Magna announces second quarter and year to date results
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AURORA, ON, Aug. 9, 2007 -- Magna International Inc. (TSX: MG.A, MG.B; NYSE: MGA) today reported financial results for the second quarter and six months ended June 30, 2007.
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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2007 2006 2007 2006
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Sales $ 6,731 $ 6,369 $ 13,154 $ 12,388
Operating income $ 377 $ 286 $ 682 $ 595
Net income $ 262 $ 193 $ 480 $ 405
Diluted earnings per share $ 2.35 $ 1.75 $ 4.32 $ 3.66
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All results are reported in millions of U.S. dollars,
except per share figures.
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THREE MONTHS ENDED JUNE 30, 2007
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We posted sales of $6.7 billion for the second quarter ended June 30, 2007, an increase of 6% over the second 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 offset in part by reductions in our complete vehicle assembly sales and our tooling, engineering and other sales.
During the second quarter of 2007, our North American and European average dollar content per vehicle increased 7% and 19% respectively, over the second quarter of 2006. During the second quarter of 2007, North American vehicle production declined 2% while European vehicle production increased 1%, each compared to the second quarter of 2006.
Complete vehicle assembly sales decreased 1% to $1.064 billion for the second quarter of 2007 compared to $1.075 billion for the second quarter of 2006, while complete vehicle assembly volumes declined 12% compared to the second quarter of 2006.
Our operating income was $377 million for the second quarter ended June 30, 2007 compared to $286 million for the second quarter ended June 30, 2006, and we earned net income for the second quarter of 2007 of $262 million compared to $193 million for the second quarter of 2006.
Diluted earnings per share were $2.35 for the second quarter ended June 30, 2007 compared to $1.75 for the second quarter ended June 30, 2006.
During the second quarter ended June 30, 2007, we generated cash from operations before changes in non-cash operating assets and liabilities of $522 million, and invested $240 million in non-cash operating assets and liabilities. Total investment activities for the second quarter of 2007 were $147 million, including $137 million in fixed asset additions and a $10 million increase in investments and other assets.
SIX MONTHS ENDED JUNE 30, 2007 ------------------------------
We posted sales of $13.2 billion for the six months ended June 30, 2007, an increase of 6% over the six months ended June 30, 2006. This higher sales level was achieved as a result of increases in our North American, European and Rest of World production sales and complete vehicle assembly sales, offset in part by reductions in tooling, engineering and other sales.
During the six months ended June 30, 2007, North American and European average dollar content per vehicle increased 8% and 17%, respectively, each over the comparable six-month period in 2006. During the six months ended June 30, 2007, North American vehicle production declined 5% while European vehicle production increased 3%, each in comparison to the six months ended June 30, 2006.
Complete vehicle assembly sales increased 3% to $2.168 billion for the six months ended June 30, 2007 compared to $2.115 billion for the six months ended June 30, 2006, while complete vehicle assembly volumes declined 8% compared to the first six months of 2006.
Our operating income was $682 million for the six months ended June 30, 2007 compared to $595 million for the six months ended June 30, 2006, and we earned net income of $480 million for the first six months of 2007 compared to $405 million for the first six months of 2006.
Diluted earnings per share were $4.32 for the six months ended June 30, 2007 compared to $3.66 for the six months ended June 30, 2006.
During the six months ended June 30, 2007, we generated cash from operations before changes in non-cash operating assets and liabilities of $958 million, and invested $411 million in non-cash operating assets and liabilities. Total investment activities for the first six months of 2007 were $338 million, including $262 million in fixed asset additions, $46 million to purchase subsidiaries, and a $30 million increase in investments and other assets.
A more detailed discussion of our consolidated financial results for the second quarter and six months ended June 30, 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, which are attached to this Press Release.
2007 OUTLOOK ------------
For the full year 2007, we expect consolidated sales to be between $24.3 billion and $25.6 billion, based on full year 2007 light vehicle production volumes of approximately 15.2 million units in North America and approximately 15.7 million units in Europe. Full year 2007 average dollar content per vehicle is expected to be between $820 and $850 in North America and between $400 and $425 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.
OTHER MATTERS -------------
Our Dividend Policy in our Corporate Constitution entitles Magna Class A Subordinate Voting and Class B shareholders to dividends equal to, in aggregate in respect of a financial year: (a) at least 10% of Magna's After Tax Profits (as defined in the Corporate Constitution) for that financial year; and (b) on average, at least 20% of Magna's After Tax Profits for that year and the two immediately preceding years. Magna has complied with this requirement since 1992 and intends to continue to fully comply with this requirement.
Based on our financial results for the six months ended June 30, 2007, our Board of Directors yesterday declared a quarterly dividend of U.S. $0.36 per share with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares for the quarter ended June 30, 2007. The dividend is payable on September 14, 2007 to shareholders of record on August 31, 2007.
In making this determination, the Board reconsidered and determined to rescind the dividend formula described in our press release dated April 2, 2007, which would have maintained a constant dividend amount in each of the first three quarters based on the prior year's results, and provided for an adjustment in the fourth quarter to meet the 20% payout contemplated by that formula. The Board reserves the right to further modify the dividend at any time and for any reason, subject to the requirements of the Corporate Constitution, particularly in response to financial, operating or other relevant circumstances.
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 interior systems; seating systems; closure systems; metal body and structural systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; as well as complete vehicle engineering and assembly.
We have approximately 83,000 employees in 236 manufacturing operations and 63 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 and six months ended June 30, 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 and six months ended June 30, 2007 have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") with respect to the preparation of interim financial information and the audited consolidated financial statements for the year ended December 31, 2006 have been prepared in accordance with Canadian GAAP.
