Magna announces third quarter and year to date results
AURORA, ON, Nov. 6, 2007 -- Magna International Inc. (TSX: MG.A; NYSE: MGA) today reported financial results for the third quarter and nine months ended September 30, 2007.
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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2007 2006 2007 2006
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Sales $ 6,077 $ 5,424 $ 19,231 $ 17,812
Operating income $ 267 $ 155 $ 949 $ 750
Net income $ 155 $ 94 $ 635 $ 499
Diluted earnings per share $ 1.38 $ 0.86 $ 5.69 $ 4.52
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All results are reported in millions of U.S. dollars,
except per share figures.
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THREE MONTHS ENDED SEPTEMBER 30, 2007
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We posted sales of $6.1 billion for the third quarter ended September 30, 2007, an increase of 12% over the third 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 third quarter of 2007, our North American and European average dollar content per vehicle increased 14% and 22%, respectively, over the third quarter of 2006. In addition, North American vehicle production increased 3% while European vehicle production increased 5%, each compared to the third quarter of 2006.
Complete vehicle assembly sales decreased 16% to $859 million for the third quarter of 2007 compared to $1.017 billion for the third quarter of 2006, while complete vehicle assembly volumes declined 25% compared to the third quarter of 2006.
Our operating income was $267 million for the third quarter ended September 30, 2007 compared to $155 million for the third quarter ended September 30, 2006, and we earned net income for the third quarter of 2007 of $155 million compared to $94 million for the third quarter of 2006.
Diluted earnings per share were $1.38 for the third quarter ended September 30, 2007 compared to $0.86 for the third quarter ended September 30, 2006.
During the third quarter ended September 30, 2007, we generated cash from operations before changes in non-cash operating assets and liabilities of $300 million, and invested $83 million in non-cash operating assets and liabilities. Total investment activities for the third quarter of 2007 were $319 million, including $174 million in fixed asset additions and a $145 million increase in investments and other assets.
NINE MONTHS ENDED SEPTEMBER 30, 2007 ------------------------------------
We posted sales of $19.2 billion for the nine months ended September 30, 2007, an increase of 8% over the nine months ended September 30, 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 nine months ended September 30, 2007, North American and European average dollar content per vehicle increased 10% and 18%, respectively, each over the comparable nine-month period in 2006. During the nine months ended September 30, 2007, North American vehicle production declined 2% while European vehicle production increased 4%, each in comparison to the nine months ended September 30, 2006.
Complete vehicle assembly sales decreased 3% to $3.027 billion for the nine months ended September 30, 2007 compared to $3.132 billion for the nine months ended September 30, 2006, while complete vehicle assembly volumes declined 14% compared to the first nine months of 2006.
Our operating income was $949 million for the nine months ended September 30, 2007 compared to $750 million for the nine months ended September 30, 2006, and we earned net income of $635 million for the first nine months of 2007 compared to $499 million for the first nine months of 2006.
Diluted earnings per share were $5.69 for the nine months ended September 30, 2007 compared to $4.52 for the nine months ended September 30, 2006.
During the nine months ended September 30, 2007, we generated cash from operations before changes in non-cash operating assets and liabilities of $1.258 billion, and invested $494 million in non-cash operating assets and liabilities. Total investment activities for the first nine months of 2007 were $657 million, including $436 million in fixed asset additions, $46 million to purchase subsidiaries, and a $175 million increase in investments and other assets.
A more detailed discussion of our consolidated financial results for the third quarter and nine months ended September 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 $25.0 billion and $26.3 billion, based on full year 2007 light vehicle production volumes of approximately 15.1 million units in North America and approximately 15.8 million units in Europe. Full year 2007 average dollar content per vehicle is expected to be between $845 and $875 in North America and between $410 and $435 in Europe. We expect full year 2007 complete vehicle assembly sales to be between $3.8 billion and $4.1 billion.
In addition, we expect that full year 2007 spending for fixed assets will be in the range of $775 million to $825 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 -------------
Subject to approval by the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE"), our Board of Directors yesterday approved the purchase for cancellation and/or for purposes of our long-term retention (restricted stock) and restricted stock unit programs, up to 9,500,000 of our Class A Subordinate Voting Shares, representing approximately 9.8% of our public float of Class A Subordinate Voting Shares, pursuant to a normal course issuer bid. The normal course issuer bid is expected to commence on or about November 12, 2007 and will terminate one year later. All purchases of Class A Subordinate Voting Shares will be made at the market price at the time of purchase in accordance with the rules and policies of the TSX and the NYSE, including Rule 10b-18 under the U.S. Securities Exchange Act of 1934.
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 September 30, 2007. The dividend is payable on December 14, 2007 to shareholders of record on November 30, 2007.
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 chassis systems; powertrain systems; exterior systems; seating systems; interior systems; vision systems; closure systems; roof systems; electronic systems; as well as complete vehicle engineering and assembly.
We have approximately 83,000 employees in 240 manufacturing operations and 62 product development and engineering centres in 23 countries.
