Magna announces fourth quarter and 2008 results
AURORA, ON, Feb. 24, 2009 -- Magna International Inc. (TSX: MG.A; NYSE: MGA) today reported financial results for the fourth quarter and year ended December 31, 2008.
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THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
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2008 2007 2008 2007
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Sales $ 4,836 $ 6,836 $ 23,704 $ 26,067
Operating (loss) income $ (165) $ 203 $ 328 $ 1,152
Net (loss) income $ (148) $ 28 $ 71 $ 663
Diluted (loss) earnings per
share $ (1.33) $ 0.24 $ 0.62 $ 5.86
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All results are reported in millions of U.S. dollars, except per share
figures, which are in U.S. dollars.
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YEAR ENDED DECEMBER 31, 2008
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We posted sales of $23.7 billion for 2008, a decrease of 9% from 2007. This lower sales level was a result of decreases in our North American production sales and complete vehicle assembly sales, offset in part by increases in our European and Rest of World production sales and our tooling, engineering and other sales.
During 2008, North American and European average dollar content per vehicle increased 1% and 12%, respectively, compared to 2007. During 2008, North American and European vehicle production declined 16% and 8%, respectively, compared to 2007.
Complete vehicle assembly sales decreased 18% to $3.3 billion for 2008 compared to $4.0 billion for 2007, while complete vehicle assembly volumes declined 37% to approximately 125 thousand units.
During 2008, operating income was $328 million, net income was $71 million and diluted earnings per share was $0.62, decreases of $824 million, $592 million and $5.24, respectively, each compared to 2007.
During 2008 and 2007, we recorded a number of unusual items, including impairment charges associated with long-lived assets and future tax assets, restructuring charges, foreign currency gains, net gain on disposal of property and future tax charges. The aggregate net charge for 2008 and 2007 related to unusual items totalled $313 and $183 million, respectively. On a per share basis, the aggregate net charge for unusual items totalled $2.75 and $1.61 in 2008 and 2007, respectively.
During 2008, we generated cash from operations of $1.3 billion before changes in non-cash operating assets and liabilities, and invested $275 million in non-cash operating assets and liabilities. Total investment activities for 2008 were $1.1 billion, including $739 million in fixed asset additions, a $231 million increase in investments and other assets and $158 million to purchase subsidiaries.
During 2008, we purchased for cancellation 3.5 million Class A Subordinate Voting Shares for cash consideration of $247 million, pursuant to the terms of our normal course issuer bid programs.
THREE MONTHS ENDED DECEMBER 31, 2008 ------------------------------------
We posted sales of $4.8 billion for the fourth quarter ended December 31, 2008, a decrease of 29% from the fourth quarter of 2007. This lower sales level was a result of decreases in our North American, European and Rest of World production sales and complete vehicle assembly sales, offset in part by increases in our tooling, engineering and other sales.
During the fourth quarter of 2008, our North American and European average dollar content per vehicle decreased 4% and 9%, respectively, each compared to the fourth quarter of 2007. In addition, North American and European vehicle production declined 25% and 26%, respectively, each compared to the fourth quarter of 2007.
Complete vehicle assembly sales decreased 51% to $479 million for the fourth quarter of 2008 compared to $981 million for the fourth quarter of 2007, while complete vehicle assembly volumes declined 60% to approximately 17 thousand units.
During the fourth quarter of 2008, operating loss was $165 million, net loss was $148 million and diluted loss per share was $1.33, decreases of $368 million, $176 million and $1.57, respectively, each compared to the fourth quarter of 2007.
During the fourth quarters of 2008 and 2007, we recorded a number of unusual items, including restructuring charges, impairment charges associated with long-lived assets and future tax assets, foreign currency gains, and a future tax charge. The aggregate net charge for the fourth quarters of 2008 and 2007 related to unusual items totalled $72 million and $144 million, respectively. On a per share basis, the aggregate net charge for unusual items for the fourth quarters of 2008 and 2007 totalled $0.65 and $1.21, respectively.
During the fourth quarter ended December 31, 2008, we generated cash from operations of $119 million before changes in non-cash operating assets and liabilities, and invested $257 million in non-cash operating assets and liabilities. Total investment activities for the fourth quarter of 2008 were $358 million, including $274 million in fixed asset additions, $49 million to purchase subsidiaries, and $35 million increase in other assets.
Siegfried Wolf, Magna's Co-Chief Executive Officer said: "We are facing one of the most difficult automotive environments in decades, across numerous markets. Our recent financial results reflect this. We have been taking actions to reduce fixed costs, minimize discretionary spending, and trim capital spending, all in an effort to restore profitability, conserve cash and maintain our strong balance sheet. At the same time, we are prudently investing for the future by spending on new programs, acquisitions and innovation, in order to further improve our competitive position and prospects for future growth when automotive markets finally recover. While these turbulent times have been painful for some of our employees, we believe our actions have been necessary to strengthen Magna for the future."
Don Walker, Magna's Co-Chief Executive Officer further commented: "The extent of financial and other support to the automotive industry made or proposed by governments around the world is encouraging. It shows that many leaders recognize the significant contribution that the automotive industry makes to the economies of their respective countries and to the global economy. I believe certain governments have also come to recognize the vital role that automotive suppliers play in keeping the industry functioning. We are hopeful that governments will recognize the need to protect amounts owing to suppliers in any restructuring of the industry."
A more detailed discussion of our consolidated financial results for the fourth quarter and year ended December 31, 2008 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.
DIVIDENDS ---------
Our Board of Directors yesterday declared a quarterly dividend with respect to our outstanding Class A Subordinate Voting Shares and Class B Shares for the quarter ended December 31, 2008. The dividend of U.S.$0.18 per share is payable on March 23, 2009 to shareholders of record on March 12, 2009.
We are the most diversified global automotive supplier. We design, develop and manufacture technologically advanced 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. Our capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; body and chassis systems; vision systems; electronic systems; exterior systems; powertrain systems; roof systems; as well as complete vehicle engineering and assembly.
We have approximately 74,000 employees in 240 manufacturing operations and 86 product development, engineering and sales centres in 25 countries.
------------------------------------------------------------------------- We will hold a conference call for interested analysts and shareholders to discuss our fourth quarter results on Tuesday, February 24, 2009 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 1-800-892-9785. The number for overseas callers is 1-212-231-2910. 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, including, without limitation: the potential for an extended global recession, including its impact on our liquidity; declining production volumes and sales levels; the impact of government financial intervention in the automotive industry; restructuring of the global automotive industry and the risk of the bankruptcy of one of our customers; the financial distress of some of our suppliers and the risk of their insolvency, bankruptcy or financial restructuring; restructuring and/or downsizing costs related to the rationalization of some of our operations; impairment charges; shifts in technology; our ability to successfully grow our sales to non-traditional customers; a reduction in the production volumes of certain vehicles, such as certain light trucks; our dependence on outsourcing by our customers; risks of conducting business in foreign countries, including Russia, India and China; our ability to quickly shift our manufacturing footprint to take advantage of lower cost manufacturing opportunities; the termination or non-renewal by our customers of any material contracts; disruptions in the capital and credit markets; fluctuations in relative currency values; our ability to successfully identify, complete and integrate acquisitions; our ability to offset price concessions demanded by our customers; the continued exertion of pricing pressures by our customers; warranty and recall costs; product liability claims in excess of our insurance coverage; 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; legal claims against us; 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 shareholder, the Stronach Trust; and other factors set out in our Annual Information Form filed with securities commissions in Canada and our annual report on Form 40-F filed with the United States Securities and Exchange Commission, and subsequent filings. In evaluating forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise.
------------------------------------------------------------------------- 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 year ended December 31, 2008 included in this Press Release, and the audited consolidated financial statements and MD&A for the year ended December 31, 2007 included in our 2007 Annual Report to Shareholders. The unaudited interim consolidated financial statements for the three months and year ended December 31, 2008 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, 2007 have been prepared in accordance with Canadian GAAP.
This MD&A has been prepared as at February 23, 2009. OVERVIEW -------------------------------------------------------------------------
We are the most diversified global automotive supplier. We design, develop and manufacture technologically advanced 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. Our capabilities include the design, engineering, testing and manufacture of automotive interior systems; seating systems; closure systems; body and chassis 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 December 31, 2008, we had 240 manufacturing divisions and 86 product development, engineering and sales centres in 25 countries.
Our operations are segmented on a geographic basis between North America, Europe and Rest of World (primarily Asia, South America and Africa). 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 capabilities. In addition to maintaining key customer, supplier and government contacts in their respective markets, our regional management teams centrally manage key aspects of our operations while permitting our divisions enough flexibility through our decentralized structure to foster an entrepreneurial environment.
HIGHLIGHTS -------------------------------------------------------------------------
2008 was a difficult year for the global automotive industry. The year began with the expectation of continued global growth in vehicle sales and production. However global economic conditions, including weakening economies and a severe credit crisis, affected every major automotive market in the second half of 2008. This led to the first annual decline in global automotive sales and production in several years.
The contraction in automotive sales and production negatively impacted the financial results and condition of essentially all industry participants. Many of the world's largest OEMs, including the Detroit 3, have asked for some measure of government assistance, in some cases in order to avert the imminent need to file for bankruptcy protection. General Motors and Chrysler have each received several billion dollars in loans from the U.S. Government, and each has requested several billion dollars more in the near term. Toyota, the world's largest OEM by vehicle sales, recently announced that it would post its first annual operating loss in 70 years. Many other large OEMs have reported or expect to report annual operating losses.
In North America, light vehicle production ("production") declined for the seventh straight year, to 12.6 million units. The rate of decline accelerated in the second half of 2008, with production down 22%, relative to the second half of 2007. For the Detroit 3, the production decline has been compounded by a shift in consumer preferences away from certain light trucks, as well as continued market share erosion. In the second half of 2008, Detroit 3 trucks, excluding cross-over utility vehicles, declined 44%, relative to the second half of 2007. The Detroit 3 have been adjusting their assembly capacity, particularly in North America, and have announced that they will continue to do so to offset the impacts of vehicle segment shifts and market share losses.
The decline in North American production reflects the significant decline in vehicle sales, which in the fourth quarter of 2008 dropped to annualized sales levels not seen in more than 25 years. The deteriorating U.S. economy, low consumer confidence and limited availability of financing for automotive consumers were among the largest drivers of the decline in North American automotive sales.
Certain of the conditions affecting North America have similarly impacted many other automotive markets. In particular, Western European automotive sales declined approximately 16% in 2008, with year-over-year rates of decline of 17%, 23% and 25%, in each of the last three months of 2008, respectively. Western European production declined 8% for 2008, but 26% in the fourth quarter of the year.
While 2008 was a difficult year for the industry, 2009 is expected to be even worse. Most industry observers expect light vehicle sales and production in most large automotive markets to be considerably weaker in 2009 than 2008. The first half of 2009 is expected to be particularly challenging, as many OEMs struggle to reduce dealer inventories.
Our financial results have been negatively impacted by the declines in production, especially in North America and Western Europe. In addition, in North America we have been negatively impacted both by the shift away from certain light trucks, on which we have relatively high average content, and by OEM capacity adjustments, of the Detroit 3. We have been taking actions to offset the production declines and capacity reductions, including:
- reducing our own capacity to adapt to the prevailing industry
conditions;
- consolidating, closing or selling a number of facilities,
particularly in North America;
- reducing discretionary spending across the organization; and
- reducing or deferring capital spending to the extent reasonably
possible.
As a result of our capacity reduction actions, we have incurred considerable restructuring charges in 2008, and expect to incur additional charges in 2009. We have also recorded impairment charges, reflecting the decline in value of certain of our long-lived assets.
Despite our actions, we have not been able to reduce costs at the rate that production has declined, nor do we believe it is prudent to capacitize our business for current levels of production. As a result, our sales and earnings have been, and at least in the short term will continue to be, negatively impacted by the current automotive environment.
The bankruptcy of one or more of our major customers remains a significant negative risk to our business, including our results from operations, financial condition and cash flow, although the extent of risk is difficult to estimate. Two of our largest customers in North America, General Motors and Chrysler have indicated that they require additional U.S. Government loans in the near term, and each has considerable execution risks, involved in their financial and operational restructuring, particularly given the present level of uncertainty in the industry.
2009 is expected to include massive global industry restructuring, involving a number of OEMs and auto suppliers. With our strong balance sheet position and cash flow, we believe in the medium term we may benefit from potential industry changes, including supplier consolidation. Beyond 2009, we expect the global auto industry to return to growth, and we anticipate that with the actions we are taking in our traditional markets, together with our planned growth in new markets, we will remain a key supplier to the auto industry.
FINANCIAL RESULTS SUMMARY -------------------------------------------------------------------------
During 2008, we posted sales of $23.7 billion, a decrease of 9% from 2007. This lower sales level was a result of decreases in our North American production sales and complete vehicle assembly sales, offset in part by increases in our European and Rest of World production sales and tooling, engineering and other sales. Comparing 2008 to 2007:
- North American average dollar content per vehicle increased 1%, while
vehicle production declined 16%;
- European average dollar content per vehicle increased 12%, while
vehicle production declined 8%; and
- Complete vehicle assembly sales decreased 18% to $3.3 billion from
$4.0 billion and complete vehicle assembly volumes declined 37% to
approximately 125 thousand units.
During 2008, we generated operating income of $328 million compared to $1.15 billion for 2007. Excluding the unusual items recorded in 2008 and 2007, as discussed in the "Unusual Items" section below, operating income for 2008 decreased $618 million or 52% primarily due to decreased margins earned on reduced sales as a result of significantly lower production volumes, in particular on many high content programs in North America. In addition, the remaining decrease in operating income was due to:
- operational inefficiencies and other costs at certain facilities;
- decreased margins earned on lower volumes for certain assembly
programs;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- increased commodity costs;
- an additional impairment of our investments in asset-backed
commercial paper ("ABCP"), as discussed in the "Cash Resources"
section below;
- costs incurred in the preparation for upcoming launches or for
programs that have not fully ramped up production;
- costs associated with electric vehicle development; and
- incremental customer price concessions.
These factors were partially offset by:
- productivity and efficiency improvements at certain divisions;
- the benefit of restructuring activities during or subsequent to 2007;
- lower employee profit sharing;
- lower incentive compensation;
- a favourable settlement on research and development incentives;
- increased margins earned on production programs that launched during
or subsequent to 2007;
- an increase in reported U.S. dollar operating income due to the
strengthening of the euro, against the U.S. dollar;
- a favourable revaluation of warranty accruals; and
- incremental margin earned related to acquisitions completed during
2008.
During 2008, we generated net income of $71 million compared to $663 million for 2007. Excluding the unusual items recorded in 2008 and 2007, as discussed in the "Unusual Items" section below, net income for 2008 decreased $462 million or 55%. The decrease in net income was as a result of the decrease in operating income partially offset by lower income taxes.
During 2008, diluted earnings per share was $0.62 compared to $5.86 for 2007. Excluding the unusual items recorded in 2008 and 2007, as discussed in the "Unusual Items" section below, diluted earnings per share for 2008 decreased $4.10 or 55%. The decrease in diluted earnings per share is primarily as a result of the decrease in net income. The weighted average number of diluted shares outstanding during 2008 was substantially unchanged from 2007, decreasing by 0.2 million shares. The additional Class A subordinate Voting Shares issued in 2007 related to the arrangement (the "Arrangement") with Russian Machines were offset by the repurchase and cancellation of Class A Subordinate Voting Shares under the terms of our Substantial Issuer Bid, which was fully completed in 2007, as well as our ongoing Normal Course issuer Bids and the reduced number of shares included with respect to the Convertible Subordinated Debentures in 2008, since the inclusion of those shares would have been anti-dilutive in 2008.