This MD&A has been prepared as at August 8, 2007. OVERVIEW -------------------------------------------------------------------------
We are a leading global supplier of technologically advanced automotive systems, assemblies, modules and components. 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: the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; metal body and structural systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; as well as complete vehicle engineering and assembly. 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 June 30, 2007, we had 236 manufacturing divisions and 63 product development and engineering centres in 23 countries.
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.
PROPOSED TRANSACTION -------------------------------------------------------------------------
On May 10, 2007, we announced a major strategic investment in Magna to be made by OJSC Russian Machines, a wholly owned subsidiary of Basic Element Limited. Russian Machines represents the Machinery Sector of Basic Element, and includes automobile manufacturer GAZ Group, airplane manufacturer Aviacor and train car manufacturer Abakanvagonmash. Basic Element is a diversified holding company founded in 1997 with assets in Russia, countries of the Commonwealth of Independent States, Europe, Africa, South America and Australia.
Under the terms of the transaction agreement entered into by Magna, the Stronach Trust and Russian Machines, Russian Machines would invest approximately $1.54 billion to indirectly acquire 20 million Class A Subordinate Voting Shares of Magna from treasury. A new Canadian holding company would hold the respective share holdings in Magna of the Stronach Trust, Russian Machines and certain principals who are also members of Magna's executive management.
We also announced our intention to make a substantial issuer bid, expected to be an offer to purchase up to 20 million Class A Subordinate Voting Shares at an aggregate price of not more than $1.54 billion.
We believe that the investment by Russian Machines will benefit Magna by:
- Allowing us to accelerate our strategic efforts to capitalize on the
significant growth opportunities in the growing Russian automotive
market, as well as other emerging markets;
- Achieving a greater alignment of interests of the Stronach Trust,
Russian Machines and our executive management with other Magna
shareholders, while creating "checks and balances" on the exercise of
the Stronach Trust's controlling interest in Magna by virtue of
Russian Machines' nominees representation on our Board.
A number of our operating units are pursuing business opportunities in Russia with local OEMs, as well as with our traditional customers that are increasing assembly capacity in Russia. We believe that the best way to minimize risks and maximize returns in this market is by working together with Russian Machines, an established industrial partner.
For more information on our proposed transaction, please refer to our Management Information Circular/Proxy Statement dated July 25, 2007 (the "Circular") issued in connection with the Special Shareholders' meeting to take place on August 28, 2007 which was called to consider the proposed investment in Magna by Russian Machines and approve the proposed plan of arrangement and Class B Share acquisition related thereto.
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 six months ended June 30, 2007, except that our maximum potential exposure in connection with our dispute with a major steel supplier has increased by approximately $30 million to $165 million as at June 30, 2007. Additionally, risks relating to the proposed investment in Magna by Russian Machines are disclosed in the Circular and incorporated herein by reference.
HIGHLIGHTS -------------------------------------------------------------------------
During the second quarter of 2007, we reported sales of $6.7 billion, an increase of 6% over the second 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, offset in part by reductions in complete vehicle assembly sales and tooling, engineering and other sales. During the second quarter of 2007, North American and European average dollar content per vehicle increased 7% and 19%, respectively, over the second quarter of 2006. During the second quarter of 2007, North American vehicle production declined 2% while European vehicle production increased 1%, each compared to the second quarter of 2006.
We reported strong sales despite the fact that in the second quarter of 2007 two of our largest OEM customers in North America continued to reduce vehicle production levels compared to the second quarter of 2006. While overall North American vehicle production volumes declined 2% in the second quarter of 2007 compared to the second quarter of 2006, Ford and General Motors ("GM") vehicle production declined by 10% and 8%, respectively.
Operating income for the second quarter of 2007 increased 32% to $377 million from $286 million for the second quarter of 2006. Excluding the unusual items recorded in the second quarters of 2007 and 2006 (see "Unusual Items" below), operating income for the second quarter of 2007 increased $85 million or 26%. The increase in operating income excluding unusual items was primarily due to additional margins earned on the launch of new programs during or subsequent to the second quarter of 2006, increased margins earned on higher volumes for certain production and assembly programs and operational improvements at certain underperforming divisions. These factors were partially offset by lower margins earned on decreased sales as a result of programs that ended production subsequent to the second quarter of 2006, operational inefficiencies and other costs at certain powertrain and interior facilities, higher employee profit sharing and incentive compensation, a one-time charge to compensation expense representing the remaining measured but unrecognized compensation expense related to restricted shares previously awarded to a former executive and incremental customer price concessions.
Net income for the second quarter of 2007 increased 36% or $69 million to $262 million from $193 million for the second quarter of 2006. Excluding the unusual items recorded in the second quarters of 2007 and 2006 (see "Unusual Items" below), net income for the second quarter of 2007 increased 32% or $70 million. The increase in net income excluding unusual items was primarily a result of the increase in operating income (excluding unusual items) partially offset by higher income taxes (excluding unusual items) due to increased pretax income, partially offset by a decrease in our effective tax rate.
Diluted earnings per share for the second quarter of 2007 increased 34% or $0.60 to $2.35 from $1.75 for the second quarter of 2006. The increase in diluted earnings per share is a result of the increase in net income (excluding unusual items) partially offset by an increase in the weighted average number of diluted shares outstanding in the second 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 second quarter of 2006.
