AURORA, Canada, November 10 /PRNewswire/ -- Magna International Inc. (TSX: MG.A, MG.B; NYSE: MGA) today reported financial results for the third quarter and nine months ended September 30, 2006.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
Sales US$5,424 US$5,381 US$17,812 US$16,957
Operating income US$155 US$240 US$ 750 US$ 817
Net income US$94 US$159 US$499 US$ 556
Diluted earnings per share US$0.86 US$1.44 US$4.52 US$5.16
All results are reported in millions of U.S. dollars, except per
share figures.
THREE MONTHS ENDED SEPTEMBER 30, 2006
We posted sales of US$5.4 billion for the third quarter ended
September 30, 2006, an increase of 1% over the third quarter of 2005. This
higher sales level was achieved as a result of increases in our European
production and complete vehicle assembly sales offset in part by reductions
in North American production sales and tooling, engineering and other sales.
During the third quarter of 2006, North American and European
average dollar content per vehicle increased 1% and 18% respectively, each
over the comparable quarter in 2005. During the third quarter of 2006, North
American and European vehicle production declined 7% and 5% respectively,
each in comparison to the third quarter of 2005.
Complete vehicle assembly sales increased 16% to US$1.017
billion for the third quarter of 2006 compared to US$879 million for the
third quarter of 2005 and complete vehicle assembly volumes were unchanged
from the third quarter of 2006 compared to the third quarter of 2005.
Our operating income was US$155 million for the third quarter
ended September 30, 2006 compared to US$240 million for the third quarter
ended September 30, 2005, and we earned net income for the third quarter of
2006 of US$94 million compared to US$159 million for the third quarter of
2005.
Diluted earnings per share were US$0.86 for the third quarter
ended September 30, 2006 compared to US$1.44 for the third quarter ended
September 30, 2005.
During the third quarter ended September 30, 2006, we
generated cash from operations before changes in non-cash operating assets
and liabilities of US$273 million, and generated US$49 million from
non-cash operating assets and liabilities. Total investment activities for
the third quarter of 2006 were US$255 million, including US$198 million in
fixed asset additions, US$51 million to purchase subsidiaries, and a US$6
million increase in investments and other assets.
NINE MONTHS ENDED SEPTEMBER 30, 2006
We posted sales of US$17.8 billion for the nine months ended
September 30, 2006, an increase of 5% over the nine months ended September
30, 2005. This higher sales level was achieved as a result of increases in
our North American and European production sales and complete vehicle
assembly sales offset in part by reductions in tooling, engineering and other
sales.
During the nine months ended September 30, 2006, North
American and European average dollar content per vehicle increased 6% and 11%
respectively, each over the comparable nine-month period in 2005. During the
nine months ended September 30, 2006, North American and European vehicle
production declined 1% and 3%, respectively, each in comparison to the nine
months ended September 30, 2005.
Complete vehicle assembly sales increased 2% to US$3.132
billion for the nine months ended September 30, 2006 compared to US$3.059
billion for the nine months ended September 30, 2005 and complete vehicle
assembly volumes increased 11% for the first nine months of 2006 compared to
the first nine months of 2005.
Our operating income was US$750 million for the nine months
ended September 30, 2006 compared to US$817 million for the nine months ended
September 30, 2005, and we earned net income of US$499 million for the first
nine months of 2006 compared to US$556 million for the first nine months of
2005.
Diluted earnings per share were US$4.52 for the nine months
ended September 30, 2006 compared to US$5.16 for the nine months ended
September 30, 2005.
During the nine months ended September 30, 2006, we generated
cash from operations before changes in non-cash operating assets and
liabilities of US$1.1 billion, and invested US$317 million in non-cash
operating assets and liabilities. Total investment activities for the first
nine months of 2006 were US$856 million, including US$544 million in fixed
asset additions, US$254 million to purchase subsidiaries, and a US$58 million
increase in investments and other assets.
A more detailed discussion of our consolidated financial
results for the third quarter and nine months ended September 30, 2006 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.
OTHER MATTERS
Our Board of Directors today declared a quarterly dividend
with respect to our outstanding Class A Subordinate Voting Shares and Class B
Shares for the quarter ended September 30, 2006. The dividend of U.S. US$0.38
per share is payable on December 15, 2006 to shareholders of record on
November 30, 2006.
We are the most diversified automotive supplier in the world.
We design, develop and manufacture automotive systems, assemblies, modules
and components, and engineer and assemble complete vehicles, primarily for
sale to original equipment manufacturers of cars and light trucks in North
America, Europe, Asia and South America. Our capabilities include the design,
engineering, testing and manufacture of automotive interior systems; seating
systems; closure systems; metal body systems; vision and engineered glass
systems; electronic systems; plastic body, lighting and exterior trim
systems; various powertrain and drivetrain systems; retractable hard top and
soft top roof systems; as well as complete vehicle engineering and assembly.
We have approximately 83,000 employees in 228 manufacturing
operations and 62 product development and engineering centres in 23
countries.
We will hold a conference call for interested analysts and
shareholders to discuss our third quarter results on Tuesday, November 7,
2006 at 8:30 a.m. EST. The conference call will be co-chaired by Mark T.
Hogan, President and Vincent J. Galifi, Executive Vice-President and Chief
Financial Officer. The number to use for this call is +1-800-741-7590. The
number for overseas callers is +1-416-641-6210. Please call in 10 minutes
prior to the call. We will also webcast the conference call at www.magna.com.
The slide presentation accompanying the conference call will be available on
our website Tuesday morning prior to the call.
FORWARD-LOOKING STATEMENTS
The previous discussion may contain statements that, to the
extent that they are not recitations of historical fact, constitute
"forward-looking statements" within the meaning of applicable securities
legislation. Forward-looking statements may include financial and other
projections, as well as statements regarding our future plans, objectives or
economic performance, or the assumptions underlying any of the foregoing. We
use words such as "may", "would", "could", "will", "likely", "expect",
"anticipate", "believe", "intend", "plan", "forecast", "project", "estimate"
and similar expressions to identify forward-looking statements. Any such
forward-looking statements are based on assumptions and analyses made by us
in light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate in the circumstances. However, whether actual results
and developments will conform with our expectations and predictions is
subject to a number of risks, assumptions and uncertainties. These risks,
assumptions and uncertainties include, but are not limited to, the impact of:
declining production volumes and changes in consumer demand for vehicles; a
reduction in the production volumes of certain vehicles, such as certain
light trucks; our ability to offset increases in the cost of commodities,
such as steel and resins, as well as energy prices; fluctuations in relative
currency values; our ability to offset price concessions demanded by our
customers; our ability to compete with suppliers with operations in low cost
countries; changes in our mix of earnings between jurisdictions with lower
tax rates and those with higher tax rates, as well as our ability to fully
benefit tax losses; other potential tax exposures; the financial distress of
some of our suppliers and customers; the inability of our customers to meet
their financial obligations to us; our ability to fully recover
pre-production expenses; warranty and recall costs; the termination by our
customers of any material contracts; product liability claims in excess of
our insurance coverage; expenses related to the restructuring and
rationalization of some of our operations; impairment charges; legal claims
against us; risks of conducting business in foreign countries; unionization
activities at our facilities; work stoppages and labour relations disputes;
changes in laws and governmental regulations; costs associated with
compliance with environmental laws and regulations; potential conflicts of
interest involving our controlling shareholder, the Stronach Trust; and other
factors set out in our Annual Information Form filed with securities
commissions in Canada and our annual report on Form 40-F filed with the
United States Securities and Exchange Commission, and subsequent filings. In
evaluating forward-looking statements, readers should specifically consider
the various factors which could cause actual events or results to differ
materially from those indicated by such forward-looking statements. Unless
otherwise required by applicable securities laws, we do not intend, nor do we
undertake any obligation, to update or revise any forward-looking statements
to reflect subsequent information, events, results or circumstances or
otherwise.
For further information about Magna, please see our website at
www.magna.com. Copies of financial data and other publicly filed documents
are available through the internet on the Canadian Securities Administrators'
System for Electronic Document Analysis and Retrieval (SEDAR) which can be
accessed at www.sedar.com and on the United States Securities and Exchange
Commission's Electronic Data Gathering, Analysis and Retrieval System (EDGAR)
which can be accessed at www.sec.gov.
MAGNA INTERNATIONAL INC.
Management's Discussion and Analysis of Results of Operations and
Financial Position
All amounts in this Management's Discussion and Analysis of
Results of Operations and Financial Position ("MD&A") are in U.S. dollars and
all tabular amounts are in millions of U.S. dollars, except per share figures
and average dollar content per vehicle, which are in U.S. dollars, unless
otherwise noted. When we use the terms "we", "us", "our" or "Magna", we are
referring to Magna International Inc. and its subsidiaries and jointly
controlled entities, unless the context otherwise requires.
This MD&A should be read in conjunction with the unaudited
interim consolidated financial statements for the three months and nine
months ended September 30, 2006 included in this Press Release, and the
audited consolidated financial statements and MD&A for the year ended
December 31, 2005 included in our 2005 Annual Report to Shareholders. The
unaudited interim consolidated financial statements for the three months and
nine months ended September 30, 2006 and the audited consolidated financial
statements for the year ended December 31, 2005 are both prepared in
accordance with Canadian generally accepted accounting principles.
This MD&A has been prepared as at November 6, 2006.
OVERVIEW
We are a leading global supplier of technologically advanced
automotive systems, assemblies, modules and components. We follow a corporate
policy of functional and operational decentralization. We conduct our
operations through divisions, each of which is an autonomous business unit
operating within pre-determined guidelines. As at September 30, 2006, we had
228 manufacturing divisions and 62 product development and engineering
centres in 23 countries. We design, develop and manufacture automotive
systems, assemblies, modules and components, and engineer and assemble
complete vehicles, for sale to original equipment manufacturers ("OEMs") of
cars and light trucks in North America, Europe, Asia and South America. Our
product capabilities span a number of major automotive areas including:
interiors; seating; closures; metal body systems; vision and engineered glass
systems; electronics; plastic body, lighting and exterior trim systems;
various powertrain and drivetrain systems; retractable hard top and soft top
roof systems; and complete vehicle engineering and assembly.
During 2005, we completed the privatizations of our former
public subsidiaries: Tesma International Inc.; Decoma International Inc.
("Decoma"); and Intier Automotive Inc. (the "Privatizations"). The
Privatizations have allowed us to improve our strategic positioning,
particularly with respect to the development of vehicle modules that cross
our traditional product lines, and to better exploit our various
competencies, particularly our complete vehicle expertise.
Our operations are segmented on a geographic basis between
North America, Europe, and Rest of World (primarily Asia and South America).
A co-Chief Executive Officer heads management in each of our two primary
markets, North America and Europe. The role of the North American and
European management teams is to manage our interests to ensure a coordinated
effort across our different product capabilities. In addition to maintaining
key customer, supplier and government contacts in their respective markets,
our regional management teams centrally manage key aspects of our operations
while permitting our divisions enough flexibility through our decentralized
structure to foster an entrepreneurial environment.