------------------------------------------------------------------------- We will hold a conference call for interested analysts and shareholders to discuss our third quarter results on Tuesday, November 6, 2007 at 8:00 a.m. EST. The conference call will be chaired by Vincent J. Galifi, Executive Vice-President and Chief Financial Officer. The number to use for this call is 1-800-952-4645. The number for overseas callers is 1-212-231-2903. Please call in 10 minutes prior to the call. We will also webcast the conference call at www.magna.com. The slide presentation accompanying the conference call will be available on our website Tuesday morning prior to the call. ------------------------------------------------------------------------- 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, without limitation, those related to the strategic alliance with OJC Russian Machines ("Russian Machines"), including: the risk that the benefits, growth prospects and strategic objectives expected to be realized from the investment by, and strategic alliance with, Russian Machines may not be fully realized, realized at all or may take longer to realize than expected; we will be governed by a board of directors on which the Stronach Trust and Russian Machines each, indirectly, have the right to designate an equal number of nominees, in addition to the current co-chief executive officers, with the result that we may be considered to be effectively controlled, indirectly, by the Stronach Trust and Russian Machines for so long as the governance arrangements remain in place between them; our Russian strategy involves making investments and carrying on business and operations in Russia, which will expose us to the political, economic and regulatory risks and uncertainties of that country; the possibility that Russian Machines may exercise its right to withdraw its investment and exit from the governance arrangements in connection with the strategic alliance at any time after two years; the possibility that the Stronach Trust may exercise its right to require Russian Machines to withdraw its investment and exit from such arrangements at any time after three years; and the possibility that Russian Machines' lender may require Russian Machines to withdraw its investment and exit from such arrangements at any time if such lender is entitled to realize on its loan to Russian Machines. In addition to the risks, assumptions and uncertainties related to our relationship with Russian Machines, there are additional risks and uncertainties relating generally to us and our business and affairs, including 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; risks associated with program launches; legal claims against us; risks of conducting business in foreign countries; 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 indirect controlling shareholders, the Stronach Trust and Russian Machines; 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.
------------------------------------------------------------------------- For further information about Magna, please see our website at www.magna.com. Copies of financial data and other publicly filed documents are available through the internet on the Canadian Securities Administrators' System for Electronic Document Analysis and Retrieval (SEDAR) which can be accessed at www.sedar.com and on the United States Securities and Exchange Commission's Electronic Data Gathering, Analysis and Retrieval System (EDGAR) which can be accessed at www.sec.gov. ------------------------------------------------------------------------- MAGNA INTERNATIONAL INC. Management's Discussion and Analysis of Results of Operations and Financial Position -------------------------------------------------------------------------
All amounts in this Management's Discussion and Analysis of Results of Operations and Financial Position ("MD&A") are in U.S. dollars and all tabular amounts are in millions of U.S. dollars, except per share figures and average dollar content per vehicle, which are in U.S. dollars, unless otherwise noted. When we use the terms "we", "us", "our" or "Magna", we are referring to Magna International Inc. and its subsidiaries and jointly controlled entities, unless the context otherwise requires.
This MD&A should be read in conjunction with the unaudited interim consolidated financial statements for the three months and nine months ended September 30, 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 nine months ended September 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 November 5, 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 metal body and chassis systems; powertrain systems; exterior systems; seating systems; interior systems; vision systems; closure systems; roof systems; electronic 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 September 30, 2007, we had 240 manufacturing divisions and 62 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.
STRATEGIC INVESTMENT BY RUSSIAN MACHINES -------------------------------------------------------------------------
During the third quarter of 2007, following approval by our Class A and Class B shareholders, we completed the court-approved plan of arrangement (the "Arrangement") whereby OJSC Russian Machines ("Russian Machines"), a wholly owned subsidiary of Basic Element Limited ("Basic Element"), made a major strategic investment in Magna. 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.
In accordance with the Arrangement:
- Russian Machines invested $1.54 billion to indirectly acquire
20 million Magna Class A Subordinate Voting Shares from treasury.
- We purchased 217,400 Class B Shares for cancellation, representing
all the outstanding Class B Shares, other than those indirectly
controlled by the Stronach Trust, for approximately $24 million and
the number of votes per each Class B Share was reduced from 500 votes
to 300 votes.
- The Stronach Trust and certain members of our executive management
combined their respective shareholdings in Magna (in the case of
executive management, a portion of their shareholdings), together
with the 20 million Class A Subordinate Voting Shares issued as part
of the Arrangement into a new Canadian holding company. At
September 20, 2007, the new Canadian holding company indirectly held
100% of the outstanding Class B Shares and approximately 71.1% of the
votes attached to all the Class A Subordinate Voting Shares and
Class B Shares then outstanding.
Prior to completion of the Arrangement, as a result of the approval of the Class B Share acquisition by the Minority Class B Shareholders, we caused the conversion of 148,704 Class B Shares held by the MIC Trust and 865714 Ontario Inc., a wholly-owned subsidiary of Magna, into Class A Subordinate Voting Shares.
On September 20, 2007, we also completed the previously announced substantial issuer bid ("SIB") pursuant to which we purchased for cancellation 11,902,654 Class A Subordinate Voting Shares, representing 9.2% of our issued and outstanding Class A Subordinate Voting Shares for an aggregate purchase price of $1.1 billion.
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 nine months ended September 30, 2007, with the exception of the following:
- on October 26, 2007, we received a favourable award in a previously
disclosed arbitration proceeding involving a steel supplier;
- as a result of the continued increase in the value of the Canadian
dollar relative to the U.S. dollar, our Canadian manufacturing
facilities may have greater difficulty competing with facilities
located outside Canada; and
- as a result of the recent UAW agreements with GM and Chrysler and
tentative agreement with Ford, there is an increased risk that these
customers may in-source production of components, modules or
assemblies currently produced by us.
Additionally, risks relating to the investment in Magna by Russian Machines are disclosed in our information circular/proxy statement dated July 25, 2007 and incorporated herein by reference.
HIGHLIGHTS -------------------------------------------------------------------------
During the third quarter of 2007, we reported sales of $6.1 billion, an increase of 12% over the third 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 third quarter of 2007, our North American and European average dollar content per vehicle increased 14% and 22%, respectively, over the third quarter of 2006. In addition, North American and European vehicle production increased 3% and 5%, respectively, over the third quarter of 2006.