Unusual Items
During the three months and six months ended June 30, 2007 and 2006, we recorded certain unusual items as follows:
2007 2006
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Diluted Diluted
Earnings Operat- Earnings
Operating Net per ing Net per
Income Income Share Income Income Share
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Second Quarter
Restructuring
charges(1) $ (14) $ (10) $ (0.09) $ (25) $ (18) $ (0.16)
Impairment
charges(1) (22) (14) (0.12) - - -
Sale of
facilities(2) - - - (17) (15) (0.14)
Future tax
recovery(3) - - - - 10 0.09
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Total second quarter
unusual items (36) (24) (0.21) (42) (23) (0.21)
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First Quarter
Restructuring
charges(1) - - - (10) (9) (0.08)
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Total first quarter
unusual items - - - (10) (9) (0.08)
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Total year to date
unusual items $ (36) $ (24) $ (0.21) $ (52) $ (32) $ (0.29)
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(1) Restructuring and Impairment Charges
(a) For the six months ended June 30, 2007
During the second quarter of 2007, we incurred restructuring
and rationalization charges of $10 million related to two
facilities in North America and $4 million related to one
facility in Europe.
During the second quarter of 2007, we recorded an asset
impairment of $22 million ($14 million after tax) relating to
specific assets at a powertrain facility in the United States.
(b) For the six months ended June 30, 2006
During the first quarter of 2006, we incurred restructuring and
rationalization charges of $10 million related primarily to
non-contractual termination benefits for employees at an
exteriors facility in Belgium.
During the second quarter of 2006, we incurred restructuring
and rationalization charges of $25 million. Specifically, we
recorded a $17 million charge as a result of an agreement we
reached with employees related to rightsizing a powertrain
facility in the United States. In addition, we incurred
additional restructuring and rationalization charges of
$4 million related to two facilities in North America and
$4 million related to two facilities in Europe.
(2) Sale of Facilities
During the second quarter of 2006, we entered into agreements for the
sale of two underperforming powertrain facilities. As a result, we
incurred losses on disposition of the facilities of $12 million and
$5 million in Europe and North America, respectively.
(3) Other Unusual Items
During the second quarter of 2006 we recorded a $10 million future
income tax recovery as a result of a reduction in future income tax
rates in Canada.
RESULTS OF OPERATIONS
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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 For the six months
ended June 30, ended June 30,
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2007 2006 Change 2007 2006 Change
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1 Canadian dollar equals U.S.
dollars 0.913 0.892 + 2% 0.884 0.879 + 1%
1 euro equals U.S. dollars 1.348 1.259 + 7% 1.330 1.231 + 8%
1 British pound equals U.S.
dollars 1.986 1.832 + 8% 1.970 1.792 + 10%
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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 six months ended June 30, 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.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 2007
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Sales
For the three months
ended June 30,
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2007 2006 Change
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Vehicle Production Volumes (millions of units)
North America 4.057 4.145 - 2%
Europe 4.254 4.223 + 1%
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Average Dollar Content Per Vehicle
North America $ 840 $ 784 + 7%
Europe $ 405 $ 340 + 19%
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Sales
External Production
North America $ 3,408 $3,251 + 5%
Europe 1,723 1,437 + 20%
Rest of World 100 67 + 49%
Complete Vehicle Assembly 1,064 1,075 - 1%
Tooling, Engineering and Other 436 539 - 19%
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Total Sales $ 6,731 $6,369 + 6%
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Total sales increased 6% or $362 million to $6.7 billion for the second quarter of 2007 compared to $6.4 billion for the second quarter of 2006.
External Production Sales - North America
External production sales in North America increased 5% or $157 million to $3.408 billion for the second quarter of 2007 compared to $3.251 billion for the second quarter of 2006. This increase in production sales reflects a 7% increase in our North American average dollar content per vehicle partially offset by a 2% decrease in North American vehicle production volumes. We reported strong sales despite the fact that in the second quarter of 2007 two of our largest OEM customers in North America continued to reduce vehicle production levels compared to the second quarter of 2006. While overall North American vehicle production volumes declined 2% in the second quarter of 2007 compared to the second quarter of 2006, Ford and General Motors ("GM") vehicle production declined by 10% and 8%, respectively.
Our average dollar content per vehicle grew by 7% or $56 to $840 for the second quarter of 2007 compared to $784 for the second quarter of 2006, primarily as a result of:
- the launch of new programs during or subsequent to the second quarter
of 2006, including:
- the Ford Edge and Lincoln MKX;
- the Saturn Outlook, GMC Acadia and Buick Enclave;
- GM's full-size pickups;
- the Jeep Wrangler, Wrangler Unlimited and Patriot;
- the BMW X5;
- the Ford F-Series SuperDuty;
- the Dodge Nitro; and
- the Dodge Avenger and Chrysler Sebring; and
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country;
- the Chrysler Pacifica;
- the Ford Fusion, Mercury Milan and Lincoln MKZ / Zephyr;
- the HUMMER H3;
- GM's SUVs;
- the Chrysler PT Cruiser;
- the Jeep Liberty;
- the Chevrolet HHR and Malibu; and
- the Pontiac Montana SV6, Saturn RELAY, Buick Terraza and Chevrolet
Uplander; and
- programs that ended production during or subsequent to the second
quarter of 2006, including the Ford Freestar and Mercury Monterey;
- the sale of certain facilities during or subsequent to the second
quarter of 2006; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 20% or $286 million to $1.723 billion for the second quarter of 2007 compared to $1.437 billion for the second quarter of 2006. This increase in production sales reflects a 19% increase in our European average dollar content per vehicle combined with a 1% increase in European vehicle production volumes for the second quarter of 2007, each as compared to the second quarter of 2006.