Our success is primarily dependent upon the levels of North
American and European car and light truck production by our customers and the
relative amount of content we have on the various programs. OEM production
volumes in different regions may be impacted by factors which may vary from
one region to the next, including general economic and political conditions,
interest rates, energy and fuel prices, international conflicts, labour
relations issues, regulatory requirements, trade agreements, infrastructure,
legislative changes, environmental emission and safety issues. A number of
other factors, discussed below under "Industry Trends and Risks" also affect
our success, including such things as relative currency values, commodities
prices, price reduction pressures from our customers, the financial condition
of our supply base and competition from manufacturers with operations in low
cost countries.
HIGHLIGHTS
We reported sales of US$5.4 billion for the third quarter of
2006, an increase of 1% over the third quarter of 2005. This higher sales
level was achieved as a result of increases in our European production and
complete vehicle assembly sales offset in part by reductions in North
American production sales and tooling, engineering and other sales.
In the third quarter of 2006, our largest OEM customers in
North America significantly reduced vehicle production levels, particularly
on their light truck programs. While overall North American vehicle
production volumes declined 7% in the third quarter of 2006 compared to the
third quarter of 2005, General Motors ("GM"), Ford and Chrysler light truck
production declined 8%, 24% and 26%, respectively.
The production declines reflect a number of factors that
continue to impact our largest customers in North America, including
declining market share, high inventory levels on certain vehicle programs,
and a shift in consumer preferences away from light trucks. The lower
production levels at our largest OEM customers, particularly for certain
light trucks, in the third quarter of 2006, significantly impacted our sales
and earnings, as our content on a number of these programs is higher than our
consolidated average content.
Operating income for the third quarter of 2006 decreased 35%
to US$155 million from US$240 million for the third quarter of 2005.
Excluding the unusual items recorded in the third quarters of 2006 and 2005
(see "Unusual Items" below), operating income for the third quarter of 2006
decreased US$68 million or 30%. The decrease in operating income excluding
unusual items was primarily due to lower sales in North America, operational
inefficiencies and other costs at certain facilities, particularly at certain
interior systems facilities, and incremental customer price concessions.
These factors were partially offset by a favourable revaluation of warranty
accruals, additional margins earned on the launch of new programs during or
subsequent to the third quarter of 2005, increased margins earned on higher
volumes for certain assembly programs and the closure, subsequent to the
third quarter of 2005, of certain underperforming divisions which incurred
losses during the third quarter of 2005.
Net income for the third quarter of 2006 decreased 41% or
US$65 million to US$94 million from US$159 million for the third quarter of
2005. Excluding the unusual items recorded in the third quarters of 2006 and
2005 (see "Unusual Items" below), net income for the third quarter of 2006
decreased 36% or US$56 million. The decrease in net income excluding unusual
items was primarily a result of the decrease in operating income (excluding
unusual items) partially offset by lower income taxes. Income taxes were
lower despite the negative impact of an unfavourable tax decision (see
"Incomes Taxes" below).
Diluted earnings per share for the third quarter of 2006
decreased 40% or US$0.58 to US$0.86 from US$1.44 for the third quarter of
2005. Excluding the unusual items recorded in the third quarters of 2006 and
2005 (see "Unusual Items" below), diluted earnings per share decreased 36% or
US$0.50 primarily as a result of the decrease in net income (excluding
unusual items).
Unusual Items
During the three months and nine months ended September 30,
2006 and 2005, we recorded certain unusual items as follows:
2006 2005
Diluted Diluted
Operating Net Earnings Operating Net Earnings
Income Income per Share Income Income per Share
Third Quarter
Restructuring
charges (1) US$(5) US$(4) US$(0.04) US$(14) US$(11) US$(0.10)
Settlement gain (2) - - - 26 16 0.14
Total third quarter
unusual items (5) (4) (0.04) 12 5 0.04
Second Quarter
Restructuring
charges (1) US$(25) US$(18) US$(0.16) US$(9) US$(7) US$(0.07)
Impairment charges (1) - - - (5) (5) (0.05)
Sale of facilities (3) (17) (15) (0.14) 16 10 0.09
Foreign currency
gain (4) - - - 18 18 0.16
Future tax recovery (4) - 10 0.09 - - -
Total second quarter
unusual items (42) (23) (0.21) 20 16 0.13
First Quarter
Restructuring
charges (1) (10) (9) (0.08) (5) (4) (0.04)
Charges associated
with MG Rover (5) - - - (15) (13) (0.13)
Total first quarter
unusual items (10) (9) (0.08) (20) (17) (0.17)
Total year to date
unusual items US$(57) US$(36) US$(0.33) US$12 US$4 US$0.03
(1) Restructuring and Impairment Charges
[a] For the nine months ended September 30, 2006
During the first quarter of 2006, we incurred restructuring
and rationalization charges of US$10 million related to activities that were
initiated in 2005. Specifically, in January 2006, we reached an agreement
with the workers' council at a facility in Belgium that covers
non-contractual termination benefits for employees at this facility. As a
result, we recorded the US$8 million cost of this agreement in the first
quarter of 2006.
During the second quarter of 2006, we incurred restructuring
and rationalization charges of US$25 million. Specifically, in June, we
recorded a US$17 million charge as a result of an agreement we reached with
employees related to rightsizing a facility in the United States. In
addition, we incurred additional restructuring and rationalization charges of
US$4 million related to two facilities in North America and US$4 million
related to two facilities in Europe.
During the third quarter of 2006, we incurred restructuring
and rationalization charges of US$4 million related to three facilities in
North America and US$1 million related to one facility in Europe.
[b] For the nine months ended September 30, 2005
During the first quarter of 2005 we incurred rationalization
charges of US$4 million related to a facility in North America and we also
expensed previously capitalized bank facility fees as a result of the
cancellation of Decoma's term credit facility.
During the second quarter of 2005, we incurred restructuring
and impairment charges totalling US$14 million related substantially to three
European facilities.
During the third quarter of 2005, we incurred restructuring
and impairment charges totalling US$14 million substantially related to a
European facility and the Privatizations.
(2) Settlement Gain
During the third quarter of 2005, we recorded a settlement
gain with respect to the receipt of US$26 million awarded by a court in a
lawsuit commenced by us in 1998 in respect of defective materials installed
by a supplier in a real estate project.
(3) Sale of Facilities
During the second quarter of 2006, we entered into agreements
for the sale of two underperforming powertrain facilities. As a result, we
incurred losses on disposition of the facilities of US$12 million and US$5
million in Europe and North America, respectively. During the second quarter
of 2005, we recorded a US$16 million gain on sale of a non-core seat
component facility in North America.
(4) Other Unusual Items
During the second quarter of 2006 we recorded a US$10 million
future income tax recovery as a result of a reduction in future income tax
rates in Canada. During the second quarter of 2005, we recorded an US$18
million foreign currency gain on the repatriation of funds from Europe.
(5) MG Rover
In April 2005, MG Rover Group Limited ("MG Rover") was placed
into administration, which is similar to Chapter 11 bankruptcy protection in
the United States (the "MG Rover situation"). As a result, we recorded
charges of US$15 million related to our MG Rover assets and supplier
obligations during the first quarter of 2005.
INDUSTRY TRENDS AND RISKS
A number of trends have had a significant impact on the global
automotive industry in recent years, including:
- the growth of Asian-based OEMs in North America and Europe
and declining market share at certain of our customers in our traditional
markets;
- increased pressure by OEMs on automotive suppliers to reduce
their prices, including through retroactive price reductions, and bear
additional costs;
- increases in raw materials and commodity prices, such as
steel and resin, as well as energy prices;
- the deterioration of the financial condition of the
automotive supply base and certain OEMs;
- the growth of the automotive industry in China, Korea, India
and other Asian countries, as well as parts of eastern Europe, and the
migration of manufacturing to such lower cost countries;
- increased engineering capabilities required in order to be
awarded new business for more complex systems and modules;
- increased outsourcing of larger modules;
- increased prevalence of vehicles built off high-volume
global vehicle platforms; and
- increased customer and consumer demand for lighter vehicles,
additional safety features, improved comfort, convenience and space
optimization features, alternative fuel systems and advanced electronics
systems.
The following are some of the more significant risks that
could affect our ability to achieve our desired results:
- The global automotive industry is cyclical and consumer
demand for automobiles is sensitive to changes in certain economic and
political conditions, including interest rates, energy prices and
international conflicts (including acts of terrorism). Automotive sales and
production can also be affected by other factors, including labour relations
issues, regulatory requirements and trade agreements. In North America, the
industry is characterized by significant overcapacity, fierce competition and
significant pension and other post employment benefit costs for the domestic
automobile manufacturers. In Europe, the market structure is relatively
fragmented with significant overcapacity. As a result of these conditions,
some of our customers are currently experiencing or may in the future
experience reduced consumer demand for their vehicles, leading to declining
vehicle production volumes. A reduction in vehicle production volumes by any
of our significant customers could have a material adverse effect on our
profitability.
- Rising healthcare, pension and other post-employment benefit
costs are having a significant adverse effect on the profitability and
competitiveness of a number of North American and European OEMs and
automotive component suppliers. Increased raw materials prices, including
steel and resins, and energy prices are also adversely affecting OEMs and
automotive component suppliers. Other economic conditions, such as increased
gas prices, have affected and could further threaten sales of certain models,
such as full-size sport utility vehicles and light trucks. All of these
conditions, coupled with a continued decline in market share, could further
threaten the financial condition of some of our customers, putting additional
pressure on us to reduce our prices and exposing us to greater credit risk.
In the event that our customers are unable to satisfy their financial
obligations or seek protection from their creditors, we may incur additional
expenses as a result of such credit exposure, which could have a material
adverse effect on our profitability and financial condition.
- Although we supply parts to all of the leading OEMs, a
significant majority of our sales are to four such customers, two of which
are rated as below investment grade by credit rating agencies. We are
attempting to further diversify our customer base, particularly to increase
our business with Asian based OEMs. A decline in overall production volumes
by any of our four largest customers could have an adverse effect on our
profitability, particularly if we are unable to further diversify our
customer base. Moreover, while we supply parts for a wide variety of vehicles
produced in North America and Europe, we do not supply parts for all vehicles
produced, nor is the number or value of parts evenly distributed among the
vehicles for which we do supply parts. Shifts in market share among vehicles
(including shifts away from vehicles we assemble) or the early termination,
loss, renegotiation of the terms of, or delay in, the implementation of any
significant production or assembly contract could have an adverse effect on
our profitability.
- The competitive environment in the automotive industry has
been intensifying as our customers seek to take advantage of lower operating
costs in China, other countries in Asia and parts of Eastern Europe. As a
result, we are facing increased competition from suppliers that have
manufacturing operations in low cost countries. While we continue to expand
our manufacturing footprint with a view to taking advantage of manufacturing
opportunities in low cost countries, we cannot guarantee that we will be able
to fully realize such opportunities. Additionally, 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 loss of any significant production contract to
a competitor in low cost countries or significant costs and risks incurred to
enter and carry on business in these countries could have an adverse effect
on our profitability.
