manner:
(1) the dividend per share to be paid in respect of each of the first
three quarters of a financial year will be approximately 5% of
Magna's After Tax Profits for the prior financial year, divided by
the number of shares outstanding at the end of the prior financial
year; and
(2) the dividend per share to be paid in respect of the fourth quarter of
a financial year will be calculated based on the amount, if any, by
which 20% of Magna's actual After Tax Profits for the current
financial year exceeds the aggregate amount distributed as dividends
in respect of the prior three quarters, divided by the number of
shares outstanding at the end of the current financial year.
As a result of the foregoing dividend formula, our quarterly dividend payable in respect of the first quarter ending March 31, 2007 is $0.24 per Class A Subordinate Voting or Class B share, payable on June 15, 2007 to shareholders of record on May 31, 2007.
Financing Resources
As at As at
March 31, December 31,
2007 2006 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 84 $ 63
Long-term debt due within
one year 76 98
Long-term debt 563 605
-------------------------------------------------------------------------
723 766
Shareholders' equity 7,420 7,157
-------------------------------------------------------------------------
Total capitalization $ 8,143 $ 7,923 $ 220
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization increased by 3% or $220 million to $8.1 billion at March 31, 2007 compared to $7.9 billion at December 31, 2006. The increase in capitalization was a result of a $263 million increase in shareholders' equity, offset in part by a $43 million decrease in liabilities.
The increase in shareholders' equity was primarily as a result of:
- net income earned during the first quarter of 2007 (as discussed
above);
- a $60 million increase in accumulated other comprehensive income,
primarily due to the strengthening of the euro against the U.S.
dollar between December 31, 2006 and March 31, 2007; and
- Class A Subordinate Voting Shares issued on the exercise of stock
options.
The increases in equity were partially offset by dividends paid during the first quarter of 2007.
The decrease in liabilities was primarily as a result of the repayment in January of the third series of senior unsecured notes related to the NVG acquisition.
These decreases were partially offset by an increase in reported U.S. dollar amounts, primarily as a result of the strengthening of the euro against the U.S. dollar.
During the first quarter of 2007, our cash resources increased by $68 million to $1.953 billion as a result of the cash provided from operating activities, partially offset by the cash used in investing and financing activities, all as discussed above. In addition to our cash resources, we had term and operating lines of credit totalling $2.0 billion, of which $1.8 billion was unused and available.
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 May 9, 2007 were exercised or converted:
Class A Subordinate Voting and Class B Shares 109,955,783
Subordinated Debentures(i) 1,096,589
Stock options(ii) 4,003,881
-------------------------------------------------------------------------
115,056,253
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 on redemption or maturity. 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 the 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 pursuant to our stock option plans.
Contractual Obligations and Off Balance Sheet Financing
There have been no material changes with respect to the contractual obligations requiring annual payments during the first quarter of 2007 that are outside the ordinary course of our business. Refer to our MD&A included in our 2006 Annual Report.
Long-term receivables in other assets are reflected net of outstanding borrowings from a customer's finance subsidiary of $43 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.
SUBSEQUENT EVENTS -------------------------------------------------------------------------
On May 10, 2007, we announced a strategic investment in Magna by Russian Machines, a wholly-owned subsidiary of Basic Element. Under the terms of the transaction agreement entered into by Magna, our controlling shareholder the Stronach Trust and Russian Machines, Russian Machines would invest approximately $1.54 billion to indirectly acquire 20 million Magna Class A Subordinate Voting Shares from treasury. A new Canadian holding company ("Newco") would hold the respective holdings in Magna of the Stronach Trust, Russian Machines, and certain principals who are also members of our executive management. We would continue to be a Canadian company whose shares are listed on the Toronto Stock Exchange ("TSX") and New York Stock Exchange ("NYSE").
Subject to acceptance and approval by the TSX, the 20 million Magna Class A Subordinate Voting Shares would be issued for $76.83 per share, representing the volume-weighted average closing price of our Class A Subordinate Voting Shares on the NYSE over the 20 trading days ended April 20, 2007, the last trading day prior to the receipt of the proposal letter from Russian Machines.