Operating income for the third quarter of 2007 increased 72% or $112 million to $267 million from $155 million for the third quarter of 2006. Excluding the unusual items recorded in the third quarters of 2007 and 2006 (see "Unusual Items" below), operating income for the third quarter of 2007 increased $84 million or 53%. 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 third quarter of 2006, increased margins earned on higher volumes for certain production programs and operational improvements at certain underperforming divisions. These factors were primarily offset by lower margins earned on decreased sales as a result of programs that ended production subsequent to the third quarter of 2006, operational inefficiencies and other costs at certain powertrain and interior facilities, costs incurred at certain facilities in preparation for upcoming launches, the impact of a favourable revaluation of warranty accruals during the third quarter of 2006, higher employee profit sharing and incentive compensation, and incremental customer price concessions.
Net income for the third quarter of 2007 increased 65% or $61 million to $155 million from $94 million for the third quarter of 2006. Excluding the unusual items recorded in the third quarters of 2007 and 2006 (see "Unusual Items" below), net income for the third quarter of 2007 increased 73% or $72 million. The increase in net income excluding unusual items was a result of the increase in operating income (excluding unusual items) partially offset by higher income taxes (excluding unusual items) due to increased operating income. Income taxes were higher despite the negative impact of an unfavourable tax decision in the third quarter of 2006 (see "Income Taxes" below).
Diluted earnings per share for the third quarter of 2007 increased 60% or $0.52 to $1.38 from $0.86 for the third quarter of 2006. Excluding the unusual items recorded in the third quarters of 2007 and 2006 (see "Unusual Items" below), diluted earnings per share for the three months ended September 30, 2007 increased 68% or $0.61. 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 third quarter of 2007 primarily as a result of the 20.0 million Class A Subordinate Voting Shares issued under the Arrangement and on the exercise of stock options during or subsequent to the third quarter of 2006, partially offset by the 11.9 million Class A Subordinate Voting Shares repurchased under the SIB.
Unusual Items
During the three months and nine months ended September 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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Third Quarter
Restructuring
charges(1) $ (8) $ (5) $ (0.05) $ (5) $ (4) $ (0.04)
Sale of
facility(2) (12) (7) (0.06) - - -
Sale of
property(3) 36 30 0.27 - - -
Foreign
currency
gain(3) 7 7 0.06 - - -
Future tax
charge(3) - (40) (0.35) - - -
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Total third
quarter unusual
items 23 (15) (0.13) (5) (4) (0.04)
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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 $ (13) $ (39) $ (0.35) $ (57) $ (36) $ (0.33)
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(1) Restructuring and Impairment Charges
(a) For the nine months ended September 30, 2007
During the third quarter of 2007, we incurred restructuring and
rationalization charges of $8 million related to three
facilities in North America.
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 and 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 nine months ended September 30, 2006
During the third quarter of 2006, we incurred restructuring and
rationalization charges of $4 million related to three
facilities in North America and $1 million related to one
facility in Europe.
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.
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.
(2) Sale of Facilities
During the third quarter of 2007, we entered into an agreement to
sell one underperforming exterior systems facility in Europe. As a
result, we incurred a loss on disposition of the facility of
$12 million.
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 third quarter of 2007, we disposed of land and building in
the United Kingdom and recorded a gain on disposal of $36 million,
recorded a $7 million foreign currency gain on the repatriation of
funds from Europe and recorded a $40 million charge to future income
tax expense as a result of an alternative minimum tax introduced in
Mexico that is effective January 1, 2008.
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 and our investment in asset-backed commercial paper ("ABCP"). 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 nine months
ended September 30, ended September 30,
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2007 2006 Change 2007 2006 Change
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1 Canadian dollar equals U.S.
dollars 0.957 0.893 + 7% 0.908 0.884 + 3%
1 euro equals U.S. dollars 1.374 1.275 + 8% 1.345 1.246 + 8%
1 British pound equals U.S.
dollars 2.020 1.877 + 8% 1.987 1.820 + 9%
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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 nine months ended September 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.
Sales
For the three months
ended September 30,
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2007 2006 Change
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Vehicle Production Volumes (millions of units)
North America 3.558 3.452 + 3%
Europe 3.499 3.336 + 5%
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Average Dollar Content Per Vehicle
North America $ 862 $ 756 + 14%
Europe $ 479 $ 394 + 22%
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Sales
External Production
North America $ 3,068 $ 2,610 + 18%
Europe 1,675 1,315 + 27%
Rest of World 100 68 + 47%
Complete Vehicle Assembly 859 1,017 - 16%
Tooling, Engineering and Other 375 414 - 9%
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Total Sales $ 6,077 $ 5,424 + 12%
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External Production Sales - North America
External production sales in North America increased 18% or $458 million to $3.068 billion for the third quarter of 2007 compared to $2.610 billion for the third quarter of 2006. This increase in production sales reflects a 14% increase in our North American average dollar content per vehicle combined with a 3% increase in North American vehicle production volumes, each as compared to the third quarter of 2006.