UNUSUAL ITEMS
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During the three months and years ended December 31, 2008 and 2007, we
recorded certain unusual items as follows:
2008 2007
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Diluted Diluted
Operat- Earnings Operat- Earnings
ing Net per ing Net per
Income Income Share Income Income Share
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Fourth Quarter
Impairment
charges(1) $ (16) $ (16) $ (0.15) $ (34) $ (26) $ (0.22)
Restructuring
charges(1) (80) (56) (0.50) (17) (12) (0.10)
Foreign currency
gain(2) - - - 19 17 0.14
Valuation
allowance on
future tax
assets(3) - - - - (115) (0.97)
Future tax
charge(3) - - - - (8) (0.06)
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Total fourth
quarter unusual
items (96) (72) (0.65) (32) (144) (1.21)
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Third Quarter
Impairment
charges(1) $ (258) $ (223) $ (2.00) $ - $ - $ -
Restructuring
charges(1) (4) (4) (0.04) (8) (5) (0.05)
Foreign currency
gain(2) 116 116 1.04 7 7 0.06
Valuation
allowance on
future tax
assets(3) - (123) (1.10) - - -
Future tax
charge(3) - - - - (40) (0.35)
Sale of facility(4) - - - (12) (7) (0.06)
Sale of property(4) - - - 36 30 0.27
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Total third quarter
unusual items (146) (234) (2.10) 23 (15) (0.13)
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Second Quarter
Impairment
charges(1) (9) (7) (0.06) (22) (14) (0.12)
Restructuring
charges(1) - - - (14) (10) (0.09)
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Total second quarter
unusual items (9) (7) (0.06) (36) (24) (0.21)
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Total year to date
unusual items $ (251) $ (313) $ (2.75) $ (45) $ (183) $ (1.61)
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(1) Restructuring and Impairment Charges
During 2008 and 2007, we recorded impairment charges as follows:
2008 2007
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Operating Net Operating Net
Income Income Income Income
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Fourth Quarter
North America $ 12 $ 12 $ 22 $ 14
Europe 4 4 12 12
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Total fourth
quarter impairment
charges 16 16 34 26
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Third Quarter
North America 258 223 - -
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Second Quarter
North America 5 3 22 14
Europe 4 4 - -
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Total second
quarter impairment
charges 9 7 22 14
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Total year to date
impairment charges $ 283 $ 246 $ 56 $ 40
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(a) For the year ended December 31, 2008
Impairment Charges
Historically, we completed our annual goodwill and long-lived asset
impairment analyses in the fourth quarter of each year. However, as a
result of the significant and accelerated declines in vehicle
production volumes, primarily in North America, we reviewed goodwill
and long-lived assets for impairment during the third quarter of
2008.
However, as a result of further declines in vehicle production
volumes, during the fourth quarter of 2008 we once again completed
our goodwill and long-lived asset impairment analyses. Based on these
analyses, during 2008 we recorded long-lived asset impairment charges
of $ 283 million, related primarily to our powertrain, and interior
and exterior systems operations in the United States and Canada. No
goodwill impairment charge was recorded during 2008 or 2007. However,
we determined that goodwill could potentially be impaired at our
powertrain North America reporting unit. Therefore, as required by
GAAP, we made a reasonable estimate of the goodwill impairment by
determining the implied fair value of goodwill in the same manner as
if we had acquired the reporting unit as at year end. Our best
estimate is that goodwill is not impaired; however, any adjustment to
the estimated impairment charge based on finalization of the
impairment analysis will be recorded during 2009. Due to the judgment
involved in determining the fair value of the reporting unit's assets
and liabilities, the final amount of the goodwill impairment charge,
if any, could differ from those estimated.
At our powertrain operations, particularly at a facility in Syracuse,
New York, asset impairment charges of $189 million were recorded
primarily as a result of the following factors:
- a dramatic market shift away from truck programs, in particular
four wheel drive pick-up trucks and SUVs;
- excess die-casting, machining and assembly capacity; and
- historical losses that are projected to continue throughout our
business planning period.
At our interiors and exteriors operations, we recorded $74 million of
asset impairment charges primarily as a result of the following
factors:
- significantly lower volumes on certain pick-up truck and SUV
programs;
- the loss of certain replacement business;
- capacity utilization that is not sufficient to support the current
overhead structure; and
- historical losses that are projected to continue throughout our
business planning period.
Additionally, in North America we recorded asset impairment charges
of $12 million related to dedicated assets at a chassis systems
facility in Canada and a seating systems facility in the United
States. In Europe, we recorded an $8 million asset impairment related
to specific assets at an interior systems facility in the United
Kingdom and specific assets at a powertrain facility in Austria.
Restructuring Charges
During 2008, we recorded restructuring and rationalization costs of
$84 million in North America.
These restructuring and rationalization costs were primarily recorded
during the fourth quarter of 2008 and relate to: (i) the
consolidation of interiors and exteriors operations in Canada and the
United States; (ii) the closure of a seating systems facility in St.
Louis; (iii) the consolidation of closure systems operations in
Canada; and (iv) the consolidation of our powertrain die casting
operations in Canada and the United States.
During 2008, we also incurred costs related to downsizing various
operations.
In addition, we expect to incur additional restructuring and
rationalization charges during 2009 in the range of $40 million to
$60 million related to activities that were initiated in 2008.
(b) For the year ended December 31, 2007
Impairment Charges
In North America, we recorded asset impairments of $44 million
related to an interior systems facility in the United States and
certain powertrain facilities in the United States and Canada. The
asset impairments were recorded as a result of: (i) ceasing
operations and/or use of certain assets at two powertrain facilities;
and (ii) losses that were projected to be incurred throughout the
business planning period based on existing and projected sales
levels.
In addition, due to recurring losses that were projected to continue
as a result of existing sales levels and limited sales growth
prospects, during 2007 we recorded asset impairments of $12 million
relating to certain assets and facilities in Germany, Austria, the
Czech Republic and Spain.
Restructuring Charges
During 2007, we recorded restructuring and rationalization charges of
$39 million in North America and Europe.
In North America, we recorded $35 million of restructuring and
rationalization charges related to: (i) the closure of exterior
systems facilities in Canada and the United States; (ii) the
consolidation of powertrain facilities in Canada; (iii) the closure
of a mirror facility in the United States; and (iv) the closure of a
stamping facility in the United States.
In Europe, we recorded restructuring charges of $4 million related to
the closure of a sunvisors facility in Spain.
(2) Foreign Currency Gains
In the normal course of business, we review our cash investment and
tax planning strategies, including where such funds are invested. As
a result of these reviews, during 2008 and 2007 we repatriated funds
from Europe and as a result recorded foreign currency gains of $116
million and $26 million, respectively.
(3) Income Taxes
(a) For the year ended December 31, 2008
During the third quarter of 2008, we recorded a $123 million charge
to establish valuation allowances against the remaining future tax
assets in the United States.
Accounting standards require that we assess whether valuation
allowances should be established against our future income tax assets
based on the consideration of all available evidence using a "more
likely than not" standard. The factors we use to assess the
likelihood of realization are our past history of earnings, forecast
of future taxable income, and available tax planning strategies that
could be implemented to realize the future tax assets. The valuation
allowances were required in the United States based on:
- historical consolidated losses at our U.S. operations that are
expected to continue in the near-term;
- the accelerated deterioration of near-term automotive market
conditions in the United States as discussed above; and
- significant and inherent uncertainty as to the timing of when we
would be able to generate the necessary level of earnings to
recover these future tax assets.
(b) For the year ended December 31, 2007
Based on the accounting standards discussed above, during the fourth
quarter of 2007 we determined that valuation allowances against
certain of our future tax assets in the United States were required.
Accordingly, we recorded a $115 million valuation allowance against
these future tax assets.
Also during 2007, we recorded a $53 million charge to future income
tax expense as a result of an alternative minimum tax introduced in
Mexico, offset in part by a $5 million future income tax recovery
related to a reduction in future income tax.
(4) Other Unusual Items
During 2007, we entered into an agreement to sell one underperforming
exterior systems facility in Europe and as a result, incurred a loss
on disposition of the facility of $12 million. Also during 2007, we
disposed of land and building in the United Kingdom and recorded a
gain on disposal of $36 million.
INDUSTRY TRENDS AND RISKS
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A number of trends continue to have a significant impact on the global automotive industry and our business, including:
- a precipitous drop in global light vehicle production and sales,
particularly since September 2008;
- the restructuring of the global automotive industry and the growing
risk of OEM insolvency proceedings;
- significant government financial intervention in the global
automotive and financial services industries;
- the accelerated deterioration of the financial condition of the
automotive supply base and the corresponding increase in our
operational and financial exposure as many of these suppliers could
become bankrupt, insolvent or cease operations;
- the continued exertion of significant pricing pressure by OEMs;
- increasing governmental intervention in the global automotive
industry, particularly fuel economy and emissions regulations;
- increasing government incentives and consumer demand for more fuel-
efficient and environmentally-friendly vehicles with alternative-
energy fuel systems and additional safety features;
- the growth of the automotive industry in China, Thailand, India,
Russia, Brazil and other low cost countries, and the migration of
component and vehicle design, development, engineering and
manufacturing to certain of these lower cost countries;
- the growth of the A to D vehicle segments (micro to mid-size cars),
particularly in emerging markets; and
- the continued consolidation of vehicle platforms.
The following are some of the more significant risks that could affect our ability to achieve our desired results:
- We are in the midst of a significant global recession. Current
conditions are causing tremendous global economic uncertainty, thus
subjecting us to significant planning risk with respect to our
business. We cannot predict when the recession will end or what our
prospects will be once the recession has ended and markets resume to
more normal conditions. The continuation of current economic
conditions for an extended period of time could have a material
adverse effect on our profitability and financial condition.
- While we believe we have sufficient liquidity to survive the current
recession, the recession may last longer and/or be more severe than
we currently anticipate. The continuation of current economic
conditions for an extended period of time could have a material
adverse effect on our profitability and financial condition.
- While the global automotive industry is cyclical and is currently
experiencing a significant downturn, a number of characteristics of
the current downturn have made it more severe than prior ones,
including the disruption of global credit markets since September
2008 and the corresponding reduction in access to credit,
particularly for purposes of vehicle financing, the deterioration of
housing and equity markets and the resulting erosion of personal net
worth, all of which of led to extremely low U.S. Consumer confidence,
which has a significant impact on consumer demand for vehicles.
Automotive sales have dropped precipitously and accordingly
production has been cut drastically in order to reflect the current,
historically low level of demand for vehicles. The continuation of
current or lower production volumes and sales levels for an extended
period of time could have a material adverse effect on our
profitability.
- In light of the continuing global recession and its pronounced impact
on the automotive industry, governments in various countries have
announced or provided financial assistance to OEMs. Governments have
attached or may attach stringent conditions to this financial
support, including conditions relating to specific restructuring
actions such as plant rationalizations, labour reductions, sale or
wind-down of vehicle brands, elimination of production and/or other
cost-cutting initiatives. There is no assurance that government
financial intervention in the automotive industry will be successful
to prevent the bankruptcy of one or more OEMs. Since governmental
financial intervention in the automotive industry is still at an
early stage, it is not yet possible to assess the potential impact on
us, however, the bankruptcy of any of our major customers could have
a material adverse effect on our profitability and financial
condition.
- Some of our traditional customers, particularly the Detroit 3 OEMs,
are currently at risk of insolvency. Notwithstanding any government
assistance that has been or may be extended to any of our major
customers, such customers may seek bankruptcy protection in order to
restructure their business and operations. On February 20, 2009, SAAB
filed for court supervised reorganization. Since OEMs rely on a
highly interdependent network of suppliers, an OEM bankruptcy could
have a "domino effect", causing multiple supplier bankruptcies and
thus the complete seizure of the automotive industry for a prolonged
period of time, all of which would have a material adverse effect on
our profitability and financial condition.
- We rely on a number of suppliers to supply us with a wide range of
components required in connection with our business. Economic
conditions, production volume cuts, intense pricing pressures and
other factors have left many automotive suppliers in varying degrees
of financial distress. The insolvency or bankruptcy of any such
supplier could disrupt the supply of components to us or our
customers, potentially causing the temporary shut-down of our or our
customers' production lines. Any prolonged disruption in the supply
of critical components to us or our customers, the inability to re-
source or insource production of a critical component from a
financially distressed automotive components sub-supplier, or any
temporary shut-down of one of our production lines or the production
lines of one of our customers, could have a material adverse effect
on our profitability. Additionally, the insolvency, bankruptcy or
financial restructuring of any of our critical suppliers could result
in us incurring unrecoverable costs related to the financial work-out
of such suppliers and/or increased exposure for product liability,
warranty or recall costs relating to the components supplied by such
suppliers to the extent such supplier is not able to assume
responsibility for such amounts, which could have an adverse effect
on our profitability.
- In response to current industry conditions, it is likely that we may
further rationalize some of our production facilities. In the course
of such rationalization, we will incur further restructuring and/or
downsizing costs related to plant closings, relocations and employee
severance costs. Such costs could have an adverse effect on our
short-term profitability. In addition, we are working to turn around
financially underperforming divisions, however, there is no guarantee
that we will be successful in doing so with respect to some or all
such divisions.
- We recorded significant impairment charges related to future tax
assets and fixed assets in recent years and may continue to do so in
the future. The bankruptcy of a significant customer or the early
termination, loss, renegotiation of the terms of, or delay in the
implementation of any significant production contract could be
indicators of impairment. In particular, at December 31, 2008 we
determined that goodwill could potentially be impaired at our
Powertrain North America reporting unit. Our current best estimate is
that goodwill is not impaired. However, to the extent that forward-
looking assumptions regarding the impact of improvement plans on
current operations, insourcing and other new business opportunities,
program price and cost assumptions on current and future business,
the timing of new program launches and future forecasted production
volumes are not met, any resulting impairment loss could have a
material adverse effect on our profitability.
- We continue to invest in technology and innovation, including certain
alternative-energy technologies which we believe will be integral in
coming years. Our ability to anticipate changes in technology and to
successfully develop and introduce new and enhanced products on a
timely basis using such technologies will be a significant factor in
our ability to remain competitive. If there is a shift away from the
use of such technologies, our costs may not be fully recovered. In
addition, if other technologies in which our investment is not as
great or our expertise is not as developed emerge as the industry-
leading technologies, we may be placed at a competitive disadvantage,
which could have a material adverse effect on our profitability and
financial condition.
- Although we supply parts to all of the leading OEMs, a significant
majority of our sales are to five such customers, two of which are
in need of further government assistance due to their financial
condition. While we have diversified our customer base somewhat in
recent years and continue to attempt to further diversify,
particularly to increase our business with Asian-based OEMs, there is
no assurance we will be successful. Our inability to successfully
grow our sales to non-traditional customers could have a material
adverse effect on our profitability.
- While we supply parts for a wide variety of vehicles produced in
North America and Europe, we do not supply parts for all vehicles
produced, nor is the number or value of parts evenly distributed
among the vehicles for which we do supply parts. Shifts in market
share among vehicles (including shifts away from vehicles we assemble
or shifts away from specific parts we produce) or the early
termination, loss, renegotiation of the terms of, or delay in, the
implementation of any significant production or assembly contract
could have a material adverse effect on our profitability.