Following the completion of the transaction, each of the Stronach Trust and Russian Machines will be entitled to nominate six Board members including at least four independent directors. Our Co-CEO's will also be nominated to serve as directors on the 14 member Board.
In addition, under the terms of the proposed transaction:
- Subject to the approval of a "majority of the minority" of the
holders of the Class B Shares, we would repurchase all Magna Class B
Shares not held by the Stronach Trust for cash consideration of
Cdn$114 per share, representing a premium of approximately 30% over
the volume-weighted average closing price of our Class A Subordinate
Voting Shares on the TSX over the 20 trading days ended April 20,
2007. The effective cost to Magna of the repurchase is approximately
Cdn$24.8 million. Concurrent with the repurchase of such Magna Class
B Shares, the voting power of each remaining Class B share would be
reduced to 300 votes per share, in order to maintain approximately
the same level of control of Magna that is currently exercised by
Mr. Stronach and the Stronach Trust;
- Russian Machines commits to use commercially reasonable efforts to
assist and support us in identifying, developing and implementing
opportunities in the Russian and other automotive markets; and
- Russian Machines would also invest a net amount of $150 million for a
50% interest in a European company that will provide the consulting
services of Mr. Stronach in relation to our business outside Canada
and Austria. As a result of this investment, Russian Machines would
be entitled to a 50% share of consulting fees paid by Magna and its
affiliates to Stronach & Co. and its affiliates under the existing
arrangements.
The transaction is proposed to be carried out by way of a court-approved plan of arrangement under Ontario law and is subject to court, regulatory and shareholder approvals, including "majority of the minority" approval of the holders of Magna's Class A Subordinate Voting Shares, voting as a separate class. Completion of the proposed transaction is also subject to finalizing definitive documentation, including a shareholders' agreement in respect of Newco, and customary closing conditions.
Conditional upon completion of the transaction and subject to regulatory approval, we intend to conduct an issuer bid to repurchase up to 20 million outstanding Magna Class A Subordinate Voting Shares.
COMMITMENTS AND CONTINGENCIES -------------------------------------------------------------------------
From time to time, we may be contingently liable for litigation and other claims. Refer to note 21 of our 2006 audited consolidated financial statements, which describes these claims.
CONTROLS AND PROCEDURES -------------------------------------------------------------------------
There have been no changes in our internal controls over financial reporting that occurred during the three months ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FORWARD LOOKING STATEMENTS -------------------------------------------------------------------------
The previous discussion may contain statements that, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of applicable securities legislation. Forward- looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or economic performance, or the assumptions underlying any of the foregoing. We use words such as "may", "would", "could", "will", "likely", "expect", "anticipate", "believe", "intend", "plan", "forecast", "project", "estimate" and similar expressions to identify forward-looking statements. Any such forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks, assumptions and uncertainties. These risks, assumptions and uncertainties include, but are not limited to, the impact of: declining production volumes and changes in consumer demand for vehicles; a reduction in the production volumes of certain vehicles, such as certain light trucks; the termination or non-renewal by our customers of any material contracts; our ability to offset increases in the cost of commodities, such as steel and resins, as well as energy prices; fluctuations in relative currency values; our ability to offset price concessions demanded by our customers; our dependence on outsourcing by our customers; our ability to compete with suppliers with operations in low cost countries; changes in our mix of earnings between jurisdictions with lower tax rates and those with higher tax rates, as well as our ability to fully benefit tax losses; other potential tax exposures; the financial distress of some of our suppliers and customers; the inability of our customers to meet their financial obligations to us; our ability to fully recover pre-production expenses; warranty and recall costs; product liability claims in excess of our insurance coverage; expenses related to the restructuring and rationalization of some of our operations; impairment charges; our ability to successfully identify, complete and integrate acquisitions, potentially including a transaction involving the Chrysler group; risks associated with new program launches; legal claims against us; risks of conducting business in foreign countries; unionization activities at our facilities; work stoppages and labour relations disputes; changes in laws and governmental regulations; costs associated with compliance with environmental laws and regulations; potential conflicts of interest involving our controlling shareholder, the Stronach Trust; and other factors set out in our Annual Information Form filed with securities commissions in Canada and our annual report on Form 40-F filed with the United States Securities and Exchange Commission, and subsequent filings. In evaluating forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(United States dollars in millions, except per share figures)