Our average dollar content per vehicle grew by 14% or $106 to $862 for the third quarter of 2007 compared to $756 for the third quarter of 2006, primarily as a result of:
- the launch of new programs during or subsequent to the third quarter
of 2006, including:
- the Ford Edge and Lincoln MKX;
- the Saturn Outlook, GMC Acadia and Buick Enclave;
- the BMW X5;
- the Jeep Wrangler, Wrangler Unlimited and Patriot;
- GM's full-size pickups;
- the Dodge Avenger and Chrysler Sebring;
- the Ford F-Series SuperDuty; and
- the Dodge Nitro;
- an increase in reported U.S. dollar sales due to the strengthening of
the Canadian dollar against the U.S. dollar; and
- the impact of higher 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:
- GM's full-size SUVs;
- the Chrysler Pacifica and PT Cruiser;
- the Ford Explorer and Mercury Mountaineer;
- the Ford Focus; and
- the Chrysler 300/300C, Dodge Charger and Magnum;
- programs that ended production during or subsequent to the third
quarter of 2006, including:
- the Saturn ION;
- the Ford Freestar and Mercury Monterey;
- the Buick Rendezvous; and
- the Ford Taurus;
- lower Chrysler minivan production volumes as a result of the change-
over to the next-generation vehicle in July 2007 and the related
ramp-up period associated with the launch; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 27% or $360 million to $1.675 billion for the third quarter of 2007 compared to $1.315 billion for the third quarter of 2006. This increase in production sales reflects a 22% increase in our European average dollar content per vehicle combined with a 5% increase in European vehicle production volumes for the third quarter of 2007, each as compared to the third quarter of 2006.
Our average dollar content per vehicle grew by 22% or $85 to $479 for the third quarter of 2007 compared to $394 for the third quarter of 2006, primarily as a result of:
- the launch of new programs during or subsequent to the third quarter
of 2006, including:
- the Mercedes-Benz C-Class;
- the MINI Cooper;
- the smart fortwo; and
- the Land Rover Freelander;
- 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 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 Honda Civic.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including the Mercedes-Benz E-Class; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in Rest of World increased 47% or $32 million to $100 million for the third quarter of 2007 compared to $68 million for the third quarter of 2006. The increase in production sales is primarily as a result of:
- the launch of new programs during or subsequent to the third quarter
of 2006 in Korea, China, Brazil and South Africa;
- increased production and/or content on certain programs 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
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 September 30,
---------------------
2007 2006 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 859 $ 1,017 - 16%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed:
BMW X3, Mercedes-Benz E-Class and
G-Class, and Saab 93 Convertible 27,542 35,827 - 23%
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander 14,413 20,266 - 29%
-------------------------------------------------------------------------
41,955 56,093 - 25%
-------------------------------------------------------------------------
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Complete vehicle assembly sales decreased 16% or $158 million to $859 million for the third quarter of 2007 compared to $1.017 billion for the third quarter of 2006 while assembly volumes decreased 25% or 14,138 units. The decrease in complete vehicle assembly sales was 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 Mercedes is
assembling this vehicle in-house; and
- a decrease in assembly volumes for the BMW X3 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 Saab 9(3) Convertible and the
Mercedes-Benz G-Class.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 9% or $39 million to $375 million for the third quarter of 2007 compared to $414 million for the third quarter of 2006.
In the third quarter of 2007 the major programs for which we recorded tooling, engineering and other sales were:
- the Ford F-Series SuperDuty; - the Audi A4; - the Dodge Grand Caravan and Chrysler Town & Country; - GM's full-size pickups; and - the Ford Flex.
In the third quarter of 2006, the major programs for which we recorded tooling, engineering and other sales were:
- GM's full-size pickups and SUVs; - the Ford Escape and Mazda Tribute; - the MINI Cooper; - the Land Rover Range Rover; - the Saturn Outlook, Buick Enclave and GMC Acadia; - the Freightliner P-Class; and - the BMW X3.
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 26% or $163 million to $798 million for the third quarter of 2007 compared to $635 million for the third quarter of 2006 and gross margin as a percentage of total sales increased to 13.1% compared to 11.7%.
The unusual items discussed in the "Highlights" section above negatively impacted gross margin as a percent of total sales by 0.1% in both the third quarter of 2007 and the third quarter of 2006. Excluding these unusual items, the 1.4% 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 third quarter of 2006;
- incremental gross margin earned as a result of increased production
volumes for certain programs;
- the end of production of the Mercedes-Benz E-Class 4MATIC at our Graz
assembly facility which had a lower gross margin than our
consolidated average gross margin;
- productivity and efficiency improvements at certain facilities,
including underperforming divisions; and
- the decrease in tooling and other sales that earn low or no margins.
These factors were partially offset by:
- a favourable revaluation to warranty accruals during the
third quarter of 2006, substantially in Europe;
- costs incurred 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;
- lower 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 15% or $29 million to $220 million for the third quarter of 2007 compared to $191 million for the third quarter of 2006. Excluding the unusual items discussed in the "Highlights" section above, depreciation and amortization increased $26 million primarily as a result of:
- 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;
- an increase in assets employed in the business to support future
growth;
- depreciation and amortization of assets at facilities that launched
new programs during or subsequent to the third quarter of 2006;
- accelerated depreciation on certain program specific assets in
North America; and
- acquisitions completed during or subsequent to the third 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.
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 5.4% for the third quarter of 2007 compared to 5.5% for the third quarter of 2006. SG&A expenses increased 10% or $31 million to $330 million for the third quarter of 2007 compared to $299 million for the third quarter of 2006. Excluding the unusual items discussed in the "Highlights" section above, SG&A expenses increased by $63 million primarily as a result of:
- 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;
- higher infrastructure costs to support the increase in sales,
including spending related to programs that launched during or
subsequent to the third quarter of 2006;
- higher employee profit sharing and incentive compensation; and
- a $7 million write-down of our investments in ABCP as discussed in
the "Financing Resources" section below.
These factors were partially offset by the sale or disposition of certain facilities during or subsequent to the third quarter of 2006.