- We are dependent on the outsourcing of components, modules and
assemblies, as well as complete vehicles, by OEMs. The extent of OEM
outsourcing is influenced by a number of factors, including relative
cost, quality and timeliness of production by suppliers as compared
to OEMs, capacity utilization, and labour relations among OEMs, their
employees and unions. As a result of recent concessions granted by
the UAW and CAW with respect to their collective bargaining
agreements with the "Detroit 3" OEMs and potentially further
reductions as contemplated by certain government support, as well as
significant excess capacity at OEM facilities, such OEMs may insource
some production which had previously been outsourced. Outsourcing of
complete vehicle assembly is particularly dependent on the degree of
unutilized capacity at the OEMs' own assembly facilities, in addition
to the foregoing factors. A reduction in outsourcing by OEMs, or the
loss of any material production or assembly programs coupled with the
failure to secure alternative programs with sufficient volumes and
margins, could have a material adverse effect on our profitability.
- Many of our customers have sought, and will likely continue to seek
to take advantage of lower operating costs in China, Thailand, India,
Russia, Brazil and other low cost countries. While we continue to
expand our manufacturing footprint with a view to taking advantage of
manufacturing opportunities in low cost countries, we cannot
guarantee that we will be able to fully realize such opportunities.
Additionally, the establishment of manufacturing operations in
emerging market countries carries its own risks, including those
relating to political and economic instability; trade, customs and
tax risks; currency exchange rates; currency controls; insufficient
infrastructure; and other risks associated with conducting business
internationally. The inability to quickly adjust our manufacturing
footprint to take advantage of manufacturing opportunities in low
cost countries could harm our ability to compete with other suppliers
operating in or from such low cost countries, which could have an
adverse effect on our profitability.
- Since September 2008, several major financial institutions have
failed or required massive government intervention in order to
prevent collapse. The turmoil in the financial sector has had a
significant effect on the global economy, and has contributed to the
current global recession. The failure of any major financial
institutions could lead to further disruptions in capital and credit
markets and could adversely affect our and our customers' ability to
access needed liquidity for working capital. In addition, in the
event of a failure of a financial institution in which we invest our
cash reserves, that is a counterparty in a derivative transaction or
a lender to us, we face the risk that that our cash reserves and
amounts owing to us pursuant to derivative transactions may not be
fully recoverable, or the amount of credit available to us may be
significantly reduced, . All of these risks could have a significant
impact on our financial condition.
- Although our financial results are reported in U.S. dollars, a
significant portion of our sales and operating costs are realized in
Canadian dollars, euros, British pounds and other currencies. Our
profitability is affected by movements of the U.S. dollar against the
Canadian dollar, the euro, the British pound and other currencies in
which we generate revenues and incur expenses. However, as a result
of hedging programs employed by us, primarily in Canada, foreign
currency transactions are not fully impacted by the recent movements
in exchange rates. We record foreign currency transactions at the
hedged rate where applicable. Despite these measures, significant
long-term fluctuations in relative currency values, in particular a
significant change in the relative values of the U.S. dollar,
Canadian dollar, euro or British pound, could have an adverse effect
on our profitability and financial condition and any sustained change
in such related currency values could adversely impact our
competitiveness in certain geographic regions.
- We have completed a number of significant acquisitions in recent
years and may continue to do so in the future. In those product areas
in which we have identified acquisitions as critical to our business
strategy, we may not be able to identify suitable acquisition targets
or successfully acquire any suitable targets which we identify.
Additionally, we may not be able to successfully integrate or achieve
anticipated synergies from those acquisitions which we do complete
and such failure could have a material adverse effect on our
profitability.
- Prior to the onset of the current global recession and industry
downturn, we were under significant pricing pressure, as well as
pressure to absorb costs related to product design, engineering and
tooling, as well as other items previously paid for directly by OEMs.
These pressures are expected to continue, even after the industry
begins to recover. The continuation or intensification of these
pricing pressures and pressure to absorb costs could have an adverse
effect on our profitability.
- Our customers continue to demand that we bear the cost of the repair
and replacement of defective products which are either covered under
their warranty or are the subject of a recall by them. Warranty
provisions are established based on our best estimate of the amounts
necessary to settle existing or probable claims on product defect
issues. Recall costs are costs incurred when government regulators
and/or our customers decide to recall a product due to a known or
suspected performance issue, and we are required to participate
either voluntarily or involuntarily. Currently, under most customer
agreements, we only account for existing or probable warranty claims.
Under certain complete vehicle engineering and assembly contracts, we
record an estimate of future warranty-related costs based on the
terms of the specific customer agreements and the specific customer's
warranty experience. The obligation to repair or replace such
products could have a material adverse effect on our profitability
and financial condition if the actual costs are materially different
from such estimates.
- From time to time, we may become liable for legal, contractual and
other claims by various parties, including, customers, suppliers,
former employees, class action plaintiffs and others. On an ongoing
basis, we attempt to assess the likelihood of any adverse judgments
or outcomes to these claims, although it is difficult to predict
final outcomes with any degree of certainty. At this time, we do not
believe that any of the claims to which we are party will have a
material adverse effect on our financial position, however, we cannot
provide any assurance to this effect.
RESULTS OF OPERATIONS
-------------------------------------------------------------------------
Average Foreign Exchange
For the three months For the year
ended December 31, ended December 31,
---------------------- ----------------------
2008 2007 Change 2008 2007 Change
-------------------------------------------------------------------------
1 Canadian dollar equals
U.S. dollars 0.828 1.019 - 19% 0.944 0.936 + 1%
1 euro equals U.S. dollars 1.320 1.450 - 9% 1.470 1.371 + 7%
1 British pound equals
U.S. dollars 1.569 2.044 - 23% 1.852 2.001 - 8%
-------------------------------------------------------------------------
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 changes in these foreign exchange rates for the three months and year ended December 31, 2008 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, impacts reported results.
RESULTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 2008
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Sales
2008 2007 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (millions of units)
North America 12.622 15.102 - 16%
Europe 14.596 15.938 - 8%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 867 $ 859 + 1%
Europe $ 486 $ 435 + 12%
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Sales
External Production
North America $ 10,938 $ 12,977 - 16%
Europe 7,089 6,936 + 2%
Rest of World 515 411 + 25%
Complete Vehicle Assembly 3,306 4,008 - 18%
Tooling, Engineering and Other 1,856 1,735 + 7%
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Total Sales $ 23,704 $ 26,067 - 9%
-------------------------------------------------------------------------
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External Production Sales - North America
External production sales in North America decreased 16% or $2.04 billion to $10.94 billion for 2008 compared to $12.98 billion for 2007. This decrease in production sales reflects a 16% decrease in North American vehicle production volumes partially offset by a 1% increase in our North American average dollar content per vehicle. More importantly, during 2008 our largest customers in North America continued to reduce vehicle production volumes compared to 2007. While North American vehicle production volumes declined 16% in 2008 compared to 2007, Chrysler, Ford and GM vehicle production declined 25%, 21% and 19%, respectively.
Our average dollar content per vehicle grew by 1% or $8 to $867 for 2008 compared to $859 for 2007, primarily as a result of:
- the launch of new programs during or subsequent to 2007, including:
- the Dodge Journey;
- the Dodge Grand Caravan, Chrysler Town & Country and Volkswagen
Routan;
- the Buick Enclave and Chevrolet Traverse;
- the Ford Flex; and
- the Mazda 6;
- acquisitions completed subsequent to 2007, including:
- a substantial portion of Plastech Engineered Products Inc.'s
("Plastech") exteriors business; and
- a stamping and sub-assembly facility in Birmingham, Alabama from
Ogihara America Corporation ("Ogihara");
- increased production and/or content on certain programs, including
the Chevrolet Cobalt and Pontiac G5; 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 pickups and SUVs;
- the Ford Explorer and Mercury Mountaineer;
- the Ford Edge and Lincoln MKX;
- the Ford F-Series SuperDuty;
- the Chevrolet Equinox and Pontiac Torrent;
- the Hummer H3; and
- the Dodge Nitro;
- programs that ended production during or subsequent to 2007,
including the Chrysler Pacifica; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 2% or $153 million to $7.1 billion for 2008 compared to $6.9 billion for 2007. This increase in production sales reflects a 12% increase in our European average dollar content per vehicle partially offset by an 8% decrease in European vehicle production volumes.
Our average dollar content per vehicle grew by 12% or $51 to $486 for 2008 compared to $435 for 2007, primarily as a result of:
- the launch of new programs during or subsequent to 2007, including:
- the Volkswagen Tiguan; and
- the MINI Clubman;
- an increase in reported U.S. dollar sales primarily due to the
strengthening of the euro against the U.S. dollar; and
- increased production and/or content on certain programs, including:
- the Mercedes-Benz C-Class;
- the Volkswagen Transporter; and
- the smart fortwo.
These factors were partially offset by:
- the impact of lower production and/or content on certain programs,
including:
- the BMW X3; and
- the MINI Cooper;
- the sale of certain facilities during or subsequent to 2007;
- programs that ended production during or subsequent to 2007,
including the Chrysler Voyager; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in Rest of World increased 25% or $104 million to $0.5 billion for 2008 compared to $0.4 billion for 2007. The increase in production sales is primarily as a result of:
- the launch of new programs in South Africa and China during or
subsequent to 2007;
- increased production and/or content on certain programs in China and
Brazil; and
- an increase in reported U.S. dollar sales as a result of the
strengthening of the Brazilian real and Chinese Renminbi, each
against the U.S. dollar.
These factors were partially offset by a decrease in reported U.S. dollar sales as a result of the weakening of the Korean Won 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.
2008 2007 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 3,306 $ 4,008 - 18%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed:
BMW X3, Mercedes-Benz G-Class, and
Saab 93 Convertible 97,229 131,056 - 26%
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander 28,207 68,913 - 59%
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125,436 199,969 - 37%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly sales decreased 18% or $0.7 billion to $3.3 billion for 2008 compared to $4.0 billion for 2007 while assembly volumes decreased 37% or 74,533 units. The decrease in complete vehicle assembly sales was primarily as a result of:
- a decrease in assembly volumes for the BMW X3, Saab 93 Convertible,
Chrysler 300, Jeep Commander and Grand Cherokee; and
- the end of production of the Chrysler Voyager at our Graz assembly
facility in the fourth quarter of 2007.
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 Mercedes-Benz G-Class.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 7% or $121 million to $1.86 billion for 2008 compared to $1.74 billion for 2007.
In 2008, the major programs for which we recorded tooling, engineering and other sales were:
- the MINI Cooper, Clubman and Crossman; - the BMW Z4, X3 and 1-Series; - GM's full-size pickups; - the Cadillac SRX and Saab 9-4X; - the Mazda 6; - the Porsche 911 / Boxster; - the Mercedes-Benz M-Class; - the Chevrolet Equinox, Pontiac Torrent and Suzuki XL7; - the Ford F-Series; - the Lincoln MKS; and - the Audi A5.
In 2007, the major programs for which we recorded tooling, engineering and other sales were:
- GM's full-size pickups; - the Ford Flex; - the BMW X3, Z4, 1-Series and 3-Series programs; - the Dodge Grand Caravan and Chrysler Town & Country; - the Dodge Journey; - the Mazda 6; - the MINI Cooper; - the smart fortwo; - the Audi A5; - the Mercedes C-Class, GL-Class and R-Class; and - the Ford F-Series SuperDuty.
In addition, tooling, engineering and other sales benefited from the strengthening of the euro against the U.S. dollar.
Gross Margin
Gross margin decreased 22% or $746 million to $2.72 billion for 2008 compared to $3.46 billion for 2007 and gross margin as a percentage of total sales decreased to 11.5% compared to 13.3%. The unusual items discussed previously in the "Unusual Items" section negatively impacted gross margin as a percent of total sales in 2008 and 2007 by 0.3% and 0.1%, respectively. Excluding these unusual items, the 1.6% decrease in gross margin as a percentage of total sales was primarily as a result of:
- lower gross margin earned as a result of a significant decrease in
production volumes, in particular on many high content programs in
North America;
- operational inefficiencies and other costs at certain facilities, in
particular at certain exterior, interior and powertrain systems
facilities in North America;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- an increase in tooling and other sales that earn low or no margins;
- increased commodity costs; and
- incremental customer price concessions.
These factors were partially offset by:
- productivity and efficiency improvements at certain facilities;
- the decrease in complete vehicle assembly sales which have a lower
gross margin than our consolidated average;
- lower employee profit sharing;
- a favourable settlement on research and development incentives;
- a favourable revaluation of warranty accruals; and
- the benefit of restructuring activities that were undertaken during
or subsequent to 2007.
Depreciation and Amortization
Depreciation and amortization costs increased $1 million to $873 million for 2008 compared to $872 million for 2007. Excluding the unusual items discussed previously in the "Unusual Items" section, depreciation and amortization increased by $7 million. The increase in depreciation and amortization in 2008 compared to 2007 was due to the strengthening of the euro against the U.S. dollar. Excluding the effect of foreign exchange, depreciation and amortization decreased primarily as a result of:
- the write-down of certain assets during or subsequent to 2007; and
- the sale or disposition of certain facilities during or subsequent to
2007.
These factors were partially offset by:
- acquisitions completed subsequent to 2007 including:
- a substantial portion of Plastech's exteriors business; and
- a facility from Ogihara; and
- an increase depreciation and amortization related to capital spending
during or subsequent to 2007.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales of 5.6% for 2008 remained unchanged compared to 2007. SG&A expenses decreased 10% or $142 million to $1.3 billion for 2008 compared to $1.5 billion for 2007. Excluding the unusual items discussed previously in the "Unusual Items" section, SG&A expenses decreased by $78 million primarily as a result of:
- lower incentive compensation;
- reduced spending at certain facilities;
- lower employee profit sharing;
- the sale or disposition of certain facilities during or subsequent to
2007; and
- reduced spending as a result of the restructuring and downsizing
activities that were initiated during or subsequent to 2007.
These factors were partially offset by:
- an increase in reported U.S. dollar SG&A due to the strengthening of
the euro against the U.S. dollar;
- a $41 million (2007 - $12 million) write-down of our investment in
ABCP as discussed in the "Cash Resources" section below;
- higher infrastructure costs related to programs that launched during
or subsequent to 2007; and
- higher infrastructure costs related to the acquisition from Ogihara.
Impairment Charges
Impairment charges increased $227 million to $283 million for 2008 compared to $56 million for 2007. For a complete discussion of the impairment charges, see the "Unusual Items" section above and note 2 of the accompanying unaudited interim consolidated financial statements for the three months and year ended December 31, 2008.
Earnings before Interest and Taxes ("EBIT")(1)
2008 2007 Change
-------------------------------------------------------------------------
North America $ (106) $ 688 N/A
Europe 241 359 - 33%
Rest of World 32 20 + 60%
Corporate and Other 99 23 + 330%
-------------------------------------------------------------------------
Total EBIT $ 266 $ 1,090 - 76%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the years ended December 31, 2008 and 2007 were the following unusual items, which have been discussed previously in the "Unusual Items" section.