Three months ended
--------------------------
March 31, March 31,
Note 2007 2006
-------------------------------------------------------------------------
Sales $ 6,423 $ 6,019
-------------------------------------------------------------------------
Cost of goods sold 5,580 5,199
Depreciation and amortization 203 188
Selling, general and administrative 9 350 324
Interest (income) expense, net (9) 1
Equity income (6) (2)
-------------------------------------------------------------------------
Income from operations before income taxes 305 309
Income taxes 87 97
-------------------------------------------------------------------------
Net income 218 212
Other comprehensive income: 2,8
Net unrealized gains on translation of
net investment in foreign operations 56 36
Net unrealized gains on cash flow hedges 2 -
Reclassifications of net losses on cash
flow hedges to net income 5 -
-------------------------------------------------------------------------
Comprehensive income $ 281 $ 248
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share:
Basic $ 2.00 $ 1.95
Diluted $ 1.96 $ 1.91
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash dividends paid per Class A Subordinate
Voting or Class B Share $ 0.19 $ 0.38
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting
and Class B Shares outstanding during the
period (in millions):
Basic 109.0 108.4
Diluted 111.8 111.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(United States dollars in millions)
Three months ended
--------------------------
March 31, March 31,
2007 2006
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 3,773 $ 3,409
Net income 218 212
Dividends on Class A Subordinate Voting
and Class B Shares (21) (42)
-------------------------------------------------------------------------
Retained earnings, end of period $ 3,970 $ 3,579
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(United States dollars in millions)
Three months ended
--------------------------
March 31, March 31,
Note 2007 2006
-------------------------------------------------------------------------
Cash provided from (used for):
OPERATING ACTIVITIES
Net income $ 218 $ 212
Items not involving current cash flows 218 215
-------------------------------------------------------------------------
436 427
Changes in non cash operating
assets and liabilities (171) (225)
-------------------------------------------------------------------------
265 202
-------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Fixed asset additions (125) (167)
Purchase of subsidiaries 3 (46) (203)
Increase in other assets (20) (9)
Proceeds from disposition 15 24
-------------------------------------------------------------------------
(176) (355)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of debt (56) (59)
Issues of debt 23 48
Issues of Class A Subordinate Voting Shares 4 8
Dividends (21) (41)
-------------------------------------------------------------------------
(50) (44)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents 29 19
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents during the period 68 (178)
Cash and cash equivalents, beginning of period 1,885 1,682
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,953 $ 1,504
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(United States dollars in millions)
March 31, December 31,
Note 2007 2006
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 1,953 $ 1,885
Accounts receivable 4,148 3,629
Inventories 1,521 1,437
Prepaid expenses and other 2 111 109
-------------------------------------------------------------------------
7,733 7,060
-------------------------------------------------------------------------
Investments 153 151
Fixed assets, net 4,086 4,114
Goodwill 3 1,133 1,096
Future tax assets 2 289 255
Other assets 2 485 478
-------------------------------------------------------------------------
$ 13,879 $ 13,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 84 $ 63
Accounts payable 3,496 3,608
Accrued salaries and wages 545 453
Other accrued liabilities 2,4 898 426
Income taxes payable 155 135
Long term debt due within one year 76 98
-------------------------------------------------------------------------
5,254 4,783
-------------------------------------------------------------------------
Deferred revenue 71 73
Long term debt 563 605
Other long term liabilities 2 312 288
Future tax liabilities 2 259 248
-------------------------------------------------------------------------
6,459 5,997
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 6
Class A Subordinate Voting Shares
(issued: 108,862,850; December 31, 2006
- 108,787,387) 2,510 2,505
Class B Shares
(convertible into Class A Subordinate
Voting Shares)
(issued: 1,092,933) - -
Contributed surplus 7 66 65
Retained earnings 3,970 3,773
Accumulated other comprehensive income 2,8 874 814
-------------------------------------------------------------------------
7,420 7,157
-------------------------------------------------------------------------
$ 13,879 $ 13,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in United States dollars and all tabular amounts in millions
unless otherwise noted)
-------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in United States dollars following
Canadian generally accepted accounting principles ("GAAP") with
respect to the preparation of interim financial information.