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
- margins earned on production sales in Europe are generally lower than
margins earned in North America.
For the three months
ended September 30,
---------------------
2007 2006 Change
-------------------------------------------------------------------------
North America $ 165 $ 67 + 146%
Europe 84 68 + 24%
Rest of World 2 (4) n/a
Corporate and Other(3) 18 - 117%
-------------------------------------------------------------------------
Total EBIT $ 248 $ 149 66%
-------------------------------------------------------------------------
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Included in EBIT for the third quarters of 2007 and 2006 were the following unusual items, which have been discussed in the "Highlights" section above.
For the three months
ended September 30,
---------------------
2007 2006
-------------------------------------------------------------------------
North America
Restructuring charges $ (8) $ (4)
-------------------------------------------------------------------------
(8) (4)
-------------------------------------------------------------------------
Europe
Restructuring charges - (1)
Sale of facility (12) -
Sale of property 36 -
-------------------------------------------------------------------------
24 (1)
-------------------------------------------------------------------------
Corporate and Other
Foreign currency gain 7 -
-------------------------------------------------------------------------
7 -
-------------------------------------------------------------------------
$ 23 $ (5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America increased 146% or $98 million to $165 million for the third quarter of 2007 compared to $67 million for the third quarter of 2006. Excluding the North American unusual items discussed in the "Highlights" section above, the $102 million increase in EBIT was primarily as a result of:
- incremental margin earned on new programs that launched during or
subsequent to the third quarter of 2006;
- incremental margin earned as a result of increased production volumes
for certain programs; and
- productivity and efficiency improvements at certain facilities,
including underperforming divisions.
-------------------------------------------------------------------------
(1) EBIT is defined as operating income as presented on our unaudited
consolidated financial statements before net interest (income)
expense.
These factors were partially offset by:
- lower margins earned as a result of a decrease in production volumes
for certain programs;
- operational inefficiencies and other costs at certain underperforming
divisions, in particular at certain powertrain and interiors
facilities;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- higher employee profit sharing and incentive compensation;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Europe
EBIT in Europe increased 24% or $16 million to $84 million for the third quarter of 2007 compared to $68 million for the third quarter of 2006. Excluding the European unusual items discussed in the "Highlights" section above, the $9 million decrease in EBIT was primarily as a result of:
- lower margins earned as a result of a decrease in vehicle production
volumes for 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;
- a favourable revaluation to warranty accruals during the
third quarter of 2006;
- costs incurred to develop and grow our electronics capabilities;
- higher employee profit sharing;
- higher affiliation fees paid to Corporate;
- costs incurred to develop and grow our business in Russia; and
- incremental customer price concessions.
These factors were partially offset by:
- incremental margin earned on new programs that launched during or
subsequent to the third quarter of 2006;
- incremental margin earned as a result of increased production volumes
for certain programs; and
- productivity and efficiency improvements at certain facilities,
including underperforming divisions;
Rest of World
Rest of World EBIT increased $6 million to $2 million for the third quarter of 2007. The increase in EBIT was primarily as a result of:
- incremental margin earned on the increase in production sales
discussed above; and
- productivity and efficiency improvements at certain new facilities.
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 $21 million to a loss of $3 million for the third quarter of 2007 compared to earnings of $18 million for the third quarter of 2006. Excluding the Corporate and Other unusual items discussed above, the $21 million decrease in EBIT was primarily as a result of:
- increased salaries and wages and increased incentive compensation;
and
- a $7 million write-down of our investments in ABCP as discussed in
the "Financing Resources" section below.
These factors were partially offset by an increase in affiliation fees earned from our divisions.
Interest Income, Net
Net interest income increased $13 million to $19 million for the third quarter of 2007 compared to $6 million for the third 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 $48 million repayment of senior unsecured notes in
October 2006; and
- an increase in interest income earned, including on the net cash
received from the Arrangement.
Operating Income
Operating income increased 72% or $112 million to $267 million for the third quarter of 2007 compared to $155 million for the third quarter of 2006. Excluding the unusual items discussed in the "Highlights" section above, operating income for the third quarter of 2007 increased 53% or $84 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) increased to 41.9% for the third quarter of 2007 from 40.4% for the third quarter of 2006. In the third 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 30.3% for the third quarter of 2007 compared to 39.7% in the third quarter of 2006. The higher effective income tax rate in 2006 is primarily due to an unfavourable Supreme Court of Canada ruling against a taxpayer which restricts deductibility of certain foreign exchange losses. The $23 million impact of this ruling was 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 65% or $61 million to $155 million for the third quarter of 2007 compared to $94 million for the third quarter of 2006. Excluding unusual items discussed in the "Highlights" section above, net income increased 73% or $72 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 September 30,
---------------------
2007 2006 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting
or Class B Share
Basic $ 1.40 $ 0.87 + 61%
Diluted $ 1.38 $ 0.86 + 60%
-------------------------------------------------------------------------
Average number of Class A Subordinate
Voting and Class B Shares outstanding
(millions)
Basic 110.5 108.6 + 2%
Diluted 113.1 111.4 + 2%
-------------------------------------------------------------------------
Diluted earnings per share increased 60% or $0.52 to $1.38 for the third quarter of 2007 compared to $0.86 for the third quarter of 2006. Excluding the unusual items discussed in the "Highlights" section above, diluted earnings per share increased $0.61 from the third quarter of 2006 to the third 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 third quarter of 2007, primarily as a result of:
- the 20.0 million Class A Subordinate Voting Shares issued under the
Arrangement; and
- Class A Subordinate Voting Shares issued on the exercise of stock
options and stock appreciation rights during or subsequent to the
third quarter of 2006.