2008 2007
-------------------------------------------------------------------------
North America
Impairment charges $ (275) $ (44)
Restructuring charges (84) (35)
Foreign currency gain - 23
-------------------------------------------------------------------------
(359) (56)
-------------------------------------------------------------------------
Europe
Impairment charges (8) (12)
Restructuring charges - (4)
Sale of facility - (12)
Sale of property - 36
-------------------------------------------------------------------------
(8) 8
-------------------------------------------------------------------------
Corporate and Other
Foreign currency gain 116 3
-------------------------------------------------------------------------
$ (251) $ (45)
-------------------------------------------------------------------------
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(1) EBIT is defined as income from operations before income taxes as
presented on our unaudited interim consolidated financial statements
before net interest income.
North America
EBIT in North America decreased $794 million to a loss of $106 million for 2008 compared to earnings of $688 million for 2007. Excluding the North American unusual items discussed previously in the "Unusual Items" section, the $491 million decrease in EBIT was primarily due to decreased margins earned on reduced sales as a result of significantly lower production volumes, in particular on many high content programs. In addition, the remaining decrease in earnings is primarily as a result of:
- operational inefficiencies and other costs at certain facilities, in
particular at certain powertrain, exterior and interior systems
facilities;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States;
- increased commodity costs; and
- incremental customer price concessions.
These factors were partially offset by:
- lower affiliation fees paid to corporate;
- the benefit of restructuring activities during or subsequent to 2007;
- productivity and efficiency improvements at certain facilities;
- a favourable settlement on research and development incentives;
- lower incentive compensation;
- lower employee profit sharing;
- incremental margin earned on new programs that launched during or
subsequent to 2007; and
- incremental margin earned related to the acquisitions from Ogihara
and Plastech.
Europe
EBIT in Europe decreased 33% or $118 million to $241 million for 2008 compared to $359 million for 2007. Excluding the European unusual items discussed previously in the "Unusual Items" section, the $102 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
Chrysler Voyager at our Graz assembly facility in the fourth quarter
of 2007;
- operational inefficiencies and other costs at certain 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; and
- incremental customer price concessions.
These factors were partially offset by:
- productivity and efficiency improvements at certain facilities, in
particular at certain interior systems facilities;
- lower employee profit sharing;
- the benefit of restructuring activities during or subsequent to 2007;
- a favourable revaluation of warranty accruals;
- an increase in reported U.S. dollar EBIT as a result of the
strengthening of the euro against the U.S. dollar;
- increased margins earned on production programs that launched during
or subsequent to 2007;
- lower affiliation fees paid to corporate; and
- lower incentive compensation.
Rest of World
Rest of World EBIT increased $12 million to $32 million for 2008 compared to $20 million for 2007. The increase in EBIT was primarily as a result of:
- increased sales; and
- productivity and efficiency improvements at certain facilities,
primarily in China.
These factors were partially offset by costs incurred at new facilities, primarily in China as we continue to grow in this market.
Corporate and Other
Corporate and Other EBIT increased $76 million to $99 million for 2008 compared to $23 million for 2007. Excluding the Corporate and Other unusual items discussed previously in the "Unusual Items" section, the $37 million decrease in EBIT was primarily as a result of:
- a decrease in affiliation fees earned from our divisions;
- the $41 million (2007 - $12 million) write-down of our investment in
ABCP as discussed in the "Cash Resources" section below;
- costs associated with electric vehicle development; and
- higher charitable and social contributions.
These factors were partially offset by:
- lower incentive compensation; and
- decreased stock based compensation costs.
Interest Income, Net
Net interest income of $62 million for 2008 remained unchanged compared to 2007. Lower interest earned on cash and cash equivalents due to lower interest rates was offset by higher interest earned on higher cash and cash equivalents balances and lower interest expense on long term debt due to debt repayments during 2007 and 2008, including repayment of our senior unsecured notes related to the acquisition of New Venture Gear ("NVG").
Operating Income
Operating income decreased 72% or $0.824 billion to $0.328 billion for 2008 compared to $1.152 billion for 2007. Excluding the unusual items discussed previously in the "Unusual Items" section, operating income for 2008 decreased 52% or $0.6 billion. This decrease in operating income was the result of the decrease in EBIT (excluding unusual items), as discussed above.
Income Taxes
Our effective income tax rate on operating income (excluding equity income) increased to 83.2% for 2008 from 42.9% for 2007. In 2008 and 2007, income tax rates were impacted by the unusual items discussed in the "Unusual Items" section above. Excluding the unusual items, our effective income tax rate increased to 34.8% for 2008 compared to 29.6% for 2007. The increase in the effective income tax rate is primarily the result of an increase in losses not benefited, primarily in the United States partially offset by a change in mix of earnings, whereby proportionately more income was earned in jurisdictions with lower income tax rates.
Net Income
Net income decreased 89% or $592 million to $71 million for 2008 compared to $663 million for 2007. Excluding the unusual items discussed previously in the "Unusual Items" section, net income decreased 55% or $462 million as a result of the decrease in operating income (excluding unusual items), partially offset by lower income taxes (excluding unusual items), all as discussed above.
Earnings per Share
2008 2007 Change
-------------------------------------------------------------------------
Earnings per Class A Subordinate Voting or
Class B Share
Basic $ 0.63 $ 5.95 - 89%
Diluted $ 0.62 $ 5.86 - 89%
-------------------------------------------------------------------------
Average number of Class A Subordinate Voting
and Class B Shares outstanding (millions)
Basic 112.8 111.4 + 1%
Diluted 113.9 114.1 -
-------------------------------------------------------------------------
Diluted earnings per share decreased 89% or $5.24 to $0.62 for 2008 compared to $5.86 for 2007. Excluding the unusual items discussed previously in the "Unusual Items" section, diluted earnings per share decreased $4.10 from 2007 as a result of the decrease in net income (excluding unusual items) described above, partially offset by a decrease in the weighted average number of diluted shares outstanding.
The decrease in the weight average number of diluted shares outstanding was primarily due to the repurchase and cancelation of our Class A Subordinate Voting Shares under the terms of our Substantial Issuer Bid, which was fully completed in 2007, as well as our ongoing NCIB and to a reduction in the number of diluted shares associated with debentures and stock options since such shares were anti-diluted in 2008, partially offset by Class A Subordinate Voting Shares issued in 2007 related to the arrangement with Russian Machines.
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 2008 was 3.9%, a decrease from 16.6% for 2007. The unusual items discussed in the "Unusual Items" section above negatively impacted 2008 and 2007 ROFE by 3.9% and 0.2%, respectively.
Excluding these unusual items, the 9.0% decrease in ROFE is due to a decrease in EBIT (excluding unusual items), as discussed above, combined with a $209 million increase in average funds employed for 2008 compared to 2007.
The increase in our average funds employed was primarily as a result of:
- an increase in our average investment in working capital;
- acquisitions completed during 2008 including:
- the acquisition from Ogihara which added approximately $51 million
of average funds employed;
- Plastech which added approximately $13 million of average funds
employed; and
- Technoplast which added approximately $12 million of average funds
employed; and
- an increase in our long-term investments due to the reclassification
of ABCP as discussed in the "Cash Resources" section below.
The factors contributing to the increase in our average funds employed were partially offset by weakening of the Canadian dollar and euro, each against the U.S. dollar.
-------------------------------------------------------------------------
(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
2008 2007 Change
-------------------------------------------------------------------------
Net income $ 71 $ 663
Items not involving current cash flows 1,258 1,024
-------------------------------------------------------------------------
1,329 1,687 $ (358)
Changes in non-cash operating assets and
liabilities (275) (94)
-------------------------------------------------------------------------
Cash provided from operating activities $ 1,054 $ 1,593 $ (539)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations before changes in non-cash operating assets and liabilities decreased $358 million to $1.3 billion for 2008 compared to $1.7 billion for 2007. The decrease in cash flow from operations was due to a $592 million decrease in net income (as discussed above) partially offset by a $234 million increase in items not involving current cash flows. Items not involving current cash flows are comprised of the following:
2008 2007 ------------------------------------------------------------------------- Depreciation and amortization $ 873 $ 872 Long-lived asset impairments 283 56 Valuation allowance established against future tax assets 123 115 Equity income (19) (11) Future income taxes and non-cash portion of current taxes (131) (123) Reclassification of gain on net investment in foreign from accumulated other comprehensive income (116) (26) Amortization of employee wage buydown 62 - Other non-cash charges 183 141 ------------------------------------------------------------------------- Items not involving current cash flows $ 1,258 $ 1,024 ------------------------------------------------------------------------- -------------------------------------------------------------------------
The $8 million change in future income taxes and non-cash portion of current taxes is due to the income tax impact of the long-lived asset impairments and the resulting timing difference between tax and book values of net assets and reserves.
Cash invested in non-cash operating assets and liabilities amounted to $275 million for 2008 compared to $94 million for 2007. The change in non-cash operating assets and liabilities is comprised of the following sources (and uses) of cash:
2008 2007 ------------------------------------------------------------------------- Accounts receivable $ 826 $ 36 Inventories (124) (97) Prepaid expenses and other (70) (13) Accounts payable and other accrued liabilities (649) (65) Income taxes payable / receivable (232) 66 Deferred revenue (26) (21) ------------------------------------------------------------------------- Changes in non-cash operating assets and liabilities $ (275) $ (94) ------------------------------------------------------------------------- -------------------------------------------------------------------------
The decrease in accounts receivable in 2008 was primarily due to a decrease in production receivables related to lower sales volumes in both North America and Europe compared to 2008, particularly during the fourth quarter of 2008. The decrease in accounts payable and other accrued liabilities was due to lower purchases related to lower volumes and the timing of payments to suppliers. The $298 million change in income taxes payable is attributable to the payment of accrued taxes for prior years and tax payments and investment tax credits for the current year.
Capital and Investment Spending
2008 2007 Change
-------------------------------------------------------------------------
Fixed assets $ (739) $ (741)
Investments and other assets (231) (190)
-------------------------------------------------------------------------
Fixed assets, investments and other assets
additions (970) (931)
Purchase of subsidiaries (158) (46)
Proceeds from disposition 65 109
-------------------------------------------------------------------------
Cash used in investing activities $ (1,063) $ (868) $ (195)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed assets, investments and other assets additions
In 2008, we invested $739 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 2008 was for manufacturing equipment for programs that launched during 2008 or will be launching subsequent to 2008.
In 2008, we invested $231 million in other assets related primarily to fully reimbursable planning, engineering and tooling costs for programs that will be launching during or subsequent to 2008, in particular at certain complete vehicle engineering and assembly facilities. The increase in investments and other assets for 2007, relates primarily to a $130 million investment in ABCP as discussed in the "Cash Resources" section below.
Purchase of subsidiaries
During 2008, we invested $158 million to purchase subsidiaries, including:
- the acquisition of a facility from Ogihara America Corporation in
Alabama that manufactures major exterior and structural welded
assemblies for sales to various customers, including Mercedes-Benz;
- a substantial portion of the exteriors business and related assets
from Plastech, in a Chapter 11 sale out of bankruptcy. The acquired
business supplies parts to various customers, including Chrysler,
Ford and General Motors in the United States and Canada;
- the acquisition of BluWav Systems LLC, a developer and supplier of
electric and energy management systems for hybrid electric vehicles,
plug-in hybrid vehicles and battery electric vehicles; and
- the acquisition of Technoplast, a supplier of plastic exterior and
interior components. Technoplast is located in Nizhny Novgorod,
Russia and currently supplies the GAZ Group with components for
several programs.
During 2007, we acquired two facilities from Pressac Investments Limited ("Pressac") for total consideration of $52 million, consisting of $46 million paid in cash, net of cash acquired, and $6 million of assumed debt.
Proceeds from disposition
Proceeds from disposition in 2008 were $65 million which represent normal course fixed and other asset disposals.
For 2007, proceeds from disposal reflect the proceeds received on the sale of property, as discussed previously in the "Unusual Items" section and normal course fixed and other asset disposals.
Financing
2008 2007 Change
-------------------------------------------------------------------------
Repayments of debt $ (354) $ (79)
Issues of debt 830 28
Issues of Class A Subordinate Voting Shares - 1,560
Repurchase of Class A Subordinate Voting
Shares (247) (1,310)
Repurchase of Class B Shares - (24)
Cash dividends paid (140) (131)
-------------------------------------------------------------------------
Cash provided from financing activities $ 89 $ 44 $ 45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The repayments of debt in 2008 include the repayment of:
- the fourth series of senior unsecured zero-coupon notes issued in
connection with the NVG acquisition in January and the fifth and
final series payment in December;
- senior unsecured notes;
- government debt in Europe.
The repayments of debt in 2007 included the repayment in January of the third series of senior unsecured zero-coupon notes issued in connection with the NVG acquisition.
The issues of debt in 2008, includes the drawdown in December on our term and operating lines of credit in response to the uncertainty related to the financial viability of some of our key customers in North America. Repayment of part of the lines of credit has been made in January 2009 as the situation facing some of our key customers became clearer.
During the third quarter of 2007, we issued 20.0 million of our 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 approximately 11.9 million of our Class A Subordinate Voting Shares for an aggregate purchase price of $1.091 billion (including transaction costs of $2 million) and 217,400 of our Class B Shares for an aggregate purchase price of $24 million. Each of these transactions is discussed in more detail in the "Capital Transactions" section of our 2007 Annual Report to Shareholders.
During 2007, we received cash proceeds of $29 million on the exercise of stock options for Class A Subordinate Voting Shares.
During 2008, we repurchased approximately 3.5 million Class A Subordinate Voting Shares for an aggregate purchase price of $247 million under our normal course issuer bid.
During the fourth quarter of 2007, we repurchased approximately 2.7 million Class A Subordinate Voting Shares for an aggregate purchase price of $219 million under our normal course issuer bid.
Cash dividends paid per Class A Subordinate Voting or Class B Share were $1.26 for 2008 compared to $1.15 for 2007 and total cash dividends paid increased to $140 million for 2008 compared to $131 million for 2007. However, cash dividends paid per Class A Subordinate Voting or Class B Share was reduced to $0.18 in the fourth quarter of 2008.
Financing Resources
Capitalization
As at As at
December December
31, 2008 31, 2007 Change
-------------------------------------------------------------------------
Liabilities
Bank indebtedness $ 909 $ 89
Long-term debt due within one year 157 374
Long-term debt 143 337
-------------------------------------------------------------------------
1,209 800
Shareholders' equity 7,363 8,642
-------------------------------------------------------------------------
Total capitalization $ 8,572 $ 9,442 $ (870)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total capitalization decreased by 9% or $0.9 billion to $8.6 billion at December 31, 2008 as compared to $9.4 billion at December 31, 2007. The decrease in capitalization was a result of decreases in shareholders' equity of $1.3 billion partially offset by a $0.4 billion increase in liabilities.
The increase in liabilities is primarily as a result of the drawdown on our term and operating lines of credit partially offset by the repayment of the fourth and fifth series of our senior unsecured notes related to the NVG acquisition and the repayment of senior unsecured notes.
The decrease in shareholders' equity was primarily as a result of:
- a $765 million decrease in accumulated net unrealized gains on
translation of net investment in foreign operations, primarily as a
result of the weakening of the Canadian dollar, euro, and British
pound, each against the U.S. dollar between December 31, 2007 and
December 31, 2008 and a $116 million gain that was realized in net
income on the repatriation of funds from Europe;
- dividends paid during 2008;
- the purchase for cancellation of Class A Subordinate Voting Shares in
connection with the NCIB; and
- an increase in net unrealized losses on cash flow hedges.
These factors were partially offset by net income earned during 2008 (as discussed above).