Accordingly, they do not include all the information and footnotes as
required in the preparation of annual financial statements and should
be read in conjunction with the December 31, 2006 audited
consolidated financial statements and notes included in the Company's
2006 Annual Report. These interim consolidated financial statements
have been prepared using the same accounting policies as the
December 31, 2006 annual consolidated financial statements, except
for the accounting change set out in note 2.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at March 31, 2007 and the results of operations
and cash flows for the three-month periods ended March 31, 2007 and
2006.
2. ACCOUNTING CHANGE
In January 2005, the Canadian Institute of Chartered Accountants
approved Handbook Sections 1530, "Comprehensive Income", 3855
"Financial Instruments - Recognition and Measurement", 3861
"Financial Instruments - Disclosure and Presentation", and 3865
"Hedges". The Company adopted these new recommendations effective
January 1, 2007 with no restatement of prior periods, except to
classify the currency translation adjustment as a component of
accumulated other comprehensive income. With the adoption of these
new standards, the Company's accounting for financial instruments and
hedges complies with U.S. GAAP in all material respects on January 1,
2007.
Financial Instruments
Under the new standards, all of our financial assets and financial
liabilities are classified as held for trading, held to maturity
investments, loans and receivables, available-for-sale financial
assets, or other financial liabilities. Held for trading financial
instruments, which include cash and cash equivalents, are measured at
fair value and all gains and losses are included in net income in the
period in which they arise. Held to maturity investments are recorded
at amortized cost using the effective interest method, and include
long-term interest bearing government securities held to partially
fund certain Austrian lump sum termination and long service payment
arrangements. Loans and receivables, which include accounts
receivable and long-term receivables, accounts payable, accrued
salaries and wages and certain other accrued liabilities are recorded
at amortized cost using the effective interest method. The Company
does not currently have any available for sale financial assets.
Comprehensive Income
Other comprehensive income includes unrealized gains and losses on
translation of the Company's net investment in self-sustaining
foreign operations, and to the extent that cash flow hedges are
effective, the change in their fair value, net of income taxes. Other
comprehensive income is presented below net income on the
Consolidated Statements of Income and Comprehensive Income.
Comprehensive income is composed of net income and other
comprehensive income.
Accumulated other comprehensive income is a separate component of
shareholders' equity which includes the accumulated balances of all
components of other comprehensive income which are recognized in
comprehensive income but excluded from net income.
Hedges
Previously, under Canadian GAAP, derivative financial instruments
that met hedge accounting criteria were accounted for on an accrual
basis, and gains and losses on hedge contracts were accounted for as
a component of the related hedged transaction. The new standards
require that all derivative instruments, whether designated in
hedging relationships or not, be recorded on the balance sheet at
fair value. The fair values of derivatives are recorded in other
assets or other liabilities. To the extent that cash flow hedges are
effective, the change in their fair value is recorded in other
comprehensive income. Amounts accumulated in other comprehensive
income are reclassified to net income in the period in which the
hedged item affects net income.