- Prices for key commodities used in our parts production,
particularly steel and resin, remain at elevated levels with the possibility
of future increases in some commodities. We expect steel prices will remain
at elevated levels in 2006 compared to levels earlier this decade.
Approximately half of our steel is acquired through resale programs operated
by the automobile manufacturers, which do not expose us to steel price
increases, and the balance is acquired through spot, short-term and long-term
contracts. However, a steel supplier has challenged its long-term agreements
with us for certain steel products while steel prices were rising and, to the
extent that it successfully disputes, terminates or otherwise refuses to
honour its contracts, our exposure to steel price increases will increase to
the extent that steel prices remain at elevated levels. We also sell scrap
steel, which is generated through our parts production process, and the
revenues from these sales have reduced some of our exposure to steel price
increases in the past. However, if scrap steel prices decline, while steel
prices remain high, our ability to reduce our exposure to steel price
increases will diminish. To the extent we are unable to fully mitigate our
exposure to increased commodity prices through hedging strategies, by
engineering products with reduced steel, resin or other commodity content, or
by passing additional steel and resin costs to our customers, such additional
commodity costs could have a material adverse effect on our profitability.
- We rely on a number of suppliers to supply us with a wide
range of components required in connection with our business. Economic
conditions, intense pricing pressures, increased commodity prices and a
number of other factors have left many automotive suppliers in varying
degrees of financial distress. The continued financial distress or the
insolvency or bankruptcy of one of our major suppliers could disrupt the
supply of components to us from these suppliers, possibly resulting in a
temporary disruption in the supply of products by us to our customers.
Additionally, the financial distress or the insolvency or bankruptcy of a
significant supplier to one of our customers could disrupt the supply of
products to such customer, resulting in a reduction in production by our
customer. Such a reduction in our customer's production could negatively
impact our production, resulting in unrecoverable losses. Any prolonged
disruption in the supply of critical components by our suppliers or suppliers
to one of our customers, the inability to re-source production of a critical
component from a financially distressed automotive components sub-supplier,
or any temporary shut-down of one of our production lines or the production
lines of our customers, could have a material adverse effect on our
profitability. Additionally, the insolvency, bankruptcy or financial
restructuring of any of our critical suppliers could result in us incurring
unrecoverable costs related to the financial work-out of such suppliers
and/or increased exposure for product liability, warranty or recall costs
relating to the components supplied by such suppliers to the extent such
suppliers are not able to assume responsibility for such amounts, which could
have an adverse effect on our profitability.
- We have entered into, and will continue to enter into,
long-term supply arrangements with our customers which provide for, among
other things, price concessions over a pre-defined supply term. To date,
these concessions have been fully or partially offset by cost reductions
arising principally from product and process improvements and price
reductions from our suppliers. However, the competitive automotive industry
environment in North America, Europe and Asia has caused these pricing
pressures to intensify. Some of our customers have demanded, and in light of
challenging automotive industry conditions may continue to demand, additional
price concessions and/or retroactive price reductions. We may not be
successful in offsetting all of these price concessions or reductions through
improved operating efficiencies, reduced expenditures or reduced prices from
our suppliers. To the extent that we are not able to offset price concessions
through cost reductions or improved operating efficiencies, such concessions
could have a material adverse effect on our profitability.
- 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.
- We continue to be pressured to absorb costs related to
product design, engineering and tooling, as well as other items previously
paid for directly by OEMs. In particular, some OEMs have requested that we
pay for design, engineering and tooling costs that are incurred up to the
start of production and recover these costs through amortization in the piece
price of the applicable component. Some of these costs cannot be capitalized,
which could have an adverse effect on our profitability until the programs in
respect of which they have been incurred are launched. In addition, since our
contracts generally do not include any guaranteed minimum purchase
requirements, if estimated production volumes are not achieved, these costs
may not be fully recovered, which could have an adverse effect on our
profitability.
- Our customers continue to demand that we bear the cost of
the repair and replacement of defective products which are either covered
under their warranty or are the subject of a recall by them. If our products
are, or are alleged to be, defective, we may be required to participate in a
recall of those products, particularly if the actual or alleged defect
relates to vehicle safety. Warranty provisions are established based on our
best estimate of the amounts necessary to settle existing or probable claims
on product 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. Costs typically include the cost of the product
being replaced, the customer's cost of the recall and labour to remove and
replace the defective part. We continue to experience increased customer
pressure to assume greater warranty responsibility. Currently, under most
customer agreements, we only account for existing or probable 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.
- Contracts from our customers consist of blanket purchase
orders which generally provide for the supply of a customer's annual
requirements for a particular vehicle, instead of a specified quantity of
products. These blanket purchase orders can be terminated by a customer at
any time and, if terminated, could result in us incurring various
pre-production, engineering and other costs which we may not recover from our
customer and which could have an adverse effect on our profitability.
- We are also subject to the risk of exposure to product
liability claims in the event that the failure of our products results in
bodily injury and/or property damage. Currently, we have bodily injury
coverage under insurance policies. This coverage will continue until August
2007 and is subject to renewal on an annual basis. A successful claim against
us in excess of our available insurance coverage could have an adverse effect
on our profitability and financial condition.
- In response to the increasingly competitive automotive
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 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 in 2005 and may
do so in 2006 and in the future. Goodwill must be tested for impairment
annually, or more frequently when an event occurs that more likely than not
reduces the fair value of a reporting unit below its carrying value. We also
evaluate fixed assets and other long-lived assets for impairment whenever
indicators of impairment exist. The bankruptcy of a significant customer or
the early termination, loss, renegotiation of the terms of, or delay in the
implementation of any significant production contract could be indicators of
impairment. In addition, to the extent that forward-looking assumptions
regarding the impact of improvement plans on current operations, in-sourcing
and other new business opportunities, program price and cost assumptions on
current and future business, the timing of new program launches and future
forecasted production volumes are not met, any resulting impairment loss
could have a material adverse effect on our profitability.
- From time to time, we may be contingently liable for
contractual and other claims with customers, suppliers and former employees.
On an ongoing basis, we attempt to assess the likelihood of any adverse
judgements or outcomes to these claims, although it is difficult to predict
final outcomes with any degree of certainty. At this time, we do not believe
that any of the claims which we are party to will have a material adverse
effect on our financial position, however, we cannot provide any assurance to
this effect.
RESULTS OF OPERATIONS
Average Foreign Exchange
For the three months For the nine months
ended September 30, ended September 30,
2006 2005 Change 2006 2005 Change
1 Canadian dollar
equals U.S. dollars 0.893 0.834 + 7% 0.884 0.818 + 8%
1 euro equals
U.S. dollars 1.275 1.221 + 4% 1.246 1.262 - 1%
1 British pound
equals U.S. dollars 1.877 1.788 + 5% 1.820 1.843 - 1%
The preceding table reflects the average foreign exchange
rates between the most common currencies in which we conduct business and our
U.S. dollar reporting currency. The significant changes in these foreign
exchange rates for the three months and nine months ended September 30, 2006
impacted the reported U.S. dollar amounts of our sales, expenses and income.
The results of operations whose functional currency is not the
U.S. dollar are translated into U.S. dollars using the average exchange rates
in the table above for the relevant period. Throughout this MD&A, reference
is made to the impact of translation of foreign operations on reported U.S.
dollar amounts where relevant.
Our results can also be affected by the impact of movements in
exchange rates on foreign currency transactions (such as raw material
purchases or sales denominated in foreign currencies). However, as a result
of hedging programs employed by us, primarily in Canada, foreign currency
transactions in the current period have not been fully impacted by the recent
movements in exchange rates. We record foreign currency transactions at the
hedged rate where applicable.
Finally, holding gains and losses on foreign currency
denominated monetary items, which are recorded in selling, general and
administrative expenses, impact reported results.
RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
Sales
For the three months
ended September 30,
2006 2005 Change
Vehicle Production Volumes (millions of units)
North America 3.452 3.722 - 7%
Europe 3.336 3.509 - 5%
Average Dollar Content Per Vehicle
North America US$ 756 US$ 746 + 1%
Europe US$ 394 US$ 335 + 18%
Sales
External Production
North America US$ 2,610 US$ 2,777 - 6%
Europe 1,315 1,176 + 12%
Rest of World 68 47 + 45%
Complete Vehicle Assembly 1,017 879 + 16%
Tooling, Engineering and Other 414 502 - 18%
Total Sales US$ 5,424 US$ 5,381 + 1%
Total sales increased 1% or US$43 million to US$5.42 billion
for the third quarter of 2006 compared to US$5.38 billion for the third
quarter of 2005.
External Production Sales - North America
External production sales in North America decreased 6% or
US$167 million to US$2.6 billion for the third quarter of 2006 compared to
US$2.8 billion for the third quarter of 2005. This decrease in production
sales reflects a 7% decrease in North American vehicle production volumes
partially offset by a 1% increase in our North American average dollar
content per vehicle.
Our average dollar content per vehicle grew by 1% or US$10 to
US$756 for the third quarter of 2006 compared to US$746 for the third quarter
of 2005, primarily as a result of:
- the launch of new programs during or subsequent to the third
quarter of 2005, including:
- GM's new full-size SUVs;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the Dodge Caliber; and
- the Mercedes GL Class;
- an increase in reported U.S. dollar sales due to the
strengthening of the Canadian dollar against the U.S. dollar;
- increased production and/or content on certain programs,
including:
- the Chevrolet HHR;
- the Chevrolet Impala; and
- the Pontiac G6; and
- the acquisition of CTS in February 2006.
These factors were largely offset by:
- the impact of lower production and/or content on certain
programs, including:
- the Dodge Caravan, Grand Caravan and Chrysler Town &
Country;
- the Ford F-Series SuperDuty;
- the Hummer H3;
- the Ford Escape and Mazda Tribute;
- the Chrysler Pacifica;
- the Ford Freestar and Mercury Monterey;
- the Dodge Durango; and
- the Chevrolet Envoy, Buick Rainier and GMC Trailblazer;
- programs that ended production during or subsequent to the
third quarter of 2005;
- incremental customer price concessions; and
- the sale of certain underperforming divisions during 2006.
External Production Sales - Europe
External production sales in Europe increased 12% or US$139
million to US$1.3 billion for the third quarter of 2006 compared to US$1.2
billion for the third quarter of 2005. This increase in production sales
reflects an 18% increase in our European average dollar content per vehicle
partially offset by a 5% decline in European vehicle production volumes.
Our average dollar content per vehicle grew by 18% or US$59 to
US$394 for the third quarter of 2006 compared to US$335 for the third quarter
of 2005, primarily as a result of:
- acquisitions during or subsequent to the third quarter of
2005, including the acquisition of CTS in February 2006;
- an increase in reported U.S. dollar sales as a result of the
strengthening of the euro and British pound, each against the U.S. dollar;
- increased production and/or content on certain programs,
including:
- the BMW X3;
- the Mercedes B-Class; and
- the Volkswagen Transporter and Multivan; and
- the launch of new programs during or subsequent to the third
quarter of 2005, including:
- the Honda Civic; and
- the Peugeot 207.