Cash Resources
During 2008, our cash resources decreased by $197 million to $2.8 billion as a result of the cash used in investing activities and the reduction of the reported US$ cash and cash equivalents as a result of the weakening of the Canadian dollar, euro and British pound, each against the U.S. dollar, partially offset by the cash provided from operating activities and financing activities, all as discussed above. In addition to our cash resources, we had term and operating lines of credit totalling $2.0 billion, of which $1.0 billion was unused and available.
In addition, at December 31, 2008, we held Canadian third party asset- backed commercial paper ("ABCP") with a face value of Cdn$134 million. When acquired, these investments were rated R1 (High) by Dominion Bond Rating Service ("DBRS"), which was the highest credit rating issued for commercial paper. These investments did not settle at the scheduled maturity during the third quarter of 2007 due to ABCP market liquidity issues, and as a result we reclassified our ABCP to long-term investments from cash and cash equivalents.
On January 16, 2009, a restructuring plan was finalized and new restructuring Notes (the "Notes") were issued in exchange for existing investments. The Notes issued include: (i) notes in a Master Trust (MAV2 - A Notes), which are rated A by DBRS with a face amount value of Cdn$102 million; (ii) subordinate notes (MAV2 - B and C Notes) which are unrated with a face amount value of Cdn$9 million; and (iii) various tracking notes which were issued in exchange for assets deemed ineligible for inclusion in the Master Trust with a face amount value of Cdn$23 million. The criteria for eligibility into the Master Trust include credit quality and expected return of the assets, and arrangements with individual asset providers. The performance of the tracking notes is tied directly to actual performance of the specific assets.
At December 31, 2008, the carrying value of this investment was Cdn$79 million (December 31, 2007 - Cdn$121 million), which was based on a valuation technique estimating the fair value from the perspective of a market participant. For the year ended December 31, 2008, we recorded a $41 million impairment charge. The impairment charge is comprised of:
(a) MAV2 - A Notes: the return on these notes is expected to be below
current market rates for instruments of comparable credit quality,
term and structure, and accordingly, an impairment charge was
recorded using a discounted cash flow analysis; and
(b) MAV2 - B and C notes and tracking notes: a charge against potentially
non-performing assets which was determined based on a probability
weighted basis.
During 2008, we recorded $5 million of interest income on these investments.
Share Capital
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 February 23, 2009 were exercised or converted:
Class A Subordinate Voting and Class B Shares 112,605,888
Subordinated Debentures (i) 1,096,589
Stock options (ii) 2,745,265
-------------------------------------------------------------------------
116,447,742
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.
On November 3, 2008, the Toronto Stock Exchange ("TSX") accepted the our Notice of Intention to Make a Normal Course Issuer Bid ("NCIB") relating to the purchase for cancellation and/or for purposes of our long-term retention (restricted stock), restricted stock unit and similar programs, of up to 11 million Magna Class A Subordinate Voting Shares (the "Bid"), representing approximately 9.9% of the public float of such shares. The Bid commenced on November 12, 2008 and will terminate one year later. All purchases of Class A Subordinate Voting Shares are made at the market price at the time of purchase in accordance with the rules and policies of the TSX and Rule 10b-18 under the U.S. Securities Exchange Act of 1934.
Finally, OJSC Russian Machines' ("Russian Machines") participation in the arrangements it entered into with the Stronach Trust in connection with its September 2007 investment in Magna terminated on October 3, 2008. Among other things, Russian Machines no longer has any interest in the 20 million Class A Subordinate Voting Shares purchased in 2007 nor any interest in M Unicar Inc., the holding company formed to hold the Magna shares of the Stronach Trust,
Russian Machines and certain members of Magna's management. We continue to have positive relations with Russian Machines and its affiliates, including the GAZ Group, which is Russia's second largest automobile manufacturer.
Contractual Obligations and Off-Balance Sheet Financing
At December 31, 2008, we had contractual obligations requiring annual payments as follows:
2010- 2012- There-
2009 2011 2013 after Total
-------------------------------------------------------------------------
Operating leases with:
MI Developments Inc.
("MID") $ 156 $ 308 $ 308 $ 478 $ 1,250
Third parties 126 201 137 112 576
Long-term debt 157 106 12 25 300
-------------------------------------------------------------------------
Total contractual
obligations $ 439 $ 615 $ 457 $ 615 $ 2,126
-------------------------------------------------------------------------
-------------------------------------------------------------------------
We had no unconditional purchase obligations other than those related to inventory, services, tooling and fixed assets in the ordinary course of business.
Our off-balance sheet financing arrangements are limited to operating lease contracts.
The majority of our facilities are subject to operating leases with MID or with third parties. Operating lease payments in 2008 for facilities leased from MID and third parties were $156 million and $88 million, respectively. Operating lease commitments in 2009 for facilities leased from MID and third parties are expected to be $156 million and $79 million, respectively. Our existing leases with MID generally provide for periodic rent escalations based either on fixed-rate step increases, or on the basis of a consumer price index adjustment (subject to certain caps).
We also have operating lease commitments for equipment. These leases are generally of shorter duration. Operating lease payments for equipment were $52 million for 2008, and are expected to be $47 million in 2009.
Although our consolidated contractual annual lease commitments decline year by year, we expect that existing leases will either be renewed or replaced, or alternatively, we will incur capital expenditures to acquire equivalent capacity.
Long-term receivables in other assets are reflected net of outstanding borrowings from a finance subsidiary of Saab for $16 million since we have a legal right of set-off of our long-term receivable from Saab against such borrowings, and we intend to settle the related amounts simultaneously.
Foreign Currency Activities
Our North American operations negotiate sales contracts with OEMs for payment in both U.S. and Canadian dollars. Materials and equipment are purchased in various currencies depending upon competitive factors, including relative currency values. The North American operations use labour and materials which are paid for in both U.S. and Canadian dollars. Our Mexican operations generally use the U.S. dollar as the functional currency.
Our European operations negotiate sales contracts with OEMs for payment principally in euros and British pounds. The European operations' material, equipment and labour are paid for principally in euros and British pounds.
We employ hedging programs, primarily through the use of foreign exchange forward contracts, in an effort to manage our foreign exchange exposure, which arises when manufacturing facilities have committed to the delivery of products for which the selling price has been quoted in foreign currencies. These commitments represent our contractual obligations to deliver products over the duration of the product programs, which can last for a number of years. The amount and timing of the forward contracts will be dependent upon a number of factors, including anticipated production delivery schedules and anticipated production costs, which may be paid in the foreign currency. In addition, we enter into foreign exchange contracts to manage foreign exchange exposure with respect to internal funding arrangements. Despite these measures, significant long-term fluctuations in relative currency values, in particular a significant change in the relative values of the U.S. dollar, Canadian dollar, euro or British pound, could have an adverse effect on our profitability and financial condition (as discussed throughout this MD&A).
RELATED PARTIES -------------------------------------------------------------------------
Mr. Frank Stronach and Ms. Belinda Stronach, Magna's Chairman and Executive Vice-Chairman, respectively, together with two other members of the Stronach family, are trustees and members of the class of potential beneficiaries of the Stronach Trust. The Stronach Trust indirectly holds shares which represent an 89% voting interest in M Unicar Inc., which controls Magna through the right to direct the votes attaching to 100% of Magna's Class B Shares and approximately 0.5% of Magna's Class A Subordinate Voting Shares. The Stronach Trust controls MID and therefore MEC, through the right to direct the votes attaching to 66% of MID's Class B Shares. Various land and buildings used in Magna's operations are leased from MID under operating lease agreements, which are effected on normal commercial terms. Lease expense included in the consolidated statements of income with respect to MID for the year ended December 31, 2008 and 2007 was $156 million and $159 million, respectively. Included in accounts payable are trade amounts owing to MID and its subsidiaries in the amount of $0.4 million.
During the fourth quarter of 2007, we entered into an agreement to purchase 225 acres of real estate located in Austria from MEC for $29 million ((euro)20 million). The transaction closed during the first quarter of 2008 following the satisfaction of customary closing conditions, including obtaining all necessary regulatory approvals.
We have agreements with affiliates of the Chairman of the Board for the provision of business development and consulting services. In addition, we have an agreement with the Chairman of the Board for the provision of business development and other services. The aggregate amount expensed under these agreements with respect to the year ended December 31, 2008 and 2007 was $10 million and $40 million, respectively.
During the year ended December 31, 2008, trusts, which exist to make orderly purchases of our shares for employees either for transfer to the Employee Equity and Profit Participation Program or to recipients of either bonuses or rights to purchase such shares from the trusts, borrowed up to $35 million from us to facilitate the purchase of Class A Subordinate Voting Shares. At December 31, 2008, the trusts' indebtedness to us was $24 million.
During the year ended December 31, 2007, we entered into agreements to provide planning, management and engineering services to companies under Basic Element's control. Sales to affiliates of Basic Element are typically under normal commercial terms. Sales included in the consolidated statements of income for the year ended December 31, 2008 (to October 3, 2008) with respect to affiliates of Basic Element were $29 million. We also formed a joint supply organization with a subsidiary of Basic Element.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED DECEMBER 31, 2008
-------------------------------------------------------------------------
Sales
For the three months
ended December 31,
----------------------
2008 2007 Change
-------------------------------------------------------------------------
Vehicle Production Volumes (millions of
units)
North America 2.739 3.658 - 25%
Europe 2.920 3.936 - 26%
-------------------------------------------------------------------------
Average Dollar Content Per Vehicle
North America $ 874 $ 906 - 4%
Europe $ 436 $ 478 - 9%
-------------------------------------------------------------------------
Sales
External Production
North America $ 2,393 $ 3,314 - 28%
Europe 1,272 1,881 - 32%
Rest of World 103 124 - 17%
Complete Vehicle Assembly 479 981 - 51%
Tooling, Engineering and Other 589 536 + 10%
-------------------------------------------------------------------------
Total Sales $ 4,836 $ 6,836 - 29%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
External Production Sales - North America
External production sales in North America decreased 28% or $921 million to $2.4 billion for the fourth quarter of 2008 compared to $3.3 billion for the fourth quarter of 2007. This decrease in production sales reflects a 25% decrease in North American vehicle production volumes combined with a 4% decline in our North American average dollar content per vehicle. More importantly, during the fourth quarter of 2008 our largest customers in North America continued to reduce vehicle production volumes compared to the fourth quarter of 2008. While North American vehicle production volumes declined 25% in the fourth quarter of 2008 compared to the fourth quarter of 2007, Ford and Chrysler vehicle production declined 33% and 39%, respectively.
Our average dollar content per vehicle declined by 4% or $32 to $874 for the fourth quarter of 2008 compared to $906 for the fourth quarter of 2007, primarily as a result of:
- the impact of lower production and/or content on certain programs,
including:
- GM's full-size pickups and SUVs;
- the Chevrolet Equinox and Pontiac Torrent;
- the Dodge Grand Caravan and Chrysler Town & Country;
- the Chrysler 300 and 300C, and Dodge Charger;
- the Ford Edge and Lincoln MKX;
- the Jeep Liberty;
- the Hummer H3;
- the Ford Explorer and Mercury Mountaineer; and
- the Jeep Wrangler and Wrangler Unlimited;
- a decrease in reported U.S. dollar sales due to the weakening of the
Canadian dollar against the U.S. dollar;
- programs that ended production during or subsequent to the fourth
quarter of 2007, including the Chrysler Pacifica; and
- incremental customer price concessions.
These factors were partially offset by:
- the launch of new programs during or subsequent to the fourth quarter
of 2007, including:
- the Chevrolet Traverse;
- the Dodge Journey;
- the Volkswagen Routan;
- the Mazda 6;
- the Dodge Ram;
- the Ford Flex;
- the Chevrolet Malibu; and
- the Dodge Challenger;
- increased production and/or content on certain programs, including:
- the Chevrolet Cobalt and Pontiac Pursuit;
- the Chevrolet Impala;
- the Ford Fusion, Mercury Milan and Lincoln MKZ; and
- the Chevrolet HHR; and
- acquisitions completed subsequent to the fourth quarter of 2007,
including:
- a substantial portion of Plastech's exteriors business; and
- a facility from Ogihara.
External Production Sales - Europe
External production sales in Europe decreased 32% or $609 million to $1.3 billion for the fourth quarter of 2008 compared to $1.9 billion for the fourth quarter of 2007. This decrease in production sales reflects a 26% decrease in European vehicle production volumes combined with a 9% decline in our European average dollar content per vehicle.
Our average dollar content per vehicle declined by 9% or $42 to $436 for the fourth quarter of 2008 compared to $478 for the fourth quarter of 2007, primarily as a result of:
- a decrease in reported U.S. dollar sales due to the weakening of the
euro and British pound, each against the U.S. dollar;
- the impact of lower production and/or content on certain programs,
including:
- the BMW X3;
- the Nissan Primastar, Renault Trafic and Opel Vivaro;
- the Ford Transit; and
- the Porsche 911;
- the sale of certain facilities during or subsequent to the fourth
quarter of 2007;
- programs that ended production during or subsequent to the fourth
quarter of 2007, including the Chrysler Voyager; and
- incremental customer price concessions.
These factors were partially offset by:
- the launch of new programs during or subsequent to the fourth quarter
of 2007, including;
- the Volkswagen Tiguan;
- the Audi Q5; and
- the Mercedes-Benz GLK; and
- increased production and/or content on certain programs, including:
- the Volkswagen Transporter; and
- the smart fortwo.
External Production Sales - Rest of World
External production sales in Rest of World decreased 17% or $21 million to $103 million for the fourth quarter of 2008 compared to $124 million for the fourth quarter of 2007. The decrease in production sales was primarily as a result of:
- a decrease in reported U.S. dollar sales as a result of the weakening
of the Korean Won, Brazilian real and South African rand each against
the U.S. dollar; and
- decreased production and/or content on certain programs in Korea and
Brazil.
These factors were partially offset by an increase in reported U.S. dollar sales as a result of the strengthening of the Chinese Renminbi against the U.S. dollar.
Complete Vehicle Assembly Sales
For the three months
ended December 31,
----------------------
2008 2007 Change
-------------------------------------------------------------------------
Complete Vehicle Assembly Sales $ 479 $ 981 - 51%
-------------------------------------------------------------------------
Complete Vehicle Assembly Volumes (Units)
Full-Costed:
BMW X3, Mercedes-Benz G-Class, and
Saab 93 Convertible 13,961 28,841 - 52%
Value-Added:
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander 2,972 13,052 - 77%
-------------------------------------------------------------------------
16,933 41,893 - 60%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Complete vehicle assembly sales decreased 51% or $502 million to $0.5 billion for the fourth quarter of 2008 compared to $1.0 billion for the fourth quarter of 2007 while assembly volumes decreased 60% or 24,960 units. The decrease in complete vehicle assembly sales is primarily as a result of:
- a decrease in assembly volumes for the BMW X3, Saab 93 Convertible,
Chrysler 300, Jeep Commander and Grand Cherokee;
- a decrease in reported U.S. dollar sales due to the weakening of the
euro against the U.S. dollar; and
- the end of production of the Chrysler Voyager at our Graz assembly
facility in the fourth quarter of 2007.
These factors were partially offset by higher assembly volumes for the Mercedes-Benz G-Class.
Tooling, Engineering and Other
Tooling, engineering and other sales increased 10% or $53 million to $589 million for the fourth quarter of 2008 compared to $536 million for the fourth quarter of 2007.