Our average dollar content per vehicle grew by 19% or $65 to $405 for the second quarter of 2007 compared to $340 for the second quarter of 2006, primarily as a result of:
- the launch of new programs during or subsequent to the second quarter
of 2006, including:
- the MINI Cooper;
- the Mercedes-Benz C-Class; and
- the smart fortwo;
- an increase in reported U.S. dollar sales due to the strengthening of
the euro and British pound, each against the U.S. dollar;
- acquisitions completed subsequent to the second quarter of 2006,
including the acquisition of two facilities from Pressac Investments
Limited (the "Pressac acquisition") in January 2007; and
- increased production and/or content on certain programs, including
the BMW 3-Series.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Mercedes-Benz E-Class; and
- the Nissan Micra;
- the sale of certain facilities during or subsequent to the second
quarter of 2006; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 49% or $33 million to $100 million for the second quarter of 2007 compared to $67 million for the second quarter of 2006. The increase in production sales is primarily 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 second quarter
of 2006 in Korea, China and Brazil;
- 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 June 30,
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2007 2006 Change
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Complete Vehicle Assembly Sales $ 1,064 $ 1,075 - 1 %
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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 36,436 39,602 - 8 %
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander 18,916 23,101 - 18 %
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55,352 62,703 - 12 %
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Complete vehicle assembly sales decreased 1% or $11 million to $1.064 billion for the second quarter of 2007 compared to $1.075 billion for the second quarter of 2006 while assembly volumes decreased 12% or 7,351 units. The decrease in complete vehicle assembly sales is primarily as a result of:
- 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 all
vehicles accounted for on a value-added basis.
These factors were partially offset by:
- 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 and the Mercedes-Benz G-Class.
In May 2007, BMW informed us of its intention to commence in-house assembly of the next generation BMW X3. We expect current BMW X3 production in our Graz assembly facility to end in 2010. In July 2007, DaimlerChrysler announced that it will consolidate production of the Chrysler 300 at its assembly facility in Brampton, Ontario. We expect current Chrysler 300 production in our Graz assembly facility to end in 2009.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 19% or $103 million to $436 million for the second quarter of 2007 compared to $539 million for the second quarter of 2006.
In the second quarter of 2007 the major programs for which we recorded tooling, engineering and other sales were:
- the Ford Flex; - the Dodge Grand Caravan and Chrysler Town & Country; - GM's full-size pickups; - the Cadillac STS; and - the Mazda 6.
In the second quarter of 2006, the major programs for which we recorded tooling, engineering and other sales were:
- GM's full-size pickups and SUVs; - the MINI Cooper; - the BMW Z4; - the Freightliner P-Class; - the Ford Edge; - the BMW 3-Series; and - the Suzuki XL7.
In addition, tooling, engineering and other sales benefited from the strengthening of the Canadian dollar, euro and British pound, each against the U.S. dollar.
Gross Margin
Gross margin increased $125 million to $972 million for the second quarter of 2007 compared to $847 million for the second quarter of 2007 and gross margin as a percentage of total sales increased to 14.4% compared to 13.3%.
The unusual items discussed in the "Highlights" section above negatively impacted gross margin as a percent of total sales by 0.2% and 0.3% in the second quarters of 2007 and 2006, respectively. Excluding these unusual items, the 1.0% increase in gross margin as a percentage of total sales was primarily as a result of:
- incremental gross margin earned on new programs that launched during
or subsequent to the second quarter of 2006;
- incremental gross margin earned as a result of increased production
volumes for certain programs;
- productivity and efficiency improvements at certain facilities,
including underperforming divisions; and
- the decrease in tooling sales that earn low or no margins.
These factors were partially offset by:
- costs incurred at new facilities in preparation for upcoming launches
or for programs that have not fully ramped up production;
- operational inefficiencies and other costs at certain facilities, in
particular at certain powertrain and interiors facilities in the
United States;
- reduced gross margin earned as a result of a decrease in production
volumes for certain programs;
- higher employee profit sharing; and
- incremental customer price concessions.
Depreciation and Amortization
Depreciation and amortization costs increased 4% or $9 million to $210 million for the second quarter of 2007 compared to $201 million for the second quarter of 2006. The increase in depreciation and amortization was primarily as a result of:
- depreciation and amortization of assets at new facilities that
launched during or subsequent to the second quarter of 2006;
- acquisitions completed during or subsequent to the second quarter of
2006 including:
- the Pressac acquisition in January 2007; and
- the Magna Golf Club and Fontana Golf and Sports Club in the third
and fourth quarters of 2006, respectively;
- an increase in reported U.S. dollar depreciation and amortization due
to the strengthening of the Canadian dollar and euro, each against
the U.S. dollar;
- accelerated depreciation on certain program specific assets in North
America; and
- an increase in assets employed in the business to support future
growth.
These factors were partially offset by a decrease in assets as a result of impairments recorded in the fourth quarter of 2006.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales decreased to 5.6% for the second quarter of 2007 compared to 5.8% for the second quarter of 2006. SG&A expenses increased 3% or $11 million to $378 million for the second quarter of 2007 compared to $367 million for the second quarter of 2006. Excluding the unusual items discussed in the "Highlights" section above, SG&A expenses increased by $34 million primarily as a result of:
- higher infrastructure costs to support the increase in sales,
including spending related to programs that launched during or
subsequent to the second quarter of 2006;
- increased stock compensation costs related to restricted shares,
specifically:
- during the second quarter of 2007, restricted share agreements
with a former executive were accelerated, which resulted in a one-
time charge to compensation expense of approximately $10 million,
representing the remaining measured but unrecognized compensation
expense related to the restricted shares awarded during 2006;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the euro and Canadian dollar, each against the U.S. dollar; and
- increased employee profit sharing and incentive compensation.
These factors were partially offset by:
- the sale or disposition of certain facilities during or subsequent to
the second quarter of 2006;
- reduced spending at certain underperforming divisions; and
- the recovery of a long-term receivable that was previously written
off.