This increase in shares was partially offset by the 11.9 million Class A Subordinate Voting Shares repurchased under the SIB.
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 third quarter of 2007 was 14.7%, an increase from 9.0% for the third quarter of 2006. The unusual items discussed in the "Highlights" section above positively impacted ROFE in the third quarter of 2007 by 1.3% and negatively impacted ROFE by 0.2% in the third quarter of 2006.
Excluding these unusual items, ROFE increased 4.2% primarily as a result of the increase in EBIT (excluding unusual items) in North America partially offset by the decrease in EBIT (excluding unusual items) in Europe, Rest of World and Corporate and Other, all as described above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
Cash Flow from Operations
For the three months
ended September 30,
---------------------
2007 2006 Change
-------------------------------------------------------------------------
Net income $ 155 $ 94
Items not involving current cash flows 145 179
-------------------------------------------------------------------------
300 273 $ 27
Changes in non-cash operating assets
and liabilities (83) 49
-------------------------------------------------------------------------
Cash provided from operating activities $ 217 $ 322 $ (105)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash operating assets and liabilities increased $27 million to $300 million for the third quarter of 2007 compared to $273 million for the third quarter of 2006. The increase in cash flow from operations was due to a $61 million increase in net income (as discussed above) partially offset by a $34 million decrease in items not involving current cash flows, including:
- a $39 million increase on gains on disposal of fixed assets,
including both the $36 million gain on sale of property in the
United Kingdom and the $12 million loss on sale of facility as
discussed in the "Highlights" section above;
- a $32 million decrease in future taxes, including the impact of the
$40 million income tax charge in the third quarter of 2007 as
discussed in the "Highlights" section above; and
- a reduction in non-cash stock compensation expense.
These factors were partially offset by:
- an increase in depreciation expense from the third quarter of 2006 to
the third quarter of 2007; and
- a $7 million write-down of a portion of our investments in ABCP as
discussed in the "Financing Resources" section below.
-------------------------------------------------------------------------
(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.
Cash invested in operating assets and liabilities amounted to $83 million for the third quarter of 2007 which was comprised of the following sources (and uses) of cash:
For the three months
ended September 30,
---------------------
2007 2006
-------------------------------------------------------------------------
Accounts receivable $ 9 $ 236
Inventory (93) (28)
Prepaid expenses and other - 2
Accounts payable and other accrued
liabilities (56) (155)
Income taxes payable 62 5
Deferred revenue (5) (11)
-------------------------------------------------------------------------
Changes in non-cash operating assets
and liabilities $ (83) $ 49
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The increase in inventory in the third quarter of 2007 was primarily as a result of:
- an increase in production inventory in North America associated with
the launch of the next-generation Chrysler minivans as discussed in
the "Sales" section above, as well as the general increase in
production inventory after the OEM summer shutdowns; and
- an increase in tooling and other inventory in Europe in preparation
for upcoming launches.
The decrease in accounts payable and other accrued liabilities was primarily due to the timing of payments to suppliers.
The increase in income taxes payable is primarily due to an increase in taxable income in certain jurisdictions resulting in our income tax payable growing in excess of our income tax instalments, which are based on prior year income.
Capital and Investment Spending
For the three months
ended September 30,
---------------------
2007 2006 Change
-------------------------------------------------------------------------
Fixed assets $ (174) $ (198)
Investments and other assets (145) (6)
-------------------------------------------------------------------------
Fixed assets, investments and other
assets additions (319) (204)
Purchase of subsidiaries - (51)
Proceeds from disposition 76 8
-------------------------------------------------------------------------
Cash used in investing activities $ (243) $ (247) $ 4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, investments and other assets additions
In the third quarter of 2007, we invested $174 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 third quarter of 2007 was for manufacturing equipment for programs that launched during the third quarter of 2007 or will be launching subsequent to the third quarter of 2007.
The increase in investments and other assets relates primarily to a $130 million investment in ABCP as discussed in the "Financing Resources" section below.
Proceeds from disposition
Proceeds from disposition for the third quarter of 2007 reflect the proceeds received on the sale of property (as discussed in the "Highlights" section above) and normal course fixed and other asset disposals.
Financing
For the three months
ended September 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Repayments of debt $ (53) $ (10)
Issues of debt 3 108
Issues of Class A Subordinate
Voting Shares 1,537 1
Repurchase of Class A Subordinate
Voting Shares (1,091) -
Repurchase of Class B Shares (24) -
Cash dividends paid (42) (41)
-------------------------------------------------------------------------
Cash used in financing activities $ 330 $ 58 $ 272
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The repayments of debt during the third quarter of 2007 relate primarily to a reduction in bank indebtedness.
The issues of debt during the third quarter of 2006 relate primarily to an increase in bank indebtedness in certain jurisdictions to support capital spending requirements.
During the third quarter of 2007, we issued 20.0 million Class A Subordinate Voting Shares for cash proceeds of $1.531 billion (net of issue costs of $6 million) in connection with the Arrangement. We also purchased for cancellation 11.9 million Class A Subordinate Voting Shares for an aggregate purchase price of $1.091 billion (including transaction costs of $2 million) and 217,400 Class B Shares for an aggregate purchase price of $24 million. Each of these transactions is discussed in more detail in the "Strategic Investment by Russian Machines" section above.
During the third quarter of 2007, we also received cash proceeds of $6 million on the exercise of stock options for Class A Subordinate Voting Shares compared to $1 million during the third quarter of 2006.
Cash dividends paid per Class A Subordinate Voting or Class B Share were $0.36 in the third quarter of 2007 compared to $0.38 in the third quarter of 2006.