These factors were partially offset by:
- the impact of lower production and/or content on certain
programs, including the Mercedes A-Class and C-Class; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 45%
or US$21 million to US$68 million for the third quarter of 2006 compared to
US$47 million for the third quarter of 2005. The increase in production sales
is primarily a result of:
- increased production sales at existing facilities in China;
- an increase in reported U.S. dollar sales due to the
strengthening of the Korean won and Chinese Renminbi, each against the U.S.
dollar;
- the ramp-up of production at new facilities in China;
- increased production sales at a closures systems facility in Brazil;
- the acquisition of a mirrors facility in South Africa; and
- increased production sales at our powertrain facilities in Korea.
Complete Vehicle Assembly Sales
The terms of our various vehicle assembly contracts differ
with respect to the ownership of components and supplies related to the
assembly process and the method of determining the selling price to the OEM
customer. Under certain contracts we are acting as principal, and purchased
components and systems in assembled vehicles are included in our inventory
and cost of sales. These costs are reflected on a full-cost basis in the
selling price of the final assembled vehicle to the OEM customer. Other
contracts provide that third party components and systems are held on
consignment by us, and the selling price to the OEM customer reflects a
value-added assembly fee only.
Production levels of the various vehicles assembled by us have
an impact on the level of our sales and profitability. In addition, the
relative proportion of programs accounted for on a full-cost basis and
programs accounted for on a value-added basis also impacts our level of
sales and operating margin percentage, but may not necessarily affect our
overall level of profitability. Assuming no change in total vehicles
assembled, a relative increase in the assembly of vehicles accounted for on a
full-cost basis has the effect of increasing the level of total sales,
however, because purchased components are included in cost of sales,
profitability as a percentage of total sales is reduced. Conversely, a
relative increase in the assembly of vehicles accounted for on a
value-added basis has the effect of reducing the level of total sales and
increasing profitability as a percentage of total sales.
For the three months
ended September 30,
2006 2005 Change
Complete Vehicle Assembly Sales US$ 1,017 US$ 879 + 16%
Complete Vehicle Assembly Volumes (Units)
Full-Costed: 35,827 32,105 + 12%
BMW X3, Mercedes E-Class and G-Class, and
Saab 93 Convertible
Value-Added: 20,266 23,930 - 15%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander
56,093 56,035 -
Complete vehicle assembly volumes remained relatively
consistent with the prior year, increasing 58 units to 56,093 units for the
third quarter of 2006 compared to 56,035 units for the third quarter of 2005.
Complete vehicle assembly sales increased 16% or US$138 million to US$1.0
billion for the third quarter of 2006 compared to US$879 million for the
third quarter of 2005. The increase in complete vehicle assembly sales is
primarily the result of:
- the increase in assembly volumes for the BMW X3;
- an increase in reported U.S. dollar sales as a result of the
strengthening of the euro against the U.S. dollar;
- the launch of the Jeep Commander in the first quarter of
2006; and
- higher assembly volumes for the Chrysler 300 which launched
in the second quarter of 2005.
These increases were partially offset by a decrease in
assembly volumes for:
- the Jeep Grand Cherokee
- the Chrysler Voyager
- the Mercedes G-Class; and
- the Saab 93 Convertible.
Tooling, Engineering and Other
Tooling, engineering and other sales declined 18% or US$88
million to US$414 million for the third quarter of 2006 compared to US$502
million for the third quarter of 2005.
In the third quarter of 2006, the major programs for which we
recorded tooling, engineering and other sales were:
- GM's next generation full-size pickups and SUVs;
- the Ford Escape and Mazda Tribute;
- the MINI Cooper;
- the Land Rover Range Rover;
- the Saturn Outlook, Buick Enclave and GMC Acadia;
- the Freightliner P-Class; and
- the BMW X3.
In the third quarter of 2005, the major programs for which we recorded tooling, engineering and other sales were:
- the BMW X5;
- GM's next generation full-size pickups and SUVs;
- the Dodge Durango;
- the Ford F-Series SuperDuty; and
- the Cadillac STS;
In addition, tooling, engineering and other sales benefited from the strengthening of the Canadian dollar, euro and British pound, each against the U.S. dollar.
Gross Margin
Gross margin decreased US$67 million to US$635 million for the third quarter of 2006 compared to US$702 million for the third quarter of 2005. Gross margin as a percentage of total sales decreased to 11.7% for the third quarter of 2006 compared to 13.0% for the third quarter of 2005. In the third quarter of 2006, the unusual items discussed in the "Highlights" section above negatively impacted gross margin and gross margin as a percentage of total sales by US$3 million and 0.1%, respectively. Excluding these unusual items, the 1.2% decrease in gross margin as a percent of sales was primarily a result of:
- lower production sales in North America;
- operational inefficiencies and other costs at certain underperforming facilities, particularly at certain of our interior systems facilities;
- an increase in complete vehicle assembly sales for the BMW X3, which has a lower gross margin than our consolidated average gross margin because the costs of this vehicle assembly program are reflected on a full-cost basis in the selling price of the vehicle; and
- incremental customer price concessions.
These factors were partially offset by:
- a favourable revaluation to warranty accruals, substantially in Europe;
- productivity and efficiency improvements at certain divisions;
- lower employee profit sharing as a result of the decrease in our consolidated earnings; and
- price reductions from our suppliers.
Depreciation and Amortization
Depreciation and amortization costs increased 10% or US$17 million to US$191 million for the third quarter of 2006 compared to US$174 million for the third quarter of 2005. The increase in depreciation and amortization was primarily as a result of:
- an increase in reported U.S. dollar depreciation and amortization due to the strengthening of the Canadian dollar and euro, each against the U.S. dollar.
- depreciation and amortization of assets at new facilities that launched during or subsequent to the third quarter of 2005;
- an increase in assets employed in the business to support future growth; and
- depreciation and amortization of assets related to the acquisition of CTS.
Selling, General and Administrative ("SG&A")
SG&A expenses as a percentage of sales increased to 5.5% for the third quarter of 2006 compared to 5.3% for the third quarter of 2005. SG&A expenses increased 4% or US$12 million to US$299 million for the third quarter of 2006 compared to US$287 million for the third quarter of 2005. Excluding the unusual items discussed in the "Highlights" section above, SG&A expenses decreased by US$2 million primarily as a result of:
- a net increase in foreign exchange gains;
- lower spending on new facilities in the third quarter of 2006 compared to the third quarter of 2005; and
- lower incentive compensation.
These factors were partially offset by:
- an increase in reported U.S. dollar SG&A due to the strengthening of the Canadian dollar and euro, each against the U.S. dollar; and
- increased selling, general and administrative expenses related to CTS.
Earnings before Interest and Taxes ("EBIT")(1)
For the three months
ended September 30,
2006 2005 Change
North America US$ 67 US$ 159 - 58%
Europe 68 38 + 79%
Rest of World (4) 2 n/a
Corporate and Other 18 43 - 58%
Total EBIT US$ 149 US$ 242 - 38%
Included in EBIT for the third quarters of 2006 and 2005 were
the following unusual items, which have been discussed in the "Highlights"
section above.
For the three months
ended September 30,
2006 2005
North America
Restructuring charges US$ (2) US$ (5)
Impairment charges (2) -
(4) (5)
Europe
Restructuring charges (1) (9)
(1) (9)
Corporate and Other
Settlement gain - 26
- 26
US$ (5) US$ 12
(1) EBIT is defined as operating income as presented on our
unaudited consolidated financial statements before net interest (income)
expense.
North America
EBIT in North America decreased 58% or US$92 million to US$67
million for the third quarter of 2006 compared to US$159 million for the
third quarter of 2005. Excluding the North American unusual items discussed
in the "Highlights" section above, EBIT decreased by US$93 million in North
America, primarily as a result of:
- lower margins earned as a result of a decrease in production
sales;
- operational inefficiencies and other costs at certain
underperforming divisions, particularly at certain of our interior systems
facilities;
- incremental customer price concessions; and
- costs incurred to develop and grow our electronics
capabilities.
These factors were partially offset by:
- margins earned on new programs that launched during or
subsequent to the third quarter of 2005;
- margins earned on increased production and/or content on
certain programs;
- operational improvements at certain underperforming
divisions;
- lower affiliation fees paid to Corporate; and
- lower employee profit sharing as a result of the decrease in
our consolidated earnings.
Europe
EBIT in Europe increased 79% or US$30 million to US$68 million
for the third quarter of 2006 compared to US$38 million for the third quarter
of 2005. The increase in EBIT is substantially the result of a favourable
revaluation to warranty accruals as a result of updated warranty claim data
received in the third quarter of 2006. EBIT was also favourably affected by:
- the European unusual items discussed in the "Highlights"
section above;
- operational improvements at certain underperforming
divisions;
- increased margins earned on higher volumes for certain
production and complete vehicle assembly programs;
- lower affiliation fees paid to Corporate; and
- lower employee profit sharing as a result of the decrease in
our consolidated earnings.
These factors were partially offset by:
- lower margins as a result of a decrease in vehicle
production volumes on certain programs;
- operational inefficiencies and other costs at certain
facilities, particularly at certain of our interior systems facilities;
- costs incurred to develop and grow our electronics
capabilities; and
- incremental customer price concessions.
Rest of World
EBIT in the Rest of World decreased US$6 million to a loss of
US$4 million for the third quarter of 2006 compared to income of US$2 million
for the third quarter of 2005.
The decrease in EBIT was primarily as a result of:
- costs incurred at new facilities, primarily in China, as we
continue to pursue opportunities in this growing market; and
- lower profits earned at our closures systems facility in
Brazil.
Partially offsetting these costs was the additional margin
earned on the increased production sales discussed above.
Corporate and Other
Corporate and Other EBIT decreased 58% or US$25 million to
US$18 million for the third quarter of 2006 compared to US$43 million for the
third quarter of 2005. Excluding the Corporate and Other unusual items
discussed in the "Highlights" section above, EBIT increased US$1 million,
primarily as a result of:
- a decrease in incentive compensation as a result of the
decrease in our consolidated earnings; and
- an increase in equity income earned on investments.
These factors were partially offset by a decrease in
affiliation fees earned from our divisions.
Interest (Income) Expense, Net
During the third quarter of 2006, we earned net interest
income of US$6 million, compared to net interest expense of US$2 million for
the third quarter of 2005. The US$8 million positive variance is primarily as
a result of:
- a reduction in interest expense due to:
- the repayment in January 2006 of the second series of our
senior unsecured notes related to the acquisition of New Venture Gear
("NVG"); and
- the repayment of US$59 million of senior unsecured notes in
May 2006; and
- an increase in interest income earned.
Operating Income
Operating income decreased 35% or US$85 million to US$155
million for the third quarter of 2006 compared to US$240 million for the
third quarter of 2005. Excluding unusual items discussed in the "Highlights"
section above, operating income decreased 30% or US$68 million for the third
quarter of 2006. The decrease in operating income (excluding unusual items)
was the result of the decrease in EBIT (excluding unusual items) combined
with the positive variance in net interest (income) expense, both as
described above.