Earnings before Interest and Taxes ("EBIT")(1)
Our operations are segmented on a geographic basis between North America, Europe and Rest of World. Our success may be impacted by factors which may vary from one region to the next. In particular, EBIT as a percentage of external sales in Europe is lower than in North America primarily as a result of:
- our assembly operations in Europe, since margins as a percentage of
sales for complete vehicle assembly sales are generally lower than
margins earned on production sales due to the high number of
purchased components; and
- generally lower margins earned on production sales in Europe as
compared to North America.
For the three months
ended June 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
North America $ 262 $ 249 + 5%
Europe 96 24 +300%
Rest of World 5 - n/a
Corporate and Other 1 10 - 90%
-------------------------------------------------------------------------
Total EBIT $ 364 $ 283 + 29%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the second quarters of 2007 and 2006 were the following unusual items, which have been discussed in the "Highlights" section above.
For the three months
ended June 30,
---------------------
2007 2006
-------------------------------------------------------------------------
North America
Restructuring charges $ (10) $ (26)
Impairment charges (22) -
-------------------------------------------------------------------------
(32) (26)
-------------------------------------------------------------------------
Europe
Restructuring charges (4) (16)
-------------------------------------------------------------------------
(4) (16)
-------------------------------------------------------------------------
$ (36) $ (42)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America increased 5% or $13 million to $262 million for the second quarter of 2007 compared to $249 million for the second quarter of 2006. Excluding the North American unusual items discussed in the "Highlights" section above, the $19 million increase in EBIT was primarily as a result of:
- incremental margin earned on new programs that launched during or
subsequent to the second quarter of 2006;
- incremental margin earned on increased production on certain
programs; and
- productivity and efficiency improvements at certain facilities,
including underperforming divisions.
These factors were partially offset by:
- lower margins earned as a result of a decrease in production on
certain programs;
- operational inefficiencies and other costs at certain underperforming
divisions, in particular at certain powertrain and interiors
facilities in the United States;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- costs incurred to develop and grow our electronics capabilities;
- higher employee profit sharing;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Europe
EBIT in Europe increased 300% or $72 million to $96 million for the second quarter of 2007 compared to $24 million for the second quarter of 2006. Excluding the European unusual items discussed above, the remaining $60 million increase in EBIT was primarily as a result of:
- incremental margin earned on new programs that launched during or
subsequent to the second quarter of 2006;
- incremental margin earned on higher volumes for certain production
and complete vehicle assembly programs;
- operational improvements at certain facilities, including
underperforming divisions;
These factors were partially offset by:
- lower margins earned as a result of a decrease in vehicle production
volumes on certain programs, including the end of production of the
Mercedes-Benz E-Class 4MATIC at our Graz assembly facility in the
fourth quarter of 2006;
- operational inefficiencies and other costs at certain facilities;
- costs incurred to develop and grow our electronics capabilities;
- higher affiliation fees paid to Corporate;
- higher employee profit sharing;
- costs incurred to develop and grow our business in Russia; and
- incremental customer price concessions.
Rest of World
Rest of World EBIT increased $5 million to $5 million for the second 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 declined $9 million to $1 million for the second quarter of 2007 compared to $10 million for the second quarter of 2006. The decrease in EBIT was primarily as a result of:
- increased stock compensation costs as discussed in the SG&A section
above;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the euro and Canadian dollar, each against the U.S. dollar;
- increased consulting fees incurred with respect to a purchasing
initiative;
- increased incentive compensation; and
- a decrease in equity income earned.
These factors were partially offset by:
- an increase in affiliation fees earned from our divisions; and
- the recovery of a long-term receivable that was previously written
off.
-------------------------------------------------------------------------
(1) EBIT is defined as operating income as presented on our unaudited
consolidated financial statements before net interest (income)
expense.
Interest Income, Net
Net interest income increased $10 million to $13 million for the second quarter of 2007 compared to $3 million for the second quarter of 2006. The increase in interest income was primarily as a result of:
- a reduction in interest expense due to:
- 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 increased 32% or $91 million to $377 million for the second quarter of 2007 compared to $286 million for the second quarter of 2006. Excluding the unusual items discussed in the "Highlights" section above, operating income for the second quarter of 2007 increased 26% or $85 million. This increase in operating income was the result of the increase in EBIT (excluding unusual items) combined with the increase in net interest income earned, both as discussed above.
Income Taxes
Our effective income tax rate on operating income (excluding equity income) decreased to 30.7% for the second quarter of 2007 from 33.0% for the second quarter of 2006. In the second quarters of 2006 and 2007, our income tax rate was impacted by the unusual items discussed in the "Highlights" section above. Excluding the unusual items, our effective income tax rate decreased to 30.9% for the second quarter of 2007 compared to 34.6% in the second quarter of 2006. The decrease in the effective income tax rate is a result of a decrease in losses not benefited, partially offset by a change in mix of earnings, whereby proportionately more income was earned in jurisdictions with higher income tax rates.
Net Income
Net income increased by 36% or $69 million to $262 million for the second quarter of 2007 compared to $193 million for the second quarter of 2006. Excluding unusual items (discussed in the "Highlights" section above), net income increased $70 million as a result of the increase in operating income (excluding unusual items), partially offset by higher income taxes (excluding unusual items), all as discussed above.