In the fourth quarter of 2008, the major programs for which we recorded tooling, engineering and other sales were:
- the MINI Cooper, Clubman and Crossman; - the BMW Z4, X3 and 1-Series; - GM's full-size pickups; - the Cadillac SRX and Saab 9-4X; - the Mercedes-Benz M-Class; - the Porsche 911/Boxster; - the Ford Fusion; - the Dodge Charger and Chrysler 300; and - the Chevrolet Camaro.
In the fourth quarter of 2007, the major programs for which we recorded tooling, engineering and other sales were:
- the BMW Z4 and 1-Series; - GM's full-size pickups; - the Dodge Grand Caravan and Chrysler Town & Country; - the Dodge Journey and Nitro programs; - the smart fortwo; - the Mercedes C-Class; - the Jeep Liberty; and - the Ford F-Series SuperDuty.
In addition, tooling, engineering and other sales decreased in the fourth quarter of 2008 due to the weakening of the euro, British pound and Canadian dollar, each against the U.S. dollar.
EBIT
For the three months
ended December 31,
----------------------
2008 2007
-------------------------------------------------------------------------
North America $ (91) $ 115
Europe (75) 59
Rest of World 3 8
Corporate and Other (16) -
-------------------------------------------------------------------------
Total EBIT $ (179) $ 182
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in EBIT for the fourth quarters of 2008 and 2007 were the following unusual items, which are discussed previously in the "Unusual Items" section.
For the three months
ended December 31,
----------------------
2008 2007
-------------------------------------------------------------------------
North America
Impairment charges $ (12) $ (22)
Restructuring charges (80) (17)
Foreign currency gain - 23
-------------------------------------------------------------------------
(92) (16)
-------------------------------------------------------------------------
Europe
Impairment charges (4) (12)
-------------------------------------------------------------------------
(4) (12)
Corporate and Other
Foreign currency loss - (4)
-------------------------------------------------------------------------
$ (96) $ (32)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America
EBIT in North America decreased $206 million to a loss of $91 million for the fourth quarter of 2008 compared to earnings of $115 million for the fourth quarter of 2007. Excluding the North American unusual items discussed previously in the "Unusual Items" section, EBIT decreased $130 million, primarily due to decreased margins earned on reduced sales as a result of significantly lower production volumes, in particular on many high content programs. The remaining decrease in EBIT was primarily as a result of:
- operational inefficiencies and other costs at certain facilities, in
particular at certain exterior and powertrain systems facilities;
- increased commodity costs;
- accelerated amortization of deferred wage buydown assets at a
powertrain systems facility in the United States; and
- incremental customer price concessions.
These factors were partially offset by:
- lower affiliation fees paid to corporate;
- the benefit of restructuring activities during or subsequent to the
fourth quarter of 2007;
- productivity and efficiency improvements at certain facilities;
- lower employee profit sharing;
- lower incentive compensation; and
- incremental margin earned from the acquisitions from Ogihara and
Plastech.
Europe
EBIT in Europe decreased $134 million to a loss of $75 million for fourth quarter of 2008 compared to earnings of $59 million for the fourth quarter of 2007. Excluding the European unusual items discussed previously in the "Unusual Items" section, EBIT decreased by $142 million, primarily due to decreased margins earned on reduced sales as a result of significantly lower production volumes, including the end of production of the Chrysler Voyager at our Graz assembly facility in the fourth quarter of 2007. The remaining decrease in EBIT was primarily as a result of:
- operational inefficiencies and other costs at certain facilities;
- favourable revaluation of warranty accruals in the fourth quarter of
2007;
- costs incurred in preparation for upcoming launches or for programs
that have not fully ramped up production;
- net foreign exchange losses incurred during the fourth quarter of
2008 compared to net foreign exchange gains recorded in the fourth
quarter of 2007; and
- incremental customer price concessions.
These factors were partially offset by:
- operational improvements at certain facilities, in particular at
certain interior systems facilities;
- lower employee profit sharing;
- lower affiliation fees paid to corporate;
- the benefit of restructuring activities during or subsequent to the
fourth quarter of 2007;
- lower incentive compensation; and
- incremental margin earned on new programs that launched during or
subsequent to the fourth quarter of 2007.
Rest of World
EBIT in the Rest of World decreased $5 million to a $3 million for the fourth quarter of 2008 compared to $8 million for the fourth quarter of 2007. EBIT decreased primarily as a result of lower margin earned on the decrease in production sales discussed above.
These factors were partially offset by improved operating efficiencies at certain facilities, primarily in China.
Corporate and Other
Corporate and Other EBIT decreased $16 million to a loss of $16 million for the fourth quarter of 2008 compared to the fourth quarter of 2007. Excluding the Corporate and Other unusual items discussed previously in the "Unusual Items" section, EBIT decreased by $20 million, primarily as a result of:
- decreased in affiliation fees earned from our divisions; - increased stock compensation costs related to restricted shares; - cost associated with electric vehicle development; and - increased consulting costs. These factors were partially offset by: - decreased in executive compensation costs; - a lower ABCP write-down; and - decreased marketing costs. FUTURE CHANGES IN ACCOUNTING POLICIES ------------------------------------------------------------------------- Conversion to International Financial Reporting Standards in Fiscal 2011
In February 2008, the Accounting Standards Board ("AcSB") confirmed that Canadian GAAP for publicly accountable enterprises will be converged with International Financial Reporting Standards ("IFRS"). IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences on recognition, measurement and disclosures. In the period leading up to the changeover, the AcSB will continue to issue accounting standards that are converged with IFRS, thus mitigating the impact of adopting IFRS at the changeover date.
These new standards will be effective for Magna for the interim and annual financial statements beginning on January 1, 2011, with retrospective presentation of the comparative 2010 results.
We are currently in the planning phase of the conversion. This includes identifying the differences between existing Canadian GAAP and IFRS, identifying potential business impacts, developing the project plan, assessing resource requirements and providing training to staff. A detailed analysis of the differences between IFRS and our accounting policies as well as an assessment of the impact of various alternatives are in progress. Changes in accounting policies are likely and may materially impact our consolidated financial statements.
Over the next two years, we will assess the implications of converting to IFRS, estimate the impact, implement the changes and perform work to ensure the accuracy of opening balances. It is currently not possible to fully determine the impact to the consolidated financial statements and any potential business impacts, as accounting standards and related interpretations continue to change.
COMMITMENTS AND CONTINGENCIES -------------------------------------------------------------------------
From time to time, we may be contingently liable for litigation and other claims.
Refer to note 24 of our 2007 audited consolidated financial statements, which describes these claims. In October 2008, we settled the C-MAC Invotronics Inc. litigation with no material impact in the year.
CONTROLS AND PROCEDURES -------------------------------------------------------------------------
There have been no changes in our internal controls over financial reporting that occurred during the year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
FORWARD-LOOKING STATEMENTS -------------------------------------------------------------------------
The previous discussion may contain statements that, to the extent that they are not recitations of historical fact, constitute "forward-looking statements" within the meaning of applicable securities legislation. Forward- looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or economic performance, or the assumptions underlying any of the foregoing. We use words such as "may", "would", "could", "will", "likely", "expect", "anticipate", "believe", "intend", "plan", "forecast", "project", "estimate" and similar expressions to identify forward-looking statements. Any such forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks, assumptions and uncertainties, including, without limitation: the potential for an extended global recession, including its impact on our liquidity; declining production volumes and sales levels; the impact of government financial intervention in the automotive industry; restructuring of the global automotive industry and the risk of the bankruptcy of one of our customers; the financial distress of some of our suppliers and the risk of their insolvency, bankruptcy or financial restructuring; restructuring and/or downsizing costs related to the rationalization of some of our operations; impairment charges; shifts in technology; our ability to successfully grow our sales to non-traditional customers; a reduction in the production volumes of certain vehicles, such as certain light trucks; our dependence on outsourcing by our customers; risks of conducting business in foreign countries, including Russia, India and China; our ability to quickly shift our manufacturing footprint to take advantage of lower cost manufacturing opportunities; the termination or non-renewal by our customers of any material contracts; disruptions in the capital and credit markets; fluctuations in relative currency values; our ability to successfully identify, complete and integrate acquisitions; our ability to offset price concessions demanded by our customers; the continued exertion of pricing pressures by our customers; warranty and recall costs; product liability claims in excess of our insurance coverage; 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; legal claims against us; 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 shareholder, the Stronach Trust; and other factors set out in our Annual Information Form filed with securities commissions in Canada and our annual report on Form 40-F filed with the United States Securities and Exchange Commission, and subsequent filings. In evaluating forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those indicated by such forward-looking statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(U.S. dollars in millions, except per share figures)
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
Note 2008 2007 2008 2007
-------------------------------------------------------------------------
Sales $ 4,836 $ 6,836 $ 23,704 $ 26,067
-------------------------------------------------------------------------
Costs and expenses
Cost of goods sold 4,447 5,981 20,982 22,599
Depreciation and
amortization 209 239 873 872
Selling, general and
administrative 9,12 343 403 1,319 1,461
Interest income, net (14) (21) (62) (62)
Equity income - (3) (19) (11)
Impairment charges 2 16 34 283 56
-------------------------------------------------------------------------
Income (loss) from
operations before
income taxes (165) 203 328 1,152
Income taxes 8 (17) 175 257 489
-------------------------------------------------------------------------
Net (loss) income (148) 28 71 663
Other comprehensive
(loss) income: 12
Net realized and
unrealized (losses)
gains on translation
of net investment in
foreign operations (587) 118 (881) 727
Repurchase of shares 10 - (25) (32) (181)
Net unrealized losses
on cash flow hedges (96) (2) (102) (8)
Reclassifications of
net losses (gains)
on cash flow hedges
to net income (loss) 2 (2) (1) 1
-------------------------------------------------------------------------
Comprehensive (loss)
income $ (829) $ 117 $ (945) $ 1,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per
Class A Subordinate
Voting or Class B Share:
Basic $ (1.33) $ 0.24 $ 0.63 $ 5.95
Diluted $ (1.33) $ 0.24 $ 0.62 $ 5.86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash dividends paid per
Class A Subordinate
Voting or Class B Share $ 0.18 $ 0.36 $ 1.26 $ 1.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average number of Class A
Subordinate Voting and
Class B Shares
outstanding during the
period (in millions):
Basic 111.6 117.1 112.8 111.4
Diluted 111.6 118.4 113.9 114.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(Unaudited)
(U.S. dollars in millions)
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
Note 2008 2007 2008 2007
-------------------------------------------------------------------------
Retained earnings,
beginning of period $ 3,525 $ 3,640 $ 3,526 $ 3,773
Net (loss) income (148) 28 71 663
Dividends on Class A
Subordinate Voting
and Class B Shares (20) (42) (142) (131)
Repurchase of Class A
Subordinate Voting
Shares 10 - (100) (98) (755)
Repurchase of Class B
Shares 10 - - - (24)
-------------------------------------------------------------------------
Retained earnings, end
of period $ 3,357 $ 3,526 $ 3,357 $ 3,526
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(U.S. dollars in millions)
Three months ended Year ended
December 31, December 31,
-------------------- --------------------
Note 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided from
(used for):
OPERATING ACTIVITIES
Net (loss) income $ (148) $ 28 $ 71 $ 663
Items not involving
current cash flows 267 401 1,258 1,024
-------------------------------------------------------------------------
119 429 1,329 1,687
Changes in non-cash
operating assets and
liabilities 257 400 (275) (94)
-------------------------------------------------------------------------
Cash provided from
operating activities 376 829 1,054 1,593
-------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Fixed asset additions (274) (305) (739) (741)
Purchase of subsidiaries 4 (49) - (158) (46)
Increase in investments
and other assets 5 (35) (15) (231) (190)
Proceeds from disposition 9 6 65 109
-------------------------------------------------------------------------
Cash used for investment
activities (349) (314) (1,063) (868)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayments of debt (258) (18) (354) (79)
Issues of debt 832 1 830 28
Issues of Class A
Subordinate Voting
Shares 10 - - - 1,560
Repurchase of Class A
Subordinate Voting
Shares 10 - (219) (247) (1,310)
Repurchase of Class B
Shares 10 - - - (24)
Dividends (19) (42) (140) (131)
-------------------------------------------------------------------------
Cash provided from (used
for) financing activities 555 (278) 89 44
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents (222) 65 (277) 300
-------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents
during the period 360 302 (197) 1,069
Cash and cash equivalents,
beginning of period 2,397 2,652 2,954 1,885
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 2,757 $ 2,954 $ 2,757 $ 2,954
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(U.S. dollars in millions)
As at As at
December 31, December 31,
Note 2008 2007
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 2,757 $ 2,954
Accounts receivable 2,821 3,981
Inventories 1,647 1,681
Income taxes receivable 8 11 -
Prepaid expenses and other 115 154
-------------------------------------------------------------------------
7,351 8,770
-------------------------------------------------------------------------
Investments 3 194 280
Fixed assets, net 2 3,701 4,307
Goodwill 4 1,160 1,237
Future tax assets 8 182 280
Other assets 5 601 469
-------------------------------------------------------------------------
$ 13,189 $ 15,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness $ 909 $ 89
Accounts payable 2,744 3,492
Accrued salaries and wages 448 544
Other accrued liabilities 6 835 911
Income taxes payable 8 - 248
Long-term debt due within one year 157 374
-------------------------------------------------------------------------
5,093 5,658
-------------------------------------------------------------------------
Deferred revenue 31 60
Long-term debt 143 337
Other long-term liabilities 7 423 394
Future tax liabilities 8 136 252
-------------------------------------------------------------------------
5,826 6,701
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 10
Class A Subordinate Voting Shares
(issued: 111,879,059;
December 31, 2007 - 115,344,184) 3,605 3,708
Class B Shares
(convertible into Class A
Subordinate Voting Shares)
(issued: 726,829) - -
Contributed surplus 11 67 58
Retained earnings 3,357 3,526
Accumulated other comprehensive income 12 334 1,350
-------------------------------------------------------------------------
7,363 8,642
-------------------------------------------------------------------------
$ 13,189 $ 15,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
MAGNA INTERNATIONAL INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(All amounts in U.S. dollars and all tabular amounts in millions unless
otherwise noted)
-------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of Magna
International Inc. and its subsidiaries (collectively "Magna" or the
"Company") have been prepared in United States dollars following
Canadian generally accepted accounting principles ("GAAP") with
respect to the preparation of interim financial information.
Accordingly, they do not include all the information and footnotes
required in the preparation of annual financial statements and
therefore should be read in conjunction with the December 31, 2007
audited consolidated financial statements and notes included in the
Company's 2007 Annual Report. These interim consolidated financial
statements have been prepared using the same accounting policies as
the December 31, 2007 annual consolidated financial statements,
except the Company prospectively adopted the new Canadian Institute
of Chartered Accountants Handbook Section 3031, "Inventories", with
no restatement of prior periods. The adoption of these
recommendations had no material impact on the interim consolidated
financial statements.
In the opinion of management, the unaudited interim consolidated
financial statements reflect all adjustments, which consist only of
normal and recurring adjustments, necessary to present fairly the
financial position at December 31, 2008 and the results of operations
and cash flows for the three-months and years ended December 31, 2008
and 2007.
2. GOODWILL AND LONG-LIVED ASSETS
In conjunction with its annual business planning cycle, the Company
completed its goodwill impairment analysis. No goodwill impairment
charge was recorded during 2008 or 2007. However, the Company
determined that goodwill could potentially be impaired at its
Powertrain North America reporting unit. Therefore, as required by
GAAP, the Company made a reasonable estimate of the goodwill
impairment by determining the implied fair value of goodwill in the
same manner as if it had acquired the reporting unit as at year end.