Financing Resources
Capitalization
As at As at
September December
30, 2007 31, 2006 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 93 $ 63
Long-term debt due within one year 87 98
Long-term debt 609 605
-------------------------------------------------------------------------
789 766
Shareholders' equity 8,759 7,157
-------------------------------------------------------------------------
Total capitalization $ 9,548 $ 7,923 $ 1,625
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization increased by 21% or $1.625 billion to $9.548 billion at September 30, 2007 as compared to $7.923 billion at December 31, 2006. The increase in capitalization was a result of increases in shareholders' equity and liabilities of $1.602 billion and $23 million, respectively.
The increase in shareholders' equity is primarily as a result of:
- Class A Subordinate Voting Shares issued in connection with the
Arrangement and on the exercise of stock options and stock
appreciation rights;
- net income earned during the first nine months of 2007; and
- a $609 million increase in accumulated net unrealized gains on
translation of net investment in foreign operations, primarily as a
result of the strengthening of the Canadian dollar, euro and British
pound, between December 31, 2006 and September 30, 2007, each against
the U.S. dollar.
These factors were partially offset by:
- the repurchase of Class A Subordinate Voting Shares in connection
with the substantial issuer bid and Class B Shares in connection with
the Arrangement;
- dividends paid during the first nine months of 2007; and
- the reduction in the stated value of our Class A Subordinate Voting
Shares as a result of the repurchase of Class A Subordinate Voting
Shares which have been awarded on a restricted basis to certain
executives.
The increase in liabilities is primarily the result of the strengthening of Canadian dollar and euro, each against the U.S. dollar and an increase in bank indebtedness to satisfy working capital requirements in certain regions.
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.
Cash Resources
During the first nine months of 2007, our cash resources increased by $767 million to $2.7 billion as a result of the cash provided from operating activities and financing activities, partially offset by the cash used in investing activities. 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. In July 2007, our five-year revolving term facility was extended for one additional year, expiring on July 31, 2012.
At September 30, 2007 we held investments in ABCP with a face value of Cdn$134 million. When acquired, these investments were rated R1 (High) by Dominion Bond Rating Service ("DBRS"), the highest credit rating issued for commercial paper, and backed by R1 (High) rated assets, and liquidity agreements. These investments matured during the third quarter of 2007 but, as a result of liquidity issues in the ABCP market, did not settle on maturity. As a result, we have reclassified our ABCP as long-term investments and recorded a $7 million impairment of the value of this investment. Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and timing of cash flows associated with the ABCP and the outcome of the restructuring process could give rise to a change in the value of our investment in ABCP which would impact our earnings.
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 November 2, 2007 were exercised or converted:
Class A Subordinate Voting and Class B Shares 118,587,051
Subordinated Debentures(i) 1,096,589
Stock options(ii) 2,945,443
-------------------------------------------------------------------------
122,629,083
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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 third 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 NINE MONTHS ENDED SEPTEMBER 30, 2007
-------------------------------------------------------------------------
Sales
For the nine months
ended September 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Vehicle Production Volumes
(millions of units)
North America 11.444 11.727 - 2%
Europe 12.002 11.566 + 4%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 844 $ 767 + 10%
Europe $ 421 $ 357 + 18%
-------------------------------------------------------------------------
Sales
External Production
North America $ 9,663 $ 8,996 + 7%
Europe 5,055 4,125 + 23%
Rest of World 287 190 + 51%
Complete Vehicle Assembly 3,027 3,132 - 3%
Tooling, Engineering and Other 1,199 1,369 - 12%
-------------------------------------------------------------------------
Total Sales $ 19,231 $ 17,812 + 8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
External Production Sales - North America
External production sales in North America increased 7% or $0.7 billion to $9.7 billion for the nine months ended September 30, 2007 compared to $9.0 billion for the nine months ended September 30, 2006. This increase in production sales reflects a 10% 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 nine months ended September 30, 2007 two of our largest OEM customers in North America produced fewer vehicles compared to the nine months ended September 30, 2006. While overall North American vehicle production volumes decreased 2% in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006, Ford and GM vehicle production both declined by 9%.
Our average dollar content per vehicle grew by 10% or $77 to $844 for the nine months ended September 30, 2007 compared to $767 for the nine months ended September 30, 2006, primarily as a result of:
- the launch of new programs during or subsequent to the nine months
ended September 30, 2006, including:
- the Ford Edge and Lincoln MKX;
- the Saturn Outlook, GMC Acadia and the Buick Enclave;
- GM's full-size pickups;
- the Jeep Wrangler and Wrangler Unlimited;
- the BMW X5;
- the Dodge Nitro;
- the Dodge Avenger and Chrysler Sebring; and
- the Ford F-Series SuperDuty; 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:
- GM's full-size SUVs;
- the Chrysler Pacifica and PT Cruiser;
- the Pontiac Montana SV6, Saturn RELAY, Buick Terraza and Chevrolet
Uplander;
- the Chrysler 300 and 300C, and Dodge Charger and Magnum;
- the Chevrolet HHR; and
- the Ford Explorer and Mercury Mountaineer;
- programs that ended production during or subsequent to the nine
months ended September 30, 2006, including:
- the Ford Freestar and Mercury Monterey;
- the Saturn ION;
- the Buick Rendezvous; and
- the Ford Taurus;
- lower Chrysler minivan production volumes as a result of the
change-over to the next-generation vehicle in July 2007 and the
related ramp-up period associated with the launch; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 23% or $930 million to $5.1 billion for the nine months ended September 30, 2007 compared to $4.1 billion for the nine months ended September 30, 2006. This increase in production sales reflects an 18% increase in our European average dollar content per vehicle combined with a 4% increase in European vehicle production volumes.