Income Taxes
Our effective income tax rate on operating income (excluding
equity income) increased to 40.4% for the third quarter of 2006 from 33.9%
for the third quarter of 2005. In the third quarters of 2006 and 2005, income
tax rates were impacted by the unusual items discussed in the "Highlights"
section above. Excluding the unusual items, our effective income tax rate
increased to 39.7% for the third quarter of 2006 compared to 32.6% for the
third quarter of 2005. The increase in the effective income tax rate is
primarily the result of an unfavourable Supreme Court of Canada ruling
against a Canadian taxpayer which restricts deductibility of certain foreign
exchange losses. As a result, we recorded a US$23 million tax expense
substantially related to the write-off of a tax asset.
The impact of this ruling was partially offset by:
- a change in mix of earnings, whereby proportionately more
income was earned in jurisdictions with lower income tax rates, and;
- a decrease in losses not benefited as a result of income tax planning
strategies.
Net Income
Net income decreased by 41% or US$65 million to US$94 million
for the third quarter of 2006 compared to US$159 million for the third
quarter of 2005. Excluding the US$9 million related to unusual items
discussed in the "Highlights" section above, net income decreased US$56
million as a result of the decrease in operating income, and the decrease in
income taxes, all as discussed above.
Earnings per Share
For the three months
ended September 30,
2006 2005 Change
Earnings per Class A Subordinate
Voting or Class B Share
Basic US$ 0.87 US$ 1.47 - 41%
Diluted US$ 0.86 US$ 1.44 - 40%
Average number of Class A Subordinate
Voting and Class B Shares outstanding (millions)
Basic 108.6 108.4 -
Diluted 111.4 111.2 -
Diluted earnings per share decreased 40% or US$0.58 to US$0.86
for the third quarter of 2006 compared to US$1.44 for the third quarter of
2005. Included in the US$0.58 decrease in diluted earnings per share is the
net decrease in diluted earnings per share of US$0.08 related to the unusual
items discussed in the "Highlights" section above.
Excluding the unusual items, diluted earnings per share
decreased US$0.50 from the third quarter of 2005 to the third quarter of 2006
as a result of the decrease in net income (excluding unusual items) described
above.
Return on Funds Employed ("ROFE")(1)
An important financial ratio that we use across all of our
operations to measure return on investment is ROFE.
ROFE for the third quarter of 2006 was 9.0%, a decrease from
14.9% for the third quarter of 2005. The unusual items discussed in the
"Highlights" section above negatively impacted ROFE in the third quarter of
2006 by 0.2% and positively impacted ROFE by 0.7% in the third quarter of
2005.
Excluding these unusual items, the 5.0% decrease in ROFE can
be attributed to a decrease in EBIT (excluding unusual items) as discussed
above combined with an increase in our average funds employed for the third
quarter of 2006 compared to the third quarter of 2005. The increase in our
average funds employed was primarily as a result of:
- acquisitions completed during or subsequent to the third
quarter of 2005, including CTS in February; and
- increased funds employed for new facilities associated with
recent or upcoming launches.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operations
For the three months
ended September 30,
2006 2005 Change
Net income US$ 94 US$ 159
Items not involving current cash flows 179 202
273 361 US$ (88)
Changes in non-cash operating assets
and liabilities 49 (482)
Cash provided from operating activities US$ 322 US$ (121) US$ 443
Cash flow from operations before changes in non-cash operating
assets and liabilities decreased US$88 million to US$273 million for the
third quarter of 2006 compared to US$361 million for the third quarter of
2005. The decrease in cash flow from operations was due to a US$65 million
decrease in net income (as discussed above) combined with a US$23 million
decrease in items not involving current cash flows.
The decrease in items not involving current cash flows was
primarily a result of:
- a US$55 million decrease in future taxes as a result of
losses benefited during the third quarter of 2006 compared to the utilization
of losses that were previously benefited in the third quarter of 2005; and
- a US$3 million increase in equity income.
These decreases were partially offset by:
- a US$17 million increase in depreciation and amortization;
and
- an US$18 million increase in other non-cash charges.
(1) ROFE is defined as EBIT divided by the average funds
employed for the period. Funds employed is defined as long-term assets,
excluding future tax assets, plus non-cash operating assets and
liabilities. Non-cash operating assets and liabilities are defined as the
sum of accounts receivable, inventory, income taxes recoverable and prepaid
assets less the sum of accounts payable, accrued salaries and wages, other
accrued liabilities, income taxes payable and deferred revenues.
Cash generated by non-cash operating assets and liabilities
amounted to US$49 million for the third quarter of 2006 compared to cash
invested in non-cash operating assets and liabilities for the third quarter
of 2005. The change in non-cash operating assets and liabilities is comprised
of the following sources (and uses) of cash:
For the three months
ended September 30,
2006 2005
Accounts receivable US$ 236 US$ (505)
Inventory (28) (116)
Prepaid expenses and other 2 (11)
Accounts payable and other
accrued liabilities (155) 140
Income taxes payable 5 8
Deferred revenues (11) 2
Changes in non-cash operating assets
and liabilities US$ 49 US$ (482)
The cash generated from accounts receivable during the third
quarter of 2006 is primarily a result of the decrease in production sales in
North America during the third quarter of 2006 compared to the second quarter
of 2006 and the collection of tooling receivables in North America during the
third quarter of 2006. In Europe, no net cash was generated from accounts
receivable as the cash generated from the collection of tooling and
engineering receivables was offset by an increase in complete vehicle
assembly receivables.
The decrease in accounts payable during the third quarter of
2006 is associated with the decrease in production sales in North America, as
discussed above, and the payment of tooling related accounts payable. In
Europe, the increase in accounts payable associated with the increase in
complete vehicle assembly sales was offset by a decrease in warranty accruals
as discussed above.
The increase in accounts receivable during the third quarter
of 2005 is primarily due to the timing of cash receipts whereby approximately
US$500 million of cash was received shortly after the end of the third
quarter ended September 30, 2005.
The increase in inventory during the third quarter of 2005 is
a result of increased tooling inventory on certain programs that launched
subsequent to the third quarter of 2005, an increase in work-in-process at
one of our assembly facilities as a result of temporary supply disruptions
and an increase in raw material inventory to support future production.
The increase in accounts payable and other accrued liabilities
during the third quarter of 2005 is consistent with the inventory build
described above.
<start_table
Capital and Investment Spending
For the three months
ended September 30,
2006 2005 Change
Fixed assets US$ (198) US$ (198)
Investments and other assets (6) (31)
Fixed assets, investments and
other assets additions (204) (229)
Purchases of subsidiaries (51) 1
Proceeds from disposals 8 7
Cash used in investing activities US$ (247) US$ (221) US$ (26)
Fixed assets, investments and other assets additions
In the third quarter of 2006, we invested US$198 million in
fixed assets. While investments were made to refurbish or replace assets
consumed in the normal course of business and for productivity improvements,
a large portion of the investment in the third quarter of 2006 was for
manufacturing equipment for programs that launched during the third quarter
of 2006 or will be launching subsequent to the third quarter of 2006,
including equipment for GM's next generation full-size pickups.
Purchase of subsidiaries
The purchases of subsidiaries for the third quarter of 2006
includes US$46 million to acquire the net assets of the Magna Golf Course
located in Aurora, Ontario from MEC. The transaction was reviewed by a
Special Committee of, and approved by the independent members of, Magna's
Board of Directors following the unanimous recommendation of the Special
Committee.
Proceeds from disposition
Proceeds from disposition for the third quarter of 2006 represents normal
course fixed and other asset disposals.
Financing
For the three months
ended September 30,
2006 2005 Change
Repayments of debt US$ (10) US$ (16)
Issues of debt 108 56
Issues of Class A Subordinate Voting Shares 1 6
Cash dividends paid (41) (41)
Cash used in financing activities US$ 58 US$ 5 US$ 53
The issues of debt during the third quarter of 2006 relates
primarily to an increase in bank indebtedness in certain jurisdictions to
support capital spending requirements.
Financing Resources
As at As at
September 30, December 31,
2006 2005 Change
Liabilities
Bank indebtedness US$ 233 US$ 89
Long-term debt due within one year 101 131
Long-term debt 652 700
986 920
Shareholders' equity 7,176 6,565
Total capitalization US$ 8,162 US$ 7,485 US$ 677
Total capitalization increased by 9% or US$677 million to
US$8.2 billion at September 30, 2006 as compared to US$7.5 billion at
December 31, 2005. The increase in capitalization is a result of an increase
in shareholders' equity and liabilities of US$611 million and US$66 million,
respectively.
The increase in shareholders' equity is primarily the result
of:
- net income earned during the first nine months of 2006 (as
discussed above);
- a US$216 million increase in the currency translation
adjustment, primarily as a result of the strengthening of the Canadian dollar
against the U.S. dollar between December 31, 2005 and September 30, 2006; and
- Class A Subordinate Voting Shares issued on the exercise of
stock options.
The increases in equity were partially offset by:
- dividends paid during the first nine months of 2006; and
- a US$6 million reduction of share capital related to the
repurchase of our Class A Subordinate Voting Shares which had been awarded on
a restricted basis to an executive.
The increase in liabilities is primarily a result of an
increase in bank indebtedness as a result of:
- the acquisition of CTS in February;
- to support capital spending requirements; and
- an increase in reported U.S. dollar amounts as a result of
the strengthening of the Canadian dollar against the U.S. dollar.
These increases were partially offset by decreases in
long-term debt as a result of:
- the repayment of the second series of our senior unsecured
notes related to the acquisition of NVG in January 2006;
- the repayment of US$59 million of senior unsecured notes in
May 2006; and
- the deconsolidation of a partially owned European subsidiary
which declared bankruptcy on August 16, 2006 and has subsequently been sold
by the administrator.
During the first nine months of 2006, our cash resources
decreased by US$33 million to US$1.6 billion as a result of the cash used in
investing and financing activities, partially offset by the cash provided
from operating activities as discussed above. In addition to our cash
resources, we had term and operating lines of credit totalling US$2.0
billion, of which US$1.6 billion was unused and available.
Maximum Number of Shares Issuable
The following table presents the maximum number of shares that
would be outstanding if all of the outstanding stock options and Subordinated
Debentures issued and outstanding at November 3, 2006 were exercised or
converted:
Class A Subordinate Voting and Class B Shares 109,729,081
Subordinated Debentures (i) 1,096,589
Stock options (ii) 4,237,182
115,062,852
(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. The number of Class A Subordinate Voting Shares
issuable at our option is dependent on the trading price of Class A
Subordinate Voting Shares at the time we elect to settle the 6.5% Convertible
Subordinated Debenture interest and principal with shares.
The above amounts also exclude Class A Subordinate Voting
Shares issuable, only at our option, to settle the 7.08% Subordinated
Debentures on redemption or maturity. The number of shares issuable is
dependent on the trading price of Class A Subordinate Voting Shares at
redemption or maturity of the 7.08% Subordinated Debentures.