The Company's best estimate is that goodwill is not impaired;
however, any adjustment to the estimated impairment charge based on
finalization of the impairment analysis will be recorded during 2009.
Due to the judgment involved in determining the fair value of the
reporting unit's assets and liabilities, the final amount of the
goodwill impairment charge, if any, could differ from those
estimated.
Furthermore, in association with the Company's annual goodwill
impairment analysis and consideration of other indicators of
impairment assets at certain operations, the Company recorded
long-lived impairment charges as follows:
Three months ended Year ended
December 31, December 31,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
North America $ 12 $ 22 $ 275 $ 44
Europe 4 12 8 12
---------------------------------------------------------------------
Total year to date
impairment charges $ 16 $ 34 $ 283 $ 56
---------------------------------------------------------------------
---------------------------------------------------------------------
Historically, the Company completed annual goodwill and long-lived
asset impairment analyses in the fourth quarter of each year.
However, as a result of the significant and accelerated declines in
vehicle production volumes primarily in North America, the Company
reviewed goodwill and long-lived assets for impairment during the
third quarter of 2008. Due to further declines in vehicle production
volumes during the fourth quarter of 2008, the Company once again
completed its goodwill and long-lived asset impairment analyses.
North America
Based on these analyses described above, during 2008 the Company
recorded long-lived asset impairment charges of $275 million
($238 million after tax), related primarily to its powertrain and
interior and exterior systems operations in the United States and
Canada. At the Company's powertrain operations, particularly at a
facility in Syracuse, New York, asset impairment charges of
$189 million ($169 million after tax) were recorded primarily as a
result of the following factors:
- a dramatic market shift away from truck programs, in particular
four wheel drive pick-up trucks and SUVs;
- excess die-casting, machining and assembly capacity; and
- historical losses that are projected to continue throughout our
business planning period.
At its interiors and exteriors operations, the Company recorded
$74 million ($61 million after tax) of asset impairment charges
primarily as a result of the following factors:
- significantly lower volumes on certain pick-up truck and SUV
programs;
- the loss of certain replacement business;
- capacity utilization that is not sufficient to support the
current overhead structure; and
- historical losses that are projected to continue throughout our
business planning period.
Additionally, in North America the Company recorded asset impairment
charges of $12 million ($8 million after tax) related to dedicated
assets at a chassis systems facility in Canada and a seating systems
facility in the United States.
During 2007, the Company recorded asset impairments of $44 million
($28 million after tax) related to an interiors systems facility in
the United States and certain powertrain facilities in the United
States and Canada. The asset impairments were recorded as a result
of: (i) ceasing operations and/or use of certain assets at two
powertrain facilities; and (ii) losses that were projected to be
incurred throughout the business planning period based on existing
and projected sales levels.
Europe
During 2008, the Company recorded an $8 million ($8 million after
tax) asset impairment related to specific assets at an interior
systems facility in the United Kingdom and specific assets at a
powertrain facility in Austria.
During 2007, the Company recorded asset impairments of $12 million
($12 million after tax) relating to certain assets and facilities in
Germany, Austria, Spain and the Czech Republic due to recurring
losses that were projected to continue as a result of existing sales
levels and limited sales growth prospects.
3. INVESTMENTS
At December 31, 2008, the Company held Canadian third party
asset-backed commercial paper ("ABCP") with a face value of
Cdn$134 million. When acquired, these investments were rated R1
(High) by Dominion Bond Rating Service ("DBRS"), which was the
highest credit rating issued for commercial paper. These investments
did not settle at the scheduled maturity during the third quarter of
2007 due to ABCP market liquidity issues, and as a result the Company
reclassified its ABCP to long-term investments from cash and cash
equivalents.
On January 16, 2009, a restructuring plan was finalized and new
restructuring Notes (the "Notes") were issued in exchange for
existing investments. The Notes issued include: (i) notes in a Master
Trust (MAV2 - A Notes), which are rated A by DBRS with a face amount
value of Cdn$102 million; (ii) subordinate notes (MAV2 - B and C
Notes) which are unrated with a face amount value of Cdn$9 million;
and (iii) various tracking notes which were issued in exchange for
assets deemed ineligible for inclusion in the Master Trust with a
face amount value of Cdn$23 million. The criteria for eligibility
into the Master Trust include credit quality of the assets, expected
performance, and arrangements with individual asset providers. The
performance of the tracking notes is tied directly to actual
performance of the specific assets.
At December 31, 2008, the carrying value of this investment was
Cdn$79 million (December 31, 2007 - Cdn$121 million), which was based
on a valuation technique estimating the fair value from the
perspective of a market participant. For the year ended December 31,
2008, the Company recorded a $41 million impairment charge (Q3 -
$24 million; Q1 - $17 million). The impairment charge is comprised
of:
(a) MAV2 - A Notes: the return on these notes is expected to be below
current market rates for instruments of comparable credit
quality, term and structure, and accordingly, an impairment
charge was recorded using a discounted cash flow analysis; and
(b) MAV2 - B and C notes and tracking notes: a charge against
potentially non-performing assets which was determined based on a
probability weighted basis.
During 2008, the Company recorded $5 million of interest income on
these investments.
4. ACQUISITIONS
On May 30, 2008, Magna acquired a facility from Ogihara America
Corporation. The facility in Birmingham, Alabama manufactures major
exterior and structural welded assemblies for sales to various
customers, including Mercedes-Benz.
On June 16, 2008, Magna was the successful bidder to acquire a
substantial portion of the exteriors business and related assets from
Plastech Engineered Product Inc., in a Chapter 11 sale out of
bankruptcy. The acquired business supplies parts to various
customers, including Chrysler, Ford and General Motors in the United
States and Canada.
On October 3, 2008, Magna acquired BluWav Systems LLC, a developer
and supplier of electric and energy management systems for hybrid
electric vehicles, plug-in hybrid vehicles and battery electric
vehicles. BlueWav is located in Rochester Hills, Michigan.
On October 31, 2008, Magna acquired Technoplast, a supplier of
plastic exterior and interior components. The company is located in
Nizhny Novgorod, Russia and currently supplies the GAZ Group with
components for several programs.
The total consideration for these and certain other acquisitions was
$177 million, consisting of $158 million paid in cash and $19 million
of assumed debt. The excess purchase price over the book value of
assets acquired and liabilities assumed was $77 million.
The purchase price allocations for these acquisitions are preliminary
and adjustments to the allocations may occur as a result of obtaining
more information regarding asset valuations. On a preliminary basis,
an allocation of the excess purchase price over the book value of
assets acquired and liabilities assumed has been made to fixed
assets, goodwill, and intangible assets.
5. OTHER ASSETS
Other assets consist of:
2008 2007
---------------------------------------------------------------------
Long-term receivables(a) $ 67 $ 128
Preproduction costs related to long-term
supply agreements with contractual
guarantee for reimbursement 230 94
Patents and licences, net 54 67
Employee wage buydown, net 52 -
Other, net 198 180
---------------------------------------------------------------------
$ 601 $ 469
---------------------------------------------------------------------
---------------------------------------------------------------------
(a) Long-term receivables are reflected net of outstanding borrowings
from a finance subsidiary of SAAB for $16 million (2007 -
$37 million) since the Company has a legal right of set-off of
its long-term receivable from SAAB payable to the Company against
such borrowings and intends to settle the related amounts
simultaneously.
6. WARRANTY
The following is a continuity of the Company's warranty accruals:
2008 2007
---------------------------------------------------------------------
Balance, beginning of period $ 103 $ 94
Expense, net 10 3
Settlements (11) (6)
Acquisition - 1
Foreign exchange and other 3 1
---------------------------------------------------------------------
Balance, March 31, 105 93
(Income) expense, net (17) 8
Settlements 4 (7)
Foreign exchange and other 1 9
---------------------------------------------------------------------
Balance, June 30, 93 103
(Income) expense, net (1) 6
Settlements (5) (5)
Foreign exchange and other (6) 6
---------------------------------------------------------------------
Balance, September 30, 81 110
Expense, net 6 2
Settlements (11) (14)
Foreign exchange and other (1) 5
---------------------------------------------------------------------
Balance, December 31, $ 75 $ 103
---------------------------------------------------------------------
---------------------------------------------------------------------
7. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as follows:
Three months ended Year ended
December 31, December 31,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Defined benefit pension
plans and other $ 4 $ 7 $ 13 $ 22
Termination and long
service arrangements 8 12 27 28
Retirement medical
benefits plan (3) 6 8 15
---------------------------------------------------------------------
$ 9 $ 25 $ 48 $ 65
---------------------------------------------------------------------
---------------------------------------------------------------------
8. INCOME TAXES
For the year ended December 31, 2008, the Company recorded a
$123 million charge to establish valuation allowances against all
future tax assets in the United States.
Accounting standards require that the Company assess whether
valuation allowances should be established against future income tax
assets based on the consideration of all available evidence using a
"more likely than not" standard. The factors used to assess the
likelihood of realization are its forecast of future taxable income
and available tax planning strategies that could be implemented to
realize the future tax assets. The valuation allowances were required
in the United States based on:
- historical consolidated losses at the Company's U.S. operations
that are expected to continue in the near-term;
- the accelerated deterioration of near-term automotive market
conditions in the United States; and
- significant and inherent uncertainty as to the timing of when
we would be able to generate the necessary level of earnings to
recover these future tax assets.
During the fourth quarter of 2007, in conjunction with the Company's
annual goodwill and long-lived asset impairment analyses, the Company
recorded a $115 million charge to establish valuation allowances
against certain of its future tax assets in the United States. In
addition, during 2007, the Company recorded a $53 million charge to
future income tax expense as a result of an alternative minimum tax
introduced in Mexico, offset in part by a $5 million future income
tax recovery related to a reduction in future income tax.
9. STOCK-BASED COMPENSATION
(a) Incentive Stock Option Plan
The following is a continuity schedule of options outstanding
(number of options in the table below are expressed in whole
numbers):
2008 2007
----------------------------- -----------------------------
Options outstanding Options outstanding
------------------- -------------------
Number of Number of
Number options Number options
of Exercise exercis- of Exercise exercis-
options price(i) able options price(i) able
-------------------------------------------------------------------------
Beginning of
period 2,942,203 82.66 2,912,877 4,087,249 77.45 3,811,336
Granted 5,000 74.50 - - - -
Exercised (1,230) 55.00 (1,230) (74,082) 63.21 (74,082)
Cancelled (10,000) 97.47 (10,000) (7,306) 73.64 (4,400)
Vested - - 10,326 - - 55,443
-------------------------------------------------------------------------
March 31 2,935,973 82.61 2,911,973 4,005,861 77.72 3,788,297
Granted - - - 40,000 88.87 -
Exercised (383) 55.00 (383) (590,008) 64.08 (590,008)
Cancelled - - - (366,686) 69.78 (361,641)
Vested - - 1,000 - - 29,000
-------------------------------------------------------------------------
June 30 2,935,590 82.62 2,912,590 3,089,167 81.41 2,865,648
Granted - - - 15,000 95.96 -
Exercised - - - (157,844) 59.99 (157,844)
Cancelled (880) 71.71 (880) (880) 71.71 -
Vested - - 3,000 - - 3,880
-------------------------------------------------------------------------
September 30 2,934,710 82.62 2,914,710 2,945,443 82.64 2,711,684
Granted 5,000 35.75 - - - -
Exercised - - - (3,240) 58.27 (3,240)
Cancelled (193,565) 90.08 (193,565) - - -
Vested - - 3,000 - - 204,433
-------------------------------------------------------------------------
December 31 2,746,145 82.01 2,724,145 2,942,203 82.66 2,912,877
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(i) The exercise price noted above represents the weighted average
exercise price in Canadian dollars.
The weighted average assumptions used in measuring the fair value
of stock options granted or modified and the compensation expense
recorded in selling, general and administrative expenses are as
follows:
Three months ended Year ended
December 31, December 31,
--------------------- ---------------------
2008 2007 2008 2007
-----------------------------------------------------------------
Risk free interest rate 1.85% - 2.71% 4.33%
Expected dividend yield 2.01% - 2.02% 1.14%
Expected volatility 31% - 27% 22%
Expected time until
exercise 4 Years - 4 years 4 years
-----------------------------------------------------------------
Weighted average fair
value of options
granted or modified
in period (Cdn$) $ 7.87 $ - $ 10.76 $ 19.50
-----------------------------------------------------------------
Compensation expense
recorded in selling,
general and
administrative
expenses $ - $ 2 $ - $ 4
-----------------------------------------------------------------
(b) Long-term retention program
Information about the Company's long-term retention program is as
follows:
December 31, December 31,
2008 2007
-----------------------------------------------------------------
Class A Subordinate Voting Shares
awarded and not released 780,609 893,541
-----------------------------------------------------------------
Reduction in stated value of Class A
Subordinate Voting Shares $ 51 $ 55
-----------------------------------------------------------------
Unamortized compensation expense
recorded as a reduction of
shareholders' equity $ 36 $ 36
-----------------------------------------------------------------
Compensation expense recorded in selling, general and
administrative expenses during the three-month period and year
ended December 31, 2008 was $6 million (2007 - $2 million), and
$12 million (2007 - $17 million), respectively.
10. CAPITAL STOCK
(a) Changes in the Class A Subordinate Voting Shares for the
three-month period and year ended December 31, 2008 consist of
the following (numbers of shares in the following table are
expressed in whole numbers):
Subordinate Voting
--------------------------
Number of Stated
shares value
-----------------------------------------------------------------
Issued and outstanding at
December 31, 2007 115,344,184 $ 3,708
Repurchase and cancellation(b) (1,555,900) (51)
Issued under the Incentive Stock
Option Plan 1,230 -
Issued under the Dividend
Reinvestment Plan 2,477 -
Release of restricted stock - 4
Repurchase(b) - (2)
-----------------------------------------------------------------
Issued and outstanding at
March 31, 2008 113,791,991 3,659
Repurchase and cancellation(b) (1,938,830) (63)
Issued under the Incentive
Stock Option Plan 383 -
Issued under the Dividend
Reinvestment Plan 6,689 1
-----------------------------------------------------------------
Issued and outstanding at
June 30, 2008 111,860,233 3,597
Issued under the Dividend
Reinvestment Plan 10,955 -
-----------------------------------------------------------------
Issued and outstanding at
September 30, 2008 111,871,188 3,597
Issued under the Dividend
Reinvestment Plan 7,871 1
Release of restricted stock - 6
Issued to settle restricted stock
unit program(b) - 5
Repurchase - (4)
-----------------------------------------------------------------
Issued and outstanding at
December 31, 2008 111,879,059 $ 3,605
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) On November 3, 2008, the Toronto Stock Exchange ("TSX") accepted
the Company's Notice of Intention to Make a Normal Course Issuer
Bid relating to the purchase for cancellation and/or for purposes
of the Company's long-term retention (restricted stock),
restricted stock unit ("RSU") and similar programs, of up to
11,000,000 Magna Class A Subordinate Voting Shares of the Company
(the "Bid"), representing approximately 9.9% of the public float
of such shares. The Bid commenced on November 12, 2008, following
the expiry of its prior bid on November 11, 2008, and will
terminate one year later. All purchases of Class A Subordinate
Voting Shares are made at the market price at the time of
purchase in accordance with the rules and policies of the TSX and
Rule 10b-18 under the U.S. Securities Exchange Act of 1934.