Our average dollar content per vehicle grew by 18% or $64 to $421 for the nine months ended September 30, 2007 compared to $357 for the nine months ended September 30, 2006, primarily as a result of:
- an increase in reported U.S. dollar sales primarily 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 nine
months of 2006, including:
- the MINI Cooper;
- the Mercedes-Benz C-Class; and
- the smart fortwo; and
- acquisitions completed during or subsequent to the first nine months
of 2006, including the Pressac acquisition in January 2007.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including the Mercedes-Benz E-Class;
- the sale of certain facilities during or subsequent to the first nine
months of 2006; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in Rest of World increased 51% or $97 million to $287 million for the nine months ended September 30, 2007 compared to $190 million for the nine months ended September 30, 2006. The increase in production sales was primarily as a result of:
- the launch of new programs during or subsequent to the first nine
months of 2006 in Korea, China, Brazil and South Africa;
- increased production and/or content on certain programs 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
For the nine months
ended September 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 3,027 $ 3,132 - 3%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed: 102,215 114,776 - 11%
BMW X3, Mercedes-Benz E-Class and
G-Class, and Saab 9(3) Convertible
Value-Added: 55,861 68,177 - 18%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander
-------------------------------------------------------------------------
158,076 182,953 - 14%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly sales decreased 3% or $105 million to $3.0 billion for the nine months ended September 30, 2007 compared to $3.1 billion for the nine months ended September 30, 2006 while assembly volumes decreased 14% or 24,877 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 Mercedes 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.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 12% or $170 million to $1.2 billion for the nine months ended September 30, 2007 compared to $1.4 billion for the nine months ended September 30, 2006.
In the nine months ended September 30, 2007, the major programs for which we recorded tooling, engineering and other sales were:
- the BMW X3; - the Dodge Grand Caravan and Chrysler Town & Country; - GM's full-size pickups; - the Ford F-Series SuperDuty; - the Audi A4; - the Mercedes C-Class; - the Mazda 6; - the Ford Flex; and - the Ford Taurus and Mercury Sable.
In the nine months ended September 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 Freightliner P-Class; - the Ford Escape and Mazda Tribute; - the Ford Edge and Lincoln MKX; - the Ford F-Series SuperDuty; - the Suzuki XL7; - the Ford Five Hundred; and - the BMW Z4.
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 nine months
ended September 30,
--------------------
2007 2006 Change
-------------------------------------------------------------------------
North America $ 573 $ 535
Europe 300 161
Rest of World 12 (4)
Corporate and Other 23 50
-------------------------------------------------------------------------
Total EBIT $ 908 $ 742 + 22%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the nine-month periods ended September 30, 2007 and 2006 were the following unusual items, which have been discussed in the "Highlights" section above.
For the nine months
ended September 30,
---------------------
2007 2006
-------------------------------------------------------------------------
North America
Impairment charges $ (22) $ -
Restructuring charges (18) (27)
Sale of facilities - (5)
-------------------------------------------------------------------------
(40) (32)
-------------------------------------------------------------------------
Europe
Restructuring charges (4) (13)
Sale of facilities (12) (12)
Sale of property 36 -
-------------------------------------------------------------------------
20 (25)
-------------------------------------------------------------------------
Corporate and Other
Foreign currency gain 7 -
-------------------------------------------------------------------------
7 -
-------------------------------------------------------------------------
$ (13) $ (57)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America increased 7% or $38 million to $573 million for the nine months ended September 30, 2007 compared to $535 million for the nine months ended September 30, 2006. Excluding the North American unusual items discussed in the "Highlights" section above, EBIT increased $46 million, primarily as a result of:
- incremental margin earned on new programs that launched during or
subsequent to the nine months ended September 30, 2006; 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 volumes
for certain programs;
- operational inefficiencies and other costs at certain underperforming
divisions, in particular at certain powertrain and interiors
facilities;
- 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 and incentive compensation;
- higher affiliation fees paid to Corporate; and
- incremental customer price concessions.
Europe
EBIT in Europe increased 86% or $139 million to $300 million for the nine months ended September 30, 2007 compared to $161 million for the nine months ended September 30, 2006. Excluding the European unusual items discussed in the "Highlights" section above, EBIT increased by $94 million, primarily as a result of:
- incremental margin earned on new programs that launched during or
subsequent to the nine months ended September 30, 2006;
- incremental margin earned as a result of higher production volumes
for certain production and complete vehicle assembly programs;
- acquisitions completed during or subsequent to the first nine months
of 2006;
- productivity and efficiency improvements at certain facilities,
including underperforming divisions; and
- the sale and/or closure of certain underperforming divisions during
or subsequent to the first nine months of 2006.
These factors were partially offset by:
- lower margins earned as a result of a decrease in vehicle production
volumes for 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;
- a favourable revaluation to warranty accruals during the third
quarter of 2006;
- costs incurred to develop and grow our business in Russia;
- 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 affiliation fees paid to Corporate;
- higher incentive compensation; and
- incremental customer price concessions.
Rest of World
EBIT in the Rest of World increased $16 million to $12 million for the nine months ended September 30, 2007 in comparison to a loss of $4 million for the nine months ended September 30, 2006. EBIT increased primarily as a result of:
- incremental margin earned on the increase in production sales
discussed above;
- operational efficiencies at certain facilities, including
underperforming divisions; and
- increased equity income earned on our 41% interest in Shin Young
Metal Ind. Co.
FIRST AND FINAL ADD TO FOLLOW