Earnings per Share
For the three months
ended June 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share
Basic $ 2.40 $ 1.78 + 35 %
Diluted $ 2.35 $ 1.75 + 34 %
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares outstanding
(millions)
Basic 109.1 108.6 -
Diluted 112.0 111.4 + 1 %
-------------------------------------------------------------------------
Diluted earnings per share increased 34% or $0.60 to $2.35 for the second quarter of 2007 compared to $1.75 for the second quarter of 2006. Diluted earnings per share increased $0.60 from the second quarter of 2006 to the second quarter of 2007 as a result of the increase in net income (excluding unusual items) described above, partially offset by an increase in the weighted average number of diluted shares outstanding in the second 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 second 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 second quarter of 2007 was 22.3%, an increase from 16.9% for the second quarter of 2006. The unusual items discussed in the "Highlights" section above negatively impacted ROFE in the second quarter of 2007 by 2.2% and negatively impacted ROFE by 2.3% in the second quarter of 2006.
Excluding these unusual items, ROFE increased 5.3% primarily as a result of an increase in EBIT (excluding unusual items) as discussed above.
-------------------------------------------------------------------------
(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 June 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Net income $ 262 $ 193
Items not involving current cash flows 260 222
-------------------------------------------------------------------------
522 415 $ 107
Changes in non-cash operating assets and
liabilities (240) (141)
-------------------------------------------------------------------------
Cash provided from operating activities $ 282 $ 274 $ 8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash operating assets and liabilities increased $107 million to $522 million for the second quarter of 2007 compared to $415 million for the second quarter of 2006. The increase in cash flow from operations was due to a $69 million increase in net income (as discussed above) and a $38 million increase in items not involving current cash flows, including:
- a $ 22 million impairment charge, as discussed in the "Highlights"
section above; and
- a $19 million increase in future taxes, including the impact of the
$10 million income tax recovery in the second quarter of 2006 as
discussed in the "Highlights" section above.
These factors were partially offset by the loss on sale of facilities in the second quarter of 2006 as discussed in the "Highlights" section above.
Cash invested in operating assets and liabilities amounted to $240 million for the second quarter of 2007 which was comprised of the following sources (and uses) of cash:
For the three months
ended June 30,
--------------------
2007 2006
-------------------------------------------------------------------------
Accounts receivable $ (117) $ (132)
Inventory (8) -
Prepaid expenses and other 1 (1)
Accounts payable and other accrued
liabilities (109) (41)
Income taxes payable (1) 36
Deferred revenue (6) (3)
-------------------------------------------------------------------------
Changes in non-cash operating assets and
liabilities $ (240) $ (141)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in accounts receivable in the second quarter of 2007 was primarily due to an increase in production receivables related to higher production sales in the second quarter of 2007 compared to the first quarter of 2007. The decrease in accounts payable and other accrued liabilities was primarily due to the timing of payments to suppliers.
Capital and Investment Spending
For the three months
ended June 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Fixed assets $ (137) $ (179)
Investments and other assets (10) (43)
-------------------------------------------------------------------------
Fixed assets, investments and other
assets additions (147) (222)
Proceeds from disposals 12 7
-------------------------------------------------------------------------
Cash used in investing activities $ (135) $ (215) $ 80
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, investments and other assets additions
In the second quarter of 2007, we invested $137 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 second quarter of 2007 was for manufacturing equipment for programs that launched during the second quarter of 2007 or will be launching subsequent to the second quarter of 2007.
Proceeds from disposition
Proceeds from disposition for the second quarter of 2007 and the second quarter of 2006 represent normal course fixed and other asset disposals.
Financing
For the three months
ended June 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Repayments of debt $ (5) $ (106)
Issues of debt 54 17
Issues of Class A Subordinate Voting
Shares 19 7
Cash dividends paid (26) (41)
-------------------------------------------------------------------------
Cash used in financing activities $ 42 $ (123) $ 165
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The repayments of debt during the second quarter of 2006 included the repayment of $59 million in senior unsecured notes as well as a reduction in bank indebtedness of $47 million.
The issues of debt during the second quarter of 2007 relate primarily to an increase in bank indebtedness as a result of the payments made to suppliers prior to quarter end as discussed in the "Cash flow from Operations" section above.
During the second quarter of 2007, we received cash proceeds of $19 million on the exercise of stock options for Class A Subordinate Voting Shares compared to $7 million during the second quarter of 2006.
Cash dividends paid per Class A Subordinate Voting or Class B Share were $0.24 in the second quarter of 2007 compared to $0.38 in the second quarter of 2006.
The Dividend Policy in our Corporate Constitution entitles Class A Subordinate Voting and Class B shareholders to dividends equal to, in aggregate in respect of a financial year: (a) at least 10% of Magna's After Tax Profits (as defined in the Corporate Constitution) for that financial year; and (b) on average, at least 20% of Magna's After Tax Profits for that year and the two immediately preceding years. Magna has complied with this requirement since 1992 and intends to continue to fully comply with this requirement.
Based on our financial results for the six months ended June 30, 2007, our Board of Directors declared a quarterly dividend of U.S. $0.36 per share with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares for the quarter ended June 30, 2007. The dividend is payable on September 14, 2007 to shareholders of record on August 31, 2007.
In making this determination, the Board reconsidered and determined to rescind the dividend formula described in our press release dated April 2, 2007, which would have maintained a constant dividend amount in each of the first three quarters based on the prior year's results, and provided for an adjustment in the fourth quarter to meet the 20% payout contemplated by that formula. The Board reserves the right to further modify the dividend at any time and for any reason, subject to the requirements of the Corporate Constitution, particularly in response to financial, operating or other relevant circumstances.
Financing Resources
As at As at
June 30, December
2007 31, 2006 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 136 $ 63
Long-term debt due within one year 84 98
Long-term debt 579 605
-------------------------------------------------------------------------
799 766
Shareholders' equity 7,924 7,157
-------------------------------------------------------------------------
Total capitalization $ 8,723 $ 7,923 $ 800
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization increased by 10% or $800 million to $8.7 billion at June 30, 2007 as compared to $7.9 billion at December 31, 2006. The increase in capitalization was a result of increases in shareholders' equity and liabilities of $767 million and $33 million, respectively.