(ii) Options to purchase Class A Subordinate Voting Shares are
exercisable by the holder in accordance with the vesting provisions and upon
payment of the exercise price as may be determined from time to time pursuant
to our stock option plans.
Contractual Obligations and Off-Balance Sheet Financing
There have been no material changes with respect to the
contractual obligations requiring annual payments during the third quarter of
2006 that are outside the ordinary course of business. Refer to our MD&A
included in our 2005 Annual Report.
Long-term receivables in other assets are reflected net of
outstanding borrowings from a customer's finance subsidiary of US$50 million
since we have a legal right of set-off of the customer's long-term
receivable payable to us against such borrowings and intend to settle the
related amounts simultaneously.
RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
Sales
For the nine months
ended September 30,
2006 2005 Change
Vehicle Production Volumes (millions of units)
North America 11.727 11.812 - 1%
Europe 11.566 11.894 - 3%
Average Dollar Content Per Vehicle
North America US$ 767 US$ 721 + 6%
Europe US$ 357 US$ 321 + 11%
Sales
External Production
North America US$ 8,996 US$ 8,519 + 6%
Europe 4,125 3,816 + 8%
Rest of World 190 123 + 54%
Complete Vehicle Assembly 3,132 3,059 + 2%
Tooling, Engineering and Other 1,369 1,440 - 5%
Total Sales US$17,812 US$16,957 + 5%
External Production Sales - North America
External production sales in North America increased 6% or
US$477 million to US$9.0 billion for the nine months ended September 30, 2006
compared to US$8.5 billion for the nine months ended September 30, 2005. This
increase in production sales reflects a 6% increase in our North American
average dollar content per vehicle partially offset by a 1% decrease in North
American vehicle production volumes.
Our average dollar content per vehicle grew by 6% or US$46 to
US$767 for the nine months ended September 30, 2006 compared to US$721 for
the nine months ended September 30, 2005, primarily as a result of:
- the launch of new programs during or subsequent to the nine
months ended September 30, 2005, including:
- GM's new full-size SUVs;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the Chevrolet HHR;
- the Chevrolet Impala;
- the Dodge Charger; and
- the Pontiac Torrent;
- an increase in reported U.S. dollar sales due to the
strengthening of the Canadian dollar against the U.S. dollar;
- increased production and/or content on certain programs,
including the Mercedes M-Class; and
- the acquisition of CTS in February 2006.
These factors were partially offset by:
- the impact of lower production and/or content on certain
programs, including:
- the Ford Escape and Mazda Tribute;
- the Dodge Caravan, Grand Caravan and Chrysler Town &
Country;
- the Chrysler Pacifica;
- the Cadillac STS;
- the Jeep Grand Cherokee;
- the Chevrolet Equinox; and
- the Ford Freestar and Mercury Monterey;
- programs that ended production during or subsequent to the
nine months ended September 30, 2005;
- the sale of certain facilities during or subsequent to the
third quarter of 2005; and
- incremental customer price concessions.
External Production Sales - Europe
External production sales in Europe increased 8% or US$309
million to US$4.1 billion for the nine months ended September 30, 2006
compared to US$3.8 billion for the nine months ended September 30, 2005. This
increase in production sales reflects an 11% increase in our European average
dollar content per vehicle partially offset by a 3% decline in European
vehicle production volumes.
Our average dollar content per vehicle grew by 11% or US$36 to
US$357 for the nine months ended September 30, 2006 compared to US$321 for
the nine months ended September 30, 2005, primarily as a result of:
- acquisitions completed during or subsequent to the first
nine months of 2006, including CTS in February 2006;
- the launch of new programs during or subsequent to the first
nine months of 2005, including:
- the Honda Civic;
- the Volkswagen Passat;
- the Peugeot 207;
- the Mercedes S-Class; and
- the Chrysler 300; and
- increased production and/or content on certain programs,
including:
- the Mercedes B-Class; and
- the BMW X3.
These factors were partially offset by:
- the impact of lower production and/or content on certain
programs, including the Mercedes A-Class and C-Class;
- a decrease in reported U.S. dollar sales primarily due to
the weakening of the euro and British pound against the U.S. dollar;
- programs that ended production during or subsequent to the
nine months ended September 30, 2005, including production on all MG Rover
programs as a result of the MG Rover situation;
- the sale of certain facilities during or subsequent to the
first nine months of 2005; and
- incremental customer price concessions.
External Production Sales - Rest of World
External production sales in the Rest of World increased 54%
or US$67 million to US$190 million for the nine months ended September 30,
2006 compared to US$123 million for the nine months ended September 30, 2005.
The increase in production sales is primarily a result of:
- the ramp-up of production at new facilities in China;
- increased production sales at our powertrain facilities in
Korea;
- an increase in production sales at a closures systems
facility in Brazil;
- the acquisition of a mirrors facility in South Africa; and
- an increase in reported U.S. dollar sales due to the
strengthening of the Korean Won and Chinese Renminbi, each against the U.S.
dollar.
Complete Vehicle Assembly Sales
For the nine months
ended September 30,
2006 2005 Change
Complete Vehicle Assembly Sales US$ 3,132 US$ 3,059 + 2%
Complete Vehicle Assembly Volumes (Units)
Full-Costed: 114,776 111,417 + 3%
BMW X3, Mercedes E-Class and G-Class, and
Saab 93 Convertible
Value-Added: 68,177 53,904 + 26%
Jeep Grand Cherokee, Chrysler 300,
Chrysler Voyager, and Jeep Commander
182,953 165,321 + 11%
Complete vehicle assembly volumes increased 11% or 17,632
units to 182,953 units for the nine months ended September 30, 2006 compared
to 165,321 units for the nine months ended September 30, 2005. Complete
vehicle assembly sales increased 2% or US$73 million to US$3.132 billion for
the nine months ended September 30, 2006 compared to US$3.059 billion for the
nine months ended September 30, 2005. The increase in complete vehicle
assembly sales is primarily the result of an increase in full-costed vehicle
assembly volumes combined with the launch of new programs during or
subsequent to the nine months ended September 30, 2005 including the Chrysler
300 in the second quarter of 2005 and the Jeep Commander in the first quarter
of 2006.
Tooling, Engineering and Other
Tooling, engineering and other sales decreased 5% or US$71
million to US$1.369 billion for the nine months ended September 30, 2006
compared to US$1.440 billion for the nine months ended September 30, 2005.
In the nine months ended September 30, 2006, the major
programs for which we recorded tooling, engineering and other sales were:
- GM's next generation full-size pickups and SUVs;
- the MINI Cooper;
- the Freightliner P-Class;
- the Ford Escape;
- the Ford Edge;
- the Ford F-Series SuperDuty;
- the Suzuki XL7;
- The Ford 500; and
- the BMW Z4.
In the nine months ended September 30, 2005, the major
programs for which we recorded tooling, engineering and other sales were:
- the BMW X5;
- GM's next generation full-size pickups and SUVs;
- the Ford Fusion, Mercury Milan and Lincoln Zephyr;
- the Dodge Caliber;
- the Hummer H3;
- the BMW X3;
- the Mercedes M-Class;
- the Dodge Durango; and
- the Ford F-Series SuperDuty.
In addition, tooling, engineering and other sales benefited
from the strengthening of the Canadian dollar against the U.S. dollar.
EBIT
For the nine months
ended September 30,
2006 2005 Change
North America US$ 535 US$ 540
Europe 161 175
Rest of World (4) 5
Corporate and Other 50 102
Total EBIT US$ 742 US$ 822 - 10%
Included in EBIT for the nine-month periods ended September
30, 2006 and 2005 were the following unusual items, which have been discussed
in the "Highlights" section above.
For the nine months
ended September 30,
2006 2005
North America
Restructuring charges US$ (27) US$ (9)
Sale of facilities (5) 16
(32) 7
Europe
Restructuring charges (13) (16)
Sale of facility (12) -
Charges associated with MG Rover - (15)
Impairment charges - (5)
(25) (36)
Corporate and Other
Restructuring charges - (3)
Settlement gain - 26
Foreign currency gain - 18
- 41
US$ (57) US$ 12
North America
EBIT in North America decreased 1% or US$5 million to US$535
million for the nine months ended September 30, 2006 compared to US$540
million for the nine months ended September 30, 2005. Excluding the North
American unusual items discussed in the "Highlights" section above, EBIT
increased US$34 million, primarily as a result of:
- margins earned on new programs that launched during or
subsequent to the nine months ended September 30, 2005;
- margins earned on increased production and/or content on
certain programs;
- operational improvements at certain underperforming
divisions;
- the closure or sale during or subsequent to the first nine
months of 2005 of facilities that incurred losses during the first nine
months of 2005;
- lower affiliation fees paid to Corporate; and
- lower employee profit sharing as a result of the decrease in
our consolidated earnings.
These factors were partially offset by:
- lower margins as a result of a decrease in production
volumes for certain programs;
- operational inefficiencies and other costs at certain
underperforming divisions, primarily at certain interior systems facilities;
- amortization of fair value increments related to the
Privatizations;
- incremental customer price concessions.
Europe
EBIT in Europe decreased 8% or US$14 million to US$161 million
for the nine months ended September 30, 2006 compared to US$175 million for
the nine months ended September 30, 2005. Excluding the European unusual
items discussed in the "Highlights" section above, EBIT decreased by US$25
million, primarily as a result of:
- operating inefficiencies and other costs at certain
facilities, primarily at certain interior systems facilities;
- lower margins as a result of the decrease in sales on
certain programs;
- amortization of fair value increments related to the
Privatizations; and
- incremental customer price concessions.
These factors were partially offset by:
- a decrease in estimated product warranty costs including a
favourable revaluation to warranty accruals as a result of updated warranty
claim data received in the third quarter of 2006;
- margins earned on assembly and production programs that
launched during or subsequent to the first nine months of 2005;
- increased margins earned on higher volumes for certain
assembly programs;
- lower affiliation fees paid to Corporate;
- operational improvements at certain underperforming
divisions;
- lower employee profit sharing as a result of the decrease in
our consolidated earnings; and
- the acquisition of CTS in February of 2006.
Rest of World
EBIT in the Rest of World decreased US$9 million to a loss of
US$4 million for the nine months ended September 30, 2006 compared income of
US$5 million for the nine months ending September 30, 2005. EBIT decreased
primarily as a result of:
- costs incurred at new facilities, primarily in China, as we
continue to pursue opportunities in this growing market; and
- lower profits earned at our closures systems facility in
Brazil.
Partially offsetting these costs was the additional margin
earned on the increased production sales discussed above.
Corporate and Other
Corporate and Other EBIT decreased 51% or US$52 million to
US$50 million for the nine months ended September 30, 2006 compared to US$102
million for the nine months ended September 30, 2005. Excluding the unusual
items discussed in the "Highlights" section above, EBIT decreased US$11
million primarily as a result of:
- a decrease in affiliation fees earned from our divisions;
- higher charitable donations, including hurricane Katrina
disaster relief; and
- foreign exchange losses incurred during the nine months
ended September 30, 2006.
These factors were partially offset by:
- a decrease in stock compensation expense;
- a decrease in incentive compensation as a result of the
decrease in our consolidated earnings; and
- an increase in equity income earned on investments.
COMMITMENTS AND CONTINGENCIES
From time to time, we may be contingently liable for
litigation and other claims. Refer to note 21 of our audited consolidated
financial statements, which describes these claims.
SUBSEQUENT EVENT
On November 3, 2006, the Company purchased the Fontana Golf
and Sports Club in Austria from MEC for total consideration of US$38 million.
The transaction was reviewed by a Special Committee of, and approved by the
independent members of, Magna's Board of Directors following the unanimous
recommendation of the Special Committee.
FORWARD LOOKING STATEMENTS
The previous discussion may contain statements that, to the
extent that they are not recitations of historical fact, constitute
"forward-looking statements" within the meaning of applicable securities
legislation. Forward-looking statements may include financial and other
projections, as well as statements regarding our future plans, objectives or
economic performance, or the assumptions underlying any of the foregoing. We
use words such as "may", "would", "could", "will", "likely", "expect",
"anticipate", "believe", "intend", "plan", "forecast", "project", "estimate"
and similar expressions to identify forward-looking statements. Any such
forward-looking statements are based on assumptions and analyses made by us
in light of our experience and our perception of historical trends, current
conditions and expected future developments, as well as other factors we
believe are appropriate in the circumstances. However, whether actual results
and developments will conform with our expectations and predictions is
subject to a number of risks, assumptions and uncertainties. These risks,
assumptions and uncertainties include, but are not limited to, the impact of:
declining production volumes and changes in consumer demand for vehicles; a
reduction in the production volumes of certain vehicles, such as certain
light trucks; our ability to offset increases in the cost of commodities,
such as steel and resins, as well as energy prices; fluctuations in relative
currency values; our ability to offset price concessions demanded by our
customers; our ability to compete with suppliers with operations in low cost
countries; changes in our mix of earnings between jurisdictions with lower
tax rates and those with higher tax rates, as well as our ability to fully
benefit tax losses; other potential tax exposures; the financial distress of
some of our suppliers and customers; the inability of our customers to meet
their financial obligations to us; our ability to fully recover
pre-production expenses; warranty and recall costs; the termination by our
customers of any material contracts; product liability claims in excess of
our insurance coverage; expenses related to the restructuring and
rationalization of some of our operations; impairment charges; legal claims
against us; risks of conducting business in foreign countries; unionization
activities at our facilities; work stoppages and labour relations disputes;
changes in laws and governmental regulations; costs associated with
compliance with environmental laws and regulations; potential conflicts of
interest involving our controlling shareholder, the Stronach Trust; and other
factors set out in our Annual Information Form filed with securities
commissions in Canada and our annual report on Form 40-F filed with the
United States Securities and Exchange Commission, and subsequent filings. In
evaluating forward-looking statements, readers should specifically consider
the various factors which could cause actual events or results to differ
materially from those indicated by such forward-looking statements. Unless
otherwise required by applicable securities laws, we do not intend, nor do we
undertake any obligation, to update or revise any forward-looking statements
to reflect subsequent information, events, results or circumstances or
otherwise.
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
[Unaudited]
[U.S. dollars in millions, except per share figures]
Three months ended Nine months ended
September 30, September 30,
Note 2006 2005 2006 2005
Sales US$5,424 US$5,381 US$17,812 US$16,957
Cost of goods sold 4,789 4,679 15,510 14,737
Depreciation and amortization 191 174 580 515
Selling, general and
administrative 6 299 287 990 884
Interest (income) expense, net (6) 2 (8) 5
Equity income (4) (1) (10) (6)
Impairment charges - - - 5
Income from operations before
income taxes and minority interest 155 240 750 817
Income taxes 61 81 251 250
Minority interest - - - 11
Net income US$94 US$159 US$499 US$556
Earnings per Class A
Subordinate Voting or Class B
Share:
Basic US$ 0.87 US$ 1.47 US$ 4.60 US$ 5.24
Diluted US$ 0.86 US$ 1.44 US$ 4.52 US$ 5.16
Cash dividends paid per Class A
Subordinate Voting or
Class B Share US$ 0.38 US$ 0.38 US$ 1.14 US$ 1.14
Average number of Class A
Subordinate Voting and Class B
Shares outstanding during
the period [in millions]:
Basic 108.6 108.4 108.6 106.2
Diluted 111.4 111.2 111.3 108.3
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
[Unaudited]
[U.S. dollars in millions]
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
Retained earnings, beginning
of period US$ 3,731 US$ 3,251 US$ 3,409 US$ 2,937
Net income 94 159 499 556
Dividends on Class A
Subordinate Voting and Class B
Shares (41) (42) (124) (125)
Retained earnings, end
of period US$ 3,784 US$ 3,368 US$ 3,784 US$ 3,368
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Unaudited]
[U.S. dollars in millions]
Three months ended Nine months ended
September 30, September 30,
Note 2006 2005 2006 2005
Cash provided from (used for):
OPERATING ACTIVITIES
Net income US$ 94 US$ 159 US$ 499 US$ 556
Items not involving current cash flows 179 202 616 576
273 361 1,115 1,132
Changes in non-cash operating
assets and liabilities 49 (482) (317) (592)
322 (121) 798 540
INVESTMENT ACTIVITIES
Fixed asset additions (198) (198) (544) (527)
Purchase of subsidiaries 2 (51) 1 (254) (168)
Increase in other assets (6) (31) (58) (100)
Proceeds from disposition 8 7 39 65
(247) (221) (817) (730)
FINANCING ACTIVITIES
Repayments of debt (10) (16) (128) (294)
Issues of debt 108 56 126 110
Issues of Class A Subordinate
Voting Shares 1 6 16 20
Dividends (41) (41) (123) (125)
58 5 (109) (289)
Effect of exchange rate changes
on cash and cash equivalents (2) 34 95 (49)
Net increase (decrease) in cash
and cash equivalents during the period 131 (303) (33) (528)
Cash and cash equivalents, beginning
of period 1,518 1,294 1,682 1,519
Cash and cash equivalents, end of
period US$ 1,649 US$ 991 US$ 1,649 US$ 991
See accompanying notes
MAGNA INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
[Unaudited]
[U.S. dollars in millions]
September 30, December 31,
Note 2006 2005
ASSETS
Current assets
Cash and cash equivalents US$ 1,649 US$ 1,682
Accounts receivable 4,068 3,436
Inventories 1,554 1,388
Prepaid expenses and other 136 97
7,407 6,603
Investments 175 142
Fixed assets, net 4,100 4,124
Goodwill 2 1,081 918
Future tax assets 264 208
Other assets 455 326
US$ 13,482 US$ 12,321
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness US$ 233 US$ 89
Accounts payable 3,555 3,241
Accrued salaries and wages 485 474
Other accrued liabilities 3 477 394
Income taxes payable 121 59
Long-term debt due within one year 101 131
4,972 4,388
Deferred revenue 78 85
Long-term debt 652 700
Other long-term liabilities 275 241
Future tax liabilities 329 342
6,306 5,756
Shareholders' equity
Capital stock 5
Class A Subordinate Voting Shares
[issued: 108,513,183; December 31,
2005 - 108,184,395] 2,487 2,470
Class B Shares
[convertible into Class A Subordinate
Voting Shares]
[issued: 1,093,983] - -
Contributed surplus 6 68 65
Retained earnings 3,784 3,409
Currency translation adjustment 837 621
7,176 6,565
US$ 13,482 US$ 12,321
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, as set out in the 2005 annual
consolidated financial statements.
The unaudited interim consolidated financial statements do not
conform in all respects to the requirements of generally accepted accounting
principles for annual financial statements. Accordingly, these unaudited
interim consolidated financial statements should be read in conjunction with
the 2005 annual 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 September 30, 2006 and the results of operations and
cash flows for the three-month and nine-month periods ended September 30,
2006 and 2005.
2. ACQUISITIONS
[a] For the nine months ended September 30, 2006
[i] CTS Fahrzeug-Dachsysteme GmbH, Bietingheim-Bissingen
["CTS"]
On February 2, 2006, Magna acquired CTS, a leading
manufacturer of roof systems for the automotive industry based in Germany.
CTS manufactures soft tops, hard tops and modular retractable hard tops. In
addition to Porsche, its customers include DaimlerChrysler, Ferrari, Peugeot
and General Motors. CTS has six facilities in Europe and two facilities in
North America.
The total consideration for the acquisition of CTS amounted to
US$271 million, consisting of US$203 million paid in cash and US$68 million
of assumed debt. The excess purchase price over the book value of assets
acquired and liabilities assumed was US$175 million, including goodwill and
intangible assets of US$128 million and US$74 million, respectively.
[ii] Magna Golf Club
On August 25, 2006, the Company acquired the net assets of the
Magna Golf Club located in Aurora, Ontario from Magna Entertainment Corp.
["MEC"] for total cash consideration US$46 million. The transaction was
reviewed by a Special Committee of, and approved by the independent members
of, Magna's Board of Directors following the unanimous recommendation of the
Special Committee.
[b] For the nine months ended September 30, 2005
[i] Tesma
On February 6, 2005, Magna acquired the 56% equity interest in
Tesma international Inc. ["Tesma"] that it did not previously own for total
consideration of US$613 million, which was satisfied by issuing 6.7 million
Magna Class A Subordinate Voting Shares and cash of US$103 million. In
addition, Magna assumed responsibility for the existing stock options of
Tesma, resulting in an increase in the purchase price of US$17 million,
representing the approximate fair value of the stock options assumed. The
excess of the purchase price over the Company's incremental interest in the
book value of the assets acquired and liabilities assumed was US$270 million,
including goodwill and intangible assets of US$147 million and US$110
million, respectively.
[ii] Decoma
On March 6, 2005, Magna acquired the 27% equity interest in
Decoma International Inc. ["Decoma"] that it did not previously own for total
consideration of US$239 million, which was satisfied by issuing 2.9 million
Magna Class A Subordinate Voting Shares and cash of US$31 million. In
addition, Magna assumed responsibility for the existing stock options of
Decoma, resulting in an increase in the purchase price of US$2 million,
representing the approximate fair value of the stock options assumed. The
excess of the purchase price over the Company's incremental interest in the
book value of the assets acquired and liabilities assumed was US$78 million,
including goodwill of US$58 million.
2. ACQUISITIONS (CONTINUED)
[iii] Intier
On April 3, 2005, Magna acquired the 15% equity interest in
Intier Automotive Inc. ["Intier"] that it did not previously own for total
consideration of US$202 million, which was satisfied by issuing 2.3 million
Magna Class A Subordinate Voting Shares and cash of US$50 million. In
addition, Magna assumed responsibility for the existing stock options of
Intier resulting in an increase in the purchase price of US$23 million,
representing the approximate fair value of the stock options assumed. The
excess of the purchase price over the Company's incremental interest in the
book value of the assets acquired and liabilities assumed was US$87 million,
including goodwill and intangible assets of US$49 million and US$37 million,
respectively.
3. Warranty
The following is a continuity of the Company's warranty
accruals:
2006 2005
Balance, beginning of period US$ 96 US$ 57
Expense, net 7 13
Settlements (5) (8)
Acquisition 6 -
Foreign exchange and other 2 (3)
Balance, March 31, 106 59
Expense, net 7 24
Settlements (3) (2)
Foreign exchange and other 5 (4)
Balance, June 30, 115 77
Expense (income), net (39) 14
Settlements (9) (2)
Foreign exchange and other - (2)
Balance, September 30, US$ 67 US$ 87
4. EMPLOYEE FUTURE BENEFIT PLANS
The Company recorded employee future benefit expenses as
follows:
Three months ended Nine months ended
September 30, September 30,
2006 2005 2006 2005
Defined benefit pension
plans and other US$ 7 US$ 4 US$ 16 US$ 11
Termination and long
service arrangements 4 3 14 11
Retirement medical benefits plan 4 2 9 7
US$ 15 US$ 9 US$ 39 US$ 29
5. Capital Stock
[a] Changes in the Class A Subordinate Voting Shares for the
three-month and nine-month periods ended September 30, 2006 are shown in the
following table [numbers of shares in the following table are expressed in
whole numbers]:
Subordinate Voting
Number of Stated
shares value
Issued and outstanding at December 31, 2005 108,184,395 US$ 2,470
Issued for cash under the Incentive
Stock Option Plan 166,209 11
Issued under the Dividend Reinvestment Plan 5,770 1
Issued and outstanding at March 31, 2006 108,356,374 2,482
Issued for cash under the Incentive Stock
Option Plan 140,535 10
Issued under the Dividend Reinvestment Plan 3,302 -
Repurchase of Class A Subordinate Voting Shares (i) - (6)
Issued and outstanding at June 30, 2006 108,500,211 2,486
Issued for cash under the Incentive
Stock Option Plan 10,137 1
Issued under the Dividend Reinvestment Plan 2,835 -
Issued and outstanding at September 30, 2006 108,513,183 US$ 2,487
(i) During the three months ended June 30, 2006, 80,407 Magna
Class A Subordinate Voting Shares, which were purchased for cash
consideration of US$6 million, were awarded on a restricted basis to an
executive. Since this stock has not been released to the executive, it has
been reflected as a reduction in the stated value of the Company's Class A
Subordinate Voting Shares.
[b] The following table presents the maximum number of shares
that would be outstanding if all the dilutive instruments outstanding at
November 3, 2006 were exercised or converted:
Class A Subordinate Voting and Class B Shares 109,729,081
Subordinated Debentures (i) 1,096,589
Stock options (ii) 4,237,182
115,062,852
(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. The number of Class A Subordinate Voting
Shares issuable at the Company's option is dependent on the trading price of
the Class A Subordinate Voting Shares at the time the Company elects 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 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.
6. Stock-Based Compensation
[a] The following is a continuity of options outstanding
[number of options in the table below are expressed in whole numbers]:
2006 2005
Options outstanding Options outstanding
Exercise Options Exercise Options
Options price(i) exercisable Options price (i) exercisable
# CDN$ # # CDN$ #
Beginning
of year 4,600,039 75.46 4,116,104 2,614,376 85.74 2,042,876
Assumed on
privatization - - - 1,053,353 71.31 864,688
Granted 115,000 87.80 - 35,000 85.75 -
Exercised (166,209) 58.32 (166,209) (170,106) 61.09 (170,106)
Vested - - 80,100 - - 9,291
Cancelled (17,001) 93.35 (12,059) - - -
March 31 4,531,829 76.33 4,017,936 3,532,623 82.62 2,746,749
Assumed on
privatization - - - 1,377,067 54.11 973,668
Exercised (140,535) 62.92 (140,535) (80,486) 53.67 (80,486)
Vested - - 8,138 - - 11,775
Cancelled (6,862) 73.11 (2,658) (17,033) 84.60 -
June 30 4,384,432 76.76 3,882,881 4,812,171 74.94 3,651,706
Exercised (10,137) 65.55 (10,137) (152,211) 60.56 (152,211)
Vested - - 107,004 - - 281,020
Cancelled (15,198) 107.83 (15,198) (4,506) 94.66 (1,163)
September 30 4,359,097 76.68 3,964,550 4,655,454 75.39 3,779,352
(i) The exercise price noted above represents the weighted
average exercise price in Canadian dollars.
[b] The fair value of stock options is estimated at the date
of grant using the Black-Scholes option pricing model. There were no
options granted or modified during the three months ended September 30, 2006
or 2005. The weighted average assumptions used in measuring the fair value of
stock options granted or modified, during the nine months ended September 30
2006 and 2005 are as follows:
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2006 2005 2006 2005
---------------------------------------------------------------------
Risk free interest rate - - 3.99% 3.24%
Expected dividend yield - - 2.05% 2.18%
Expected volatility - - 23% 23%
Expected time until exercise - - 4 years 2 years
---------------------------------------------------------------------
Weighted average fair value
of options granted or
modified in period (Cdn$) - - CDN$14.89 CDN$18.48
---------------------------------------------------------------------
Compensation expense recorded
in selling, general and
administrative expenses US$ 4 US$ 4 US$ 10 US$ 13
[c] At September 30, 2006, unamortized compensation expense
related to the restricted stock arrangements was US$43 million, and has been
presented as a reduction of shareholders' equity.
6. Stock-Based Compensation (CONTINUED)
[d] Contributed surplus consists of accumulated stock option
compensation expense less the fair value of options at the grant date that
have been exercised and reclassified to share capital, the accumulated
restricted stock compensation expense, and the value of the holders
conversion option on the 6.5% Convertible Subordinated Debentures. The
following is a continuity of contributed surplus:
2006 2005
---------------------------------------------------------------------
Stock-based compensation
Balance, beginning of period US$ 62 US$ 16
Impact of privatization transactions - 20
Stock-based compensation expense 2 2
Exercise of options (3) (5)
---------------------------------------------------------------------
Balance, March 31, 61 33
Impact of privatization transactions - 25
Stock-based compensation expense 3 5
Exercise of options (3) (2)
---------------------------------------------------------------------
Balance, June 30, 61 61
Stock-based compensation expense 4 3
Exercise of options - (3)
---------------------------------------------------------------------
Balance, September 30, 65 61
Holders conversion option 3 3
---------------------------------------------------------------------
US$ 68 US$ 64
---------------------------------------------------------------------
---------------------------------------------------------------------
7. SEGMENTED INFORMATION
Three months ended
September 30, 2006
-----------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
--------------------------------------------------------------------
North America
Canada US$ 1,444 US$ 1,384 US$ 1,123
United States 1,187 1,145 1,117
Mexico 374 334 349
Eliminations (134) - -
--------------------------------------------------------------------
2,871 2,863 US$ 67 2,589
Europe
Euroland 2,203 2,168 1,030
Great Britain 203 203 84
Other European countries 148 118 107
Eliminations (44) - -
--------------------------------------------------------------------
2,510 2,489 68 1,221
Rest of World 84 72 (4) 111
Corporate and Other (41) - 18 179
--------------------------------------------------------------------
Total reportable segments US$5,424 US$5,424 US$ 149 4,100
Current assets 7,407
Investments, goodwill and
other assets 1,975
--------------------------------------------------------------------
Consolidated total assets US$ 13,482
--------------------------------------------------------------------
--------------------------------------------------------------------
Three months ended
September 30, 2005
-----------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
--------------------------------------------------------------------
North America
Canada US$ 1,599 US$ 1,502 US$ 1,060
United States 1,406 1,353 1,221
Mexico 277 266 331
Eliminations (154) - -
--------------------------------------------------------------------
3,128 3,121 US$ 159 2,612
Europe
Euroland 1,957 1,926 1,136
Great Britain 196 194 81
Other European countries 125 91 90
Eliminations (35) - -
--------------------------------------------------------------------
2,243 2,211 38 1,307
Rest of World 59 49 2 79
Corporate and Other (49) - 43 112
--------------------------------------------------------------------
Total reportable segments US$ 5,381 US$ 5,381 US$ 242 4,110
Current assets 6,647
Investments, goodwill and
other assets 1,621
--------------------------------------------------------------------
Consolidated total assets US$ 12,378
--------------------------------------------------------------------
--------------------------------------------------------------------
Nine months ended
September 30, 2006
-----------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
--------------------------------------------------------------------
North America
Canada US$ 4,833 US$ 4,647 US$ 1,123
United States 4,233 4,083 1,117
Mexico 1,203 1,098 349
Eliminations (408) - -
--------------------------------------------------------------------
9,861 9,828 US$ 535 2,589
Europe
Euroland 6,855 6,740 1,030
Great Britain 684 682 84
Other European countries 457 353 107
Eliminations (142) - -
--------------------------------------------------------------------
7,854 7,775 161 1,221
Rest of World 240 209 (4) 111
Corporate and Other (143) - 50 179
--------------------------------------------------------------------
Total reportable segments US$17,812 US$ 17,812 US$ 742 4,100
Current assets 7,407
Investments, goodwill and
other assets 1,975
--------------------------------------------------------------------
Consolidated total assets US$ 13,482
--------------------------------------------------------------------
--------------------------------------------------------------------
Nine months ended
September 30, 2005
-----------------------------------------
Fixed
Total External assets,
sales sales EBIT(i) net
--------------------------------------------------------------------
North America
Canada US$ 4,794 US$ 4,568 US$ 1,060
United States 4,321 4,130 1,221
Mexico 791 750 331
Eliminations (426) - -
--------------------------------------------------------------------
9,480 9,448 US$ 540 2,612
Europe
Euroland 6,481 6,350 1,136
Great Britain 702 691 81
Other European countries 443 341 90
Eliminations (137) - -
--------------------------------------------------------------------
7,489 7,382 175 1,307
Rest of World 152 127 5 79
Corporate and Other (164) - 102 112
--------------------------------------------------------------------
Total reportable segments US$16,957 US$16,957 US$ 822 4,110
Current assets 6,647
Investments, goodwill and
other assets 1,621
--------------------------------------------------------------------
Consolidated total assets US$ 12,378
--------------------------------------------------------------------
--------------------------------------------------------------------
(i) EBIT represents operating income before interest income or expense.
8. RELATED PARTY TRANSACTIONS
On March 31, 2006, the Company purchased a real estate
property located in the United States from MEC for a total purchase price of
US$6 million.
On August 25, 2006, the Company purchased the Magna Golf Club
from MEC for a total purchase price of US$46 million [see note 2].
9. sUBSEQUENT EVENT
On November 3, 2006, the Company purchased the Fontana Golf
and Sports Club in Austria from MEC for total consideration of US$38 million.
The transaction was reviewed by a Special Committee of, and approved by the
independent members of, Magna's Board of Directors following the unanimous
recommendation of the Special Committee.
10. Comparative Figures
Certain of the comparative figures have been reclassified to
conform to the current period's method of presentation.