During the year, the Company purchased for cancellation
3.5 million Magna Class A Subordinate Voting Shares under a
normal course issuer bid for cash consideration of $245 million.
The excess of the cash paid over the book value of the Class A
Subordinate Voting Shares repurchased of $98 million was charged
to retained earnings.
During the three months ended March 31, 2008, the Company also
purchased 30,188 Magna Class A Subordinate Voting Shares for
aggregate cash consideration of $2 million. These shares are
being held in trust for purposes of the Company's restricted
stock unit program and are reflected as a reduction in the stated
value of the Company's Class A Subordinate Voting Shares. During
the three months ended December 31, 2008, the Company issued
49,604 Magna Class A Subordinate Voting Shares from the trust to
settle amounts owing under the Company's restricted stock unit
program.
(c) The following table presents the maximum number of shares that
would be outstanding if all the dilutive instruments outstanding
at February 23, 2009 were exercised or converted:
Class A Subordinate Voting and Class B Shares 112,605,888
Subordinated Debentures(i) 1,096,589
Stock options(ii) 2,745,265
-----------------------------------------------------------------
116,447,742
-----------------------------------------------------------------
-----------------------------------------------------------------
(i) The above amounts include shares issuable if the holders of
the 6.5% Convertible Subordinated Debentures exercise their
conversion option but exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle
interest and principal related to the 6.5% Convertible
Subordinated Debentures on redemption or maturity. The
number of Class A Subordinate Voting Shares issuable at the
Company's option is dependent on the trading price of
Class A Subordinate Voting Shares at the time the Company
elects to settle the 6.5% Convertible Subordinated Debenture
interest and principal with shares. All or part of the 6.5%
Convertible Subordinate Debentures are currently redeemable
at the Company's option.
The above amounts also exclude Class A Subordinate Voting
Shares issuable, only at the Company's option, to settle the
7.08% Subordinated Debentures on redemption or maturity. The
number of shares issuable is dependent on the trading price
of Class A Subordinate Voting Shares at redemption or
maturity of the 7.08% Subordinated Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting
provisions and upon payment of the exercise price as may be
determined from time to time pursuant to the Company's stock
option plans.
11. CONTRIBUTED SURPLUS
Contributed surplus consists of accumulated stock option compensation
expense less the fair value of options at the grant date that have
been exercised and credited to Class A Subordinate Voting Shares, the
accumulated restricted stock compensation expense and the value of
the holders' conversion option on the 6.5% Convertible Subordinated
Debentures. The following is a continuity schedule of contributed
surplus:
2008 2007
---------------------------------------------------------------------
Stock-based compensation
Balance, beginning of period $ 55 $ 62
Stock-based compensation expense 2 2
Exercise of options - (1)
Release of restricted stock (4) (3)
---------------------------------------------------------------------
Balance, March 31, 53 60
Stock-based compensation expense 2 14
Exercise of options - (3)
Exercise of stock appreciation rights - (11)
Release of restricted stock - (6)
---------------------------------------------------------------------
Balance, June 30, 55 54
Stock-based compensation expense 1 2
Release of restricted stock - (1)
---------------------------------------------------------------------
Balance, September 30, 56 55
Stock-based compensation expense 14 -
Exercise of options - -
Release of restricted stock (6) -
---------------------------------------------------------------------
Balance, December 31, 64 55
Holders' conversion option 3 3
---------------------------------------------------------------------
$ 67 $ 58
---------------------------------------------------------------------
---------------------------------------------------------------------
12. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following is a continuity schedule of accumulated other
comprehensive income:
Three months ended Year ended
December 31, December 31,
--------------------- ---------------------
2008 2007 2008 2007
---------------------------------------------------------------------
Accumulated net unrealized
gains on translation of
net investment in foreign
operations
Balance, beginning of
period $ 1,034 $ 1,267 $ 1,360 $ 814
Net unrealized (losses)
gains on translation of
net investment in
foreign operations (587) 137 (765) 753
Reclassification of gain
on translation of net
investment in foreign
operations to net
income (loss)(i) - (19) (116) (26)
Repurchase of shares
(note 10) - (25) (32) (181)
---------------------------------------------------------------------
Balance, end of period 447 1,360 447 1,360
---------------------------------------------------------------------
Accumulated net unrealized
loss on cash flow hedges(ii)
Balance, beginning of
period (19) (6) (10) -
Net unrealized losses on
cash flow hedges (96) (2) (102) (8)
Reclassifications of net
losses (gains) on cash
flow hedges to net
income (loss) 2 (2) (1) 1
Adjustment for change in
accounting policy - - - (3)
---------------------------------------------------------------------
Balance, end of period (113) (10) (113) (10)
---------------------------------------------------------------------
Total accumulated other
comprehensive income $ 334 $ 1,350 $ 334 $ 1,350
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) In the normal course of business, the Company reviews its cash
investment strategies, including where such funds are invested.
As a result of these reviews, the Company repatriated funds from
Europe and as a result recorded foreign currency gains in
selling, general and administrative expenses of $116 million
(2007 - $26 million).
(ii) The amount of income tax benefit (expense) that has been netted
in the amounts above is as follows:
Three months ended Year ended
December 31, December 31,
--------------------- ---------------------
2008 2007 2008 2007
----------------------------------------------------------------
Balance, beginning
of period $ 8 $ 2 $ 4 $ -
Net unrealized losses
on cash flow hedges 40 1 42 3
Reclassifications of
net losses (gains) on
cash flow hedges to
net income (loss) - 1 2 -
Adjustment for change
in accounting policy - - - 1
----------------------------------------------------------------
Balance, end of
period $ 48 $ 4 $ 48 $ 4
----------------------------------------------------------------
The amount of other comprehensive loss that is expected to be
reclassified to net income over the next 12 months is $90 million
(net of income tax benefit of $27 million).
13. CAPITAL DISCLOSURES
The Company manages capital in order to ensure it has adequate
borrowing capacity and financial structure to allow financial
flexibility and to provide an adequate return to shareholders. In
order to maintain or adjust the capital structure, the Company may
adjust the amount of dividends paid to shareholders, issue new
shares, purchase shares for cancellation or increase or decrease the
amount of debt outstanding.
The Company monitors capital using the ratio of debt to total
capitalization. Debt includes bank indebtedness and long-term debt as
shown in the balance sheet. Total capitalization includes debt and
all components of shareholders' equity.
The Company's capitalization and debt to total capitalization is as
follows:
December 31, December 31,
2008 2007
---------------------------------------------------------------------
Liabilities
Bank indebtedness $ 909 $ 89
Long-term debt due within one year 157 374
Long-term debt 143 337
---------------------------------------------------------------------
1,209 800
Shareholders' equity 7,363 8,642
---------------------------------------------------------------------
Total capitalization $ 8,572 $ 9,442
---------------------------------------------------------------------
---------------------------------------------------------------------
Debt to total capitalization 14.1% 8.5%
---------------------------------------------------------------------
---------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
(a) The Company's financial assets and financial liabilities consist
of the following:
December 31, December 31,
2008 2007
-----------------------------------------------------------------
Held for trading
Cash and cash equivalents $ 2,757 $ 2,954
-----------------------------------------------------------------
-----------------------------------------------------------------
Held to maturity investments
Investment in ABCP $ 64 $ 121
Severance investments 9 10
-----------------------------------------------------------------
$ 73 $ 131
-----------------------------------------------------------------
-----------------------------------------------------------------
Loans and Receivables
Accounts receivable $ 2,821 $ 3,981
Long-term receivables included in
other assets 67 128
Income taxes receivable 11 -
-----------------------------------------------------------------
$ 2,899 $ 4,109
-----------------------------------------------------------------
-----------------------------------------------------------------
Other financial liabilities
Bank indebtedness $ 909 $ 89
Long-term debt (including portion
due within one year) 300 711
Accounts payable 2,744 3,492
Accrued salaries and wages 448 544
Other accrued liabilities 835 911
Income taxes payable - 248
-----------------------------------------------------------------
$ 5,236 $ 5,995
-----------------------------------------------------------------
-----------------------------------------------------------------
(b) Fair value
The Company determined the estimated fair values of its financial
instruments based on valuation methodologies it believes are
appropriate; however, considerable judgment is required to
develop these estimates. Accordingly, these estimated fair values
are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The estimated fair value
amounts can be materially affected by the use of different
assumptions or methodologies. The methods and assumptions used to
estimate the fair value of financial instruments are described
below:
Cash and cash equivalents, bank indebtedness, accounts payable,
accrued salaries and wages, other accrued liabilities and income
taxes receivable.
Due to the short period to maturity of the instruments, the
carrying values as presented in the consolidated balance sheets
are reasonable estimates of fair values.
Investments
Fair value information is not readily determinable for the
Company's investment in ABCP. At December 31, 2008, the Company
recorded its investment in ABCP at its estimated fair value
(note 3).
Term debt
The Company's term debt includes $157 million due within one
year. Due to the short period to maturity of this debt, the
carrying value as presented in the consolidated balance sheet is
a reasonable estimate of its fair value. The fair value of the
Company's long-term debt, based on current rates for debt with
similar terms and maturities, is not materially different from
its carrying value.
(c) Credit risk
The Company's financial assets that are exposed to credit risk
consist primarily of cash and cash equivalents, accounts
receivable, held to maturity investments, and foreign exchange
forward contracts with positive fair values.
The Company's held to maturity investments includes an investment
in ABCP (note 3). Given the continuing uncertainties regarding
the value of the underlying assets, the amount and timing of cash
flows and the risk of collateral calls in the event that spreads
widened considerably, the Company could be exposed to further
losses on its investment.
Cash and cash equivalents, which consists of short-term
investments, are only invested in governments, bank term deposits
and bank commercial paper with an investment grade credit rating.
Credit risk is further reduced by limiting the amount which is
invested in certain governments or any major financial
institution.
The Company is also exposed to credit risk from the potential
default by any of its counterparties on its foreign exchange
forward contracts. The Company mitigates this credit risk by
dealing with counterparties who are major financial institutions
that the Company anticipates will satisfy their obligations under
the contracts.
In the normal course of business, the Company is exposed to
credit risk from its customers, substantially all of which are in
the automotive industry. These accounts receivable are subject to
normal industry credit risks. However, in North America, sales to
the Company's three largest customers (the "Detroit 3")
represented 44% of the Company's total sales. The Detroit 3 are
rated as below investment grade by credit rating agencies and
General Motors and Chrysler are currently receiving funding from
the United States government in order to remain solvent. The
inability of these customers to satisfy their financial
obligations to the Company and the potential for these customers
to seek protection from their creditors represent material credit
risks to the Company.
For the three months ended December 31, 2008, sales to the
Company's five largest customers (including the Detroit 3)
represented 75% of our total sales, and substantially all of our
sales are to customers in which the Company has ongoing
contractual relationships. Due to the nature of these business
relationships and the level of integration the Company has with
its customers, the Company's exposure to overdue accounts
receivable does not represent a material credit risk to the
Company.
(d) Currency risk
The Company is exposed to fluctuations in foreign exchange rates
when manufacturing facilities have committed to the delivery of
products for which the selling price has been quoted in
currencies other than the facilities' functional currency, or
when materials and equipment are purchased in currencies other
than the facilities' functional currency. In an effort to manage
this net foreign exchange exposure, the Company employs hedging
programs, primarily through the use of foreign exchange forward
contracts.
As at December 31, 2008, the net foreign exchange exposure was
not material.
(e) Interest rate risk
The Company is not exposed to significant interest rate risk due
to the short-term maturity of its monetary current assets and
current liabilities. In particular, the amount of interest income
earned on our cash and cash equivalents is impacted more by the
investment decisions made and the demands to have available cash
on hand, than by movements in the interest rates over a given
period.
In addition, the Company is not exposed to interest rate risk on
its long-term debt instruments as the interest rates on these
instruments are fixed.
15. SEGMENTED INFORMATION
Three months ended
December 31, 2008
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 1,121 $ 1,036 $ 682
United States 1,263 1,216 806
Mexico 453 415 374
Eliminations (150) - -
---------------------------------------------------------------------
2,687 2,667 $ (91) 1,862
Europe
Euroland 1,702 1,637 1,107
Great Britain 270 270 66
Other European countries 168 137 191
Eliminations (45) - -
---------------------------------------------------------------------
2,095 2,044 (75) 1,364
Rest of World 130 121 3 173
Corporate and Other (76) 4 (16) 302
---------------------------------------------------------------------
Total reportable segments $ 4,836 $ 4,836 $ (179) 3,701
Current assets 7,351
Investments, goodwill and
other assets 2,137
---------------------------------------------------------------------
Consolidated total assets $ 13,189
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended
December 31, 2007
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 1,893 $ 1,774 $ 1,137
United States 1,540 1,483 989
Mexico 422 364 380
Eliminations (211) - -
---------------------------------------------------------------------
3,644 3,621 $ 115 2,506
Europe
Euroland 2,622 2,564 1,126
Great Britain 321 320 95
Other European countries 226 192 136
Eliminations (61) - -
---------------------------------------------------------------------
3,108 3,076 59 1,357
Rest of World 152 137 8 152
Corporate and Other (68) 2 - 292
---------------------------------------------------------------------
Total reportable segments $ 6,836 $ 6,836 $ 182 4,307
Current assets 8,770
Investments, goodwill and
other assets 2,266
---------------------------------------------------------------------
Consolidated total assets $ 15,343
---------------------------------------------------------------------
---------------------------------------------------------------------
Year ended
December 31, 2008
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 5,480 $ 5,134 $ 682
United States 5,250 5,043 806
Mexico 1,840 1,649 374
Eliminations (653) - -
---------------------------------------------------------------------
11,917 11,826 $ (106) 1,862
Europe
Euroland 9,608 9,383 1,107
Great Britain 1,160 1,157 66
Other European countries 903 761 191
Eliminations (240) - -
---------------------------------------------------------------------
11,431 11,301 241 1,364
Rest of World 611 560 32 173
Corporate and Other (255) 17 99 302
---------------------------------------------------------------------
Total reportable segments $ 23,704 $ 23,704 $ 266 3,701
Current assets 7,351
Investments, goodwill and
other assets 2,137
---------------------------------------------------------------------
Consolidated total assets $ 13,189
---------------------------------------------------------------------
Year ended
December 31, 2007
-------------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
---------------------------------------------------------------------
North America
Canada $ 7,043 $ 6,721 $ 1,137
United States 5,972 5,792 989
Mexico 1,560 1,370 380
Eliminations (628) - -
---------------------------------------------------------------------
13,947 13,883 $ 688 2,506
Europe
Euroland 10,021 9,839 1,126
Great Britain 1,203 1,201 95
Other European countries 793 689 136
Eliminations (195) - -
---------------------------------------------------------------------
11,822 11,729 359 1,357
Rest of World 504 446 20 152
Corporate and Other (206) 9 23 292
---------------------------------------------------------------------
Total reportable segments $ 26,067 $ 26,067 $ 1,090 4,307
Current assets 8,770
Investments, goodwill and
other assets 2,266
---------------------------------------------------------------------
Consolidated total assets $ 15,343
---------------------------------------------------------------------
---------------------------------------------------------------------
(i) EBIT represents income from operations before income taxes and
net interest income.
16. SUBSEQUENT EVENTS
As at December 31, 2008, the Company had outstanding borrowings under
its five-year revolving credit facility of $1.0 billion at an average
rate of 2.6% (see note 15 to the Company's 2007 Annual Report).
Subsequent to year end, the Company repaid $419 million of
borrowings.
17. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current period's method of presentation.