The increase in shareholders' equity is primarily the result of:
- net income earned during the first six months of 2007 (as discussed
above);
- a $302 million increase in accumulated other comprehensive income,
primarily as a result of the strengthening of the Canadian dollar,
euro and British pound, between December 31, 2006 and June 30, 2007,
each against the U.S. dollar; and
- Class A Subordinate Voting Shares issued on the exercise of stock
options.
These factors were partially offset by:
- dividends paid during the first six months of 2007; and
- a $7 million reduction of share capital related to the repurchase of
our Class A Subordinate Voting Shares which had previously been
awarded on a restricted basis to certain executives.
The increase in liabilities is primarily the result of an increase in bank indebtedness as a result of earlier timing of payments made to certain suppliers.
This increase in bank indebtedness was partially offset by decreases in long-term debt as a result of the repayment of the third series of our senior unsecured notes related to the NVG acquisition.
During the first six months of 2007, our cash resources increased by $348 million to $2.2 billion as a result of the cash provided from operating activities, partially offset by the cash used in investing and financing activities. In addition to our cash resources, we had term and operating lines of credit totalling $2.0 billion, of which $1.6 billion was unused and available. In July 2007, our five-year revolving term facility was extended for one additional year, expiring on July 31, 2012.
Maximum Number of Shares Issuable
The following table presents the maximum number of shares that would be outstanding if all of the outstanding stock options and Subordinated Debentures issued and outstanding at August 8, 2007 were exercised or converted:
Class A Subordinate Voting and Class B Shares 110,556,701
Subordinated Debentures(i) 1,096,589
Stock options(ii) 3,079,723
-------------------------------------------------------------------------
114,733,013
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 second quarter of 2007 that are outside the ordinary course of 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 $36 million since we have a legal right of set-off of the customer's long-term receivable payable to us against such borrowings and intend to settle the related amounts simultaneously.
RESULTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2007
-------------------------------------------------------------------------
Sales
For the six months
ended June 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (millions of units)
North America 7.886 8.275 - 5 %
Europe 8.503 8.230 + 3 %
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 836 $ 772 + 8 %
Europe $ 398 $ 341 + 17 %
-------------------------------------------------------------------------
Sales
External Production
North America $ 6,595 $ 6,386 + 3 %
Europe 3,380 2,810 + 20 %
Rest of World 187 122 + 53 %
Complete Vehicle Assembly 2,168 2,115 + 3 %
Tooling, Engineering and Other 824 955 - 14 %
-------------------------------------------------------------------------
Total Sales $ 13,154 $ 12,388 + 6 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
External Production Sales - North America
External production sales in North America increased 3% or $209 million to $6.6 billion for the six months ended June 30, 2007 compared to $6.4 billion for the six months ended June 30, 2006. This increase in production sales reflects an 8% increase in our North American average dollar content per vehicle partially offset by a 5% decrease in North American vehicle production volumes. We reported strong sales despite the fact that production volumes at two of our largest North American customers for the first half of 2007 continued to deteriorate when compared to the first half of 2006. While North American vehicle production volumes declined 5% during the first six months of 2007 compared to the first six months of 2006, production volumes at Ford and GM declined 13% and 11%, respectively.
Our average dollar content per vehicle grew by 8% or $64 to $836 for the six months ended June 30, 2007 compared to $772 for the six months ended June 30, 2006, primarily as a result of:
- the launch of new programs during or subsequent to the six months
ended June 30, 2006, including:
- the Ford Edge and Lincoln MKX;
- GM's full-size pickups;
- the Saturn Outlook, GMC Acadia and the Buick Enclave;
- the Jeep Wrangler, Wrangler Unlimited and Patriot;
- the BMW X5;
- the Dodge Nitro;
- the Ford F-Series SuperDuty; and
- the Dodge Avenger and Chrysler Sebring; and
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Dodge Caravan, Grand Caravan and Chrysler Town & Country;
- the Ford Fusion, Mercury Milan and Lincoln MKZ / Zephyr;
- the Pontiac Montana SV6, Saturn RELAY, Buick Terraza and Chevrolet
Uplander;
- the Chrysler Pacifica;
- the Chevrolet HHR and Malibu;
- the GMC Envoy, Buick Rainier, and Chevrolet Trailblazer;
- the Chrysler 300 and 300C, and Dodge Charger and Magnum;
- the Dodge Ram; and
- the Jeep Liberty;
- programs that ended production during or subsequent to the six months
ended June 30, 2006, including the Ford Freestar and Mercury
Monterey;
- the sale of certain facilities during or subsequent to the six months
ended June 30, 2006; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 20% or $570 million to $3.3 billion for the six months ended June 30, 2007 compared to $2.8 billion for the six months ended June 30, 2006. This increase in production sales reflects a 17% increase in our European average dollar content per vehicle combined with a 3% increase in European vehicle production volumes.