The impact of this accounting policy change on the consolidated
balance sheet as at January 1, 2007 was as follows:
Increase in prepaid expenses and other $ 28
Increase in other assets 17
Increase in future tax assets 14
-------------------------------------------------------------------
Increase in other accrued liabilities $ 32
Increase in other long-term liabilities 17
Increase in future tax liabilities 13
-------------------------------------------------------------------
Decrease in accumulated other comprehensive income $ 3
-------------------------------------------------------------------
3. ACQUISITIONS
(a) For the three months ended March 31, 2007
On January 15, 2007, Magna acquired two facilities from Pressac
Investments Limited ("Pressac"). The facilities in Germany and
Italy manufacture electronic components for sale to various
customers, including Volkswagen, DaimlerChrysler and Fiat.
The total consideration for the acquisition amounted to
$52 million ((euro) 40 million), consisting of $46 million paid
in cash, net of cash acquired, and $6 million of assumed debt.
The excess purchase price over the book value of assets acquired
and liabilities assumed was $29 million.
The purchase price allocations for Pressac are preliminary and
adjustments to the allocations may occur as a result of
obtaining more information regarding asset valuations. On a
preliminary basis, an allocation of the excess purchase price
over the book value of assets acquired and liabilities assumed
has been made to fixed assets and goodwill.
(b) For the three months ended March 31, 2006
On February 2, 2006, Magna acquired CTS Fahrzeug-Dachsysteme
GmbH, Bietingheim-Bissingen ("CTS"), a leading manufacturer of
roof systems for the automotive industry. CTS manufactures soft
tops, hard tops and modular retractable hard tops. In addition
to Porsche, its customers include DaimlerChrysler, Ferrari,
Peugeot and General Motors. CTS has six facilities in Europe and
two facilities in North America.
The total consideration for the acquisition of CTS amounted to
$271 million, consisting of $203 million paid in cash and
$68 million of assumed debt.
4. WARRANTY
The following is a continuity of the Company's warranty accruals:
2007 2006
-------------------------------------------------------------------
Balance, beginning of period $ 94 $ 96
Expense, net 3 7
Settlements (6) (5)
Acquisition 1 6
Foreign exchange and other 1 2
-------------------------------------------------------------------
Balance, March 31, $ 93 106
-------------------------------------------------------------------
-------------------------------------------------------------------
5. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as follows:
Three months ended
----------------------
March 31, March 31,
2007 2006
-------------------------------------------------------------------
Defined benefit pension plan and other $ 6 $ 4
Termination and long service arrangements 6 5
Retirement medical benefits plan 2 1
-------------------------------------------------------------------
$ 14 $ 10
-------------------------------------------------------------------
-------------------------------------------------------------------
6. CAPITAL STOCK
(a) Changes in the Class A Subordinate Voting Shares for the
three-month period ended March 31, 2007 are shown in the
following table (numbers of shares in the following table are
expressed in whole numbers):
Subordinate Voting
----------------------
Number of Stated
shares value
--------------------------------------------------------------
Issued and outstanding at
December 31, 2006 108,787,387 $ 2,505
Issued under the Incentive Stock
Option Plan 74,082 5
Issued under the Dividend Reinvestment
Plan 1,381 -
--------------------------------------------------------------
Issued and outstanding at
March 31, 2007 108,862,850 $ 2,510
--------------------------------------------------------------
--------------------------------------------------------------
(b) The following table presents the maximum number of shares that
would be outstanding if all dilutive instruments outstanding
at May 9, 2007 were exercised:
Class A Subordinate Voting and Class B Shares
outstanding 109,955,783
Subordinated Debentures(i) 1,096,589
Stock options(ii) 4,003,881
--------------------------------------------------------------
115,056,253
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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 the Company's option, to settle
interest and principal related to the 6.5% Convertible
Subordinated Debentures on redemption or maturity. The
number of Class A Subordinate Voting Shares issuable at the
Company's option is dependent on the trading price of Class
A Subordinate Voting Shares at the time the Company elects
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 the Company's option, to settle
the 7.08% Subordinated Debentures on redemption or
maturity. The number of shares issuable is dependent on the
trading price of Class A Subordinate Voting Shares at
redemption or maturity of the 7.08% Subordinated
Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting
provisions and upon payment of the exercise price as may be
determined from time to time and pursuant to the Company's
stock option plans.