Our average dollar content per vehicle grew by 17% or $57 to $398 for the six months ended June 30, 2007 compared to $341 for the six months ended June 30, 2006, primarily as a result of:
- the launch of new programs during or subsequent to the first six
months of 2006, including:
- the MINI Cooper;
- the Mercedes-Benz C-Class; and
- the BMW 3-Series;
- an increase in reported U.S. dollar sales primarily due to the
strengthening of the euro and British pound against the U.S. dollar;
- acquisitions completed during or subsequent to the first six months
of 2006, including the Pressac acquisition in January 2007; and
- increased production and/or content on certain programs.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the Mercedes-Benz E-Class; and
- the Nissan Micra;
- the sale of certain facilities during or subsequent to the first six
months of 2006; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 53% or $65 million to $187 million for the six months ended June 30, 2007 compared to $122 million for the six months ended June 30, 2006. The increase in production sales is primarily 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 six months
ended June 30, 2006 in Korea, China and Brazil; 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
For the six months
ended June 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 2,168 $ 2,115 + 3 %
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed: 74,673 78,949 - 5 %
BMW X3, Mercedes-Benz E-Class and
G-Class, and Saab 9(3) Convertible
Value-Added: 41,448 47,911 - 13 %
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander
-------------------------------------------------------------------------
116,121 126,860 - 8 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly sales increased 3% or $53 million to $2.168 billion for the six months ended June 30, 2007 compared to $2.115 billion for the six months ended June 30, 2006 while assembly volumes decreased 8% or 10,739 units. The increase in complete vehicle assembly sales is primarily as a result of:
- higher assembly volumes for the BMW X3; and
- an increase in reported U.S. dollar sales due to the strengthening of
the euro against the U.S. dollar.
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 the
Chrysler Voyager and 300.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 14% or $131 million to $824 billion for the six months ended June 30, 2007 compared to $955 billion for the six months ended June 30, 2006.
In the six months ended June 30, 2007, the major programs for which we recorded tooling, engineering and other sales were:
- the BMW X3; - the Ford Flex; - the Dodge Grand Caravan and Chrysler Town & Country; - GM's full-size pickups; - the Mazda 6; - the Ford F-Series; - the Cadillac STS; and - the Audi A5.
In the six months ended June 30, 2006, the major programs for which we recorded tooling, engineering and other sales were:
- GM's full-size pickups and SUVs; - the MINI Cooper; - the BMW Z4; - the BMW X5; - the Freightliner P-Class; - the Ford Edge; - the Ford F-Series SuperDuty; - the BMW 3-Series; and - the Suzuki XL7.
In addition, tooling, engineering and other sales benefited from the strengthening of the Canadian, euro and British pound, each against the U.S. dollar.
EBIT
For the six months
ended June 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
North America $ 408 $ 468
Europe 216 93
Rest of World 10 -
Corporate and Other 26 32
-------------------------------------------------------------------------
Total EBIT $ 660 $ 593 + 11 %
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the six-month periods ended June 30, 2007 and 2006 were the following unusual items, which have been discussed in the "Highlights" section above.
For the six months
ended June 30,
--------------------
2007 2006
-------------------------------------------------------------------------
North America
Impairment charges $ (22) $ -
Restructuring charges (10) (23)
Sale of facilities - (5)
-------------------------------------------------------------------------
(32) (28)
-------------------------------------------------------------------------
Europe
Restructuring charges (4) (12)
Sale of facility - (12)
-------------------------------------------------------------------------
(4) (24)
-------------------------------------------------------------------------
$ (36) $ (52)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America decreased 13% or $60 million to $408 million for the six months ended June 30, 2007 compared to $468 million for the six months ended June 30, 2006. Excluding the North American unusual items discussed in the "Highlights" section above, EBIT decreased $56 million, primarily as a result of:
- lower margins earned on decreased production on certain programs;
- operational inefficiencies and other costs at certain underperforming
divisions, in particular at certain powertrain and interiors
facilities in the United States;
- costs incurred at new facilities in preparation for upcoming launches
or for programs that have not fully ramped up production;
- costs incurred to develop and grow our electronics capabilities;
- higher employee profit sharing;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
These factors were partially offset by:
- incremental margin earned on new programs that launched during or
subsequent to the six months ended June 30, 2006; and
- productivity and efficiency improvements at certain facilities,
including underperforming divisions.
Europe
EBIT in Europe increased 132% or $123 million to $216 million for the six months ended June 30, 2007 compared to $93 million for the six months ended June 30, 2006. Excluding the European unusual items discussed in the "Highlights" section above, EBIT increased by $103 million, primarily as a result of:
- incremental margin earned on new programs that launched during or
subsequent to the six months ended June 30, 2006;
- incremental margin earned on higher volumes for certain production
and complete vehicle assembly programs;
- acquisitions completed during or subsequent to the first six months
of 2006;
- the sale and/or closure of certain underperforming divisions during
or subsequent to the first six months of 2006; and
- operational improvements at certain facilities, including
underperforming divisions.
These factors were partially offset by:
- lower margins as a result of a decrease in vehicle production volumes
on certain programs including the end of production of the Mercedes-
Benz E-Class 4MATIC at our Graz assembly facility in the fourth
quarter of 2006;
- operational inefficiencies and other costs at certain facilities,
specifically certain interior facilities;
- costs incurred to develop and grow our electronics capabilities;
- higher affiliation fees paid to Corporate;
- higher employee profit sharing; and
- incremental customer price concessions.
Rest of World
EBIT in the Rest of World increased $10 million to $10 million for the six months ended June 30, 2007 in comparison to the six months ended June 30, 2006. EBIT increased primarily as a result of:
- incremental margin earned on the increase in production sales
discussed above;
- operational 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 decreased 19% or $6 million to $26 million for the six months ended June 30, 2007 compared to $32 million for the six months ended June 30, 2006. The decrease in EBIT was primarily as a result of:
- increased stock compensation costs as discussed in the SG&A section
above;
- an increase in reported U.S. dollar SG&A due to the strengthening of
the euro and Canadian dollar, each against the U.S. dollar; and
- increased incentive compensation.
These factors were partially offset by:
- an increase in affiliation fees earned from our divisions; and
- the recovery of a long-term receivable that was previously written
off.
COMMITMENTS AND CONTINGENCIES
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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 six months